As filed May 31, 2007 File No. 333-141201
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2/A
AMENDMENT NO. 2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
V2K INTERNATIONAL, INC.
(Name of small business issuer in its charter)
COLORADO 6719 20-5614030
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1127 AURARIA PARKWAY, SUITE 204
DENVER, COLORADO 80204
(303) 202-1120
(Address and telephone number of principal executive offices)
1127 AURARIA PARKWAY, SUITE 204
DENVER, COLORADO 80204
(Address of principal place of business or intended principal place of business)
VICTOR J. YOSHA, PRESIDENT
V2K INTERNATIONAL, INC.
1127 AURARIA PARKWAY, SUITE 204
DENVER, COLORADO 80204
(303) 202-1120
(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 any of the securities registered on this form are being offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act, check the
following box. [X]
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
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TITLE OF EACH CLASS AMOUNT PROPOSED PROPOSED
OF SECURITIES TO TO BE REGISTERED MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
BE REGISTERED (1)<F1> (2)<F2> PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
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Common stock, $0.001 par 11,445,561 $0.20 $2,289,112.20 $244.94
value per share
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<FN>
(1)<F1> Pursuant to Rule 416 of the Securities Act of 1933, as amended, this
registration statement also covers such additional number of shares of
common stock that may become issuable as a result of any stock splits,
stock dividends, or other similar transactions.
(2)<F2> Includes 11,445,561 shares representing (i) 10,445,561 shares owned by
selling security holders, (ii) 1,000,000 shares of common stock
issuable upon exercise of the warrants, and (iii) the additional
securities to be offered or issued to prevent dilution resulting from
stock splits, stock dividends, or similar transactions with respect to
the foregoing.
</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.
ii
Subject to Completion, Dated May 31, 2007
V2K INTERNATIONAL, INC.
UP TO 11,445,561 SHARES OF COMMON STOCK
Unless the context otherwise requires, the terms "we", "our" and "us"
refers to V2K International, Inc. and its subsidiaries.
This prospectus relates to the resale by selling shareholders of up to
10,445,561 shares owned by selling security holders and 1,000,000 shares of
common stock issuable upon exercise of the warrants. We will receive the
proceeds from the exercise of the warrants, but we will not receive any proceeds
from sale of any of the shares offered by the selling shareholders. We will pay
the expenses of registering these shares. The selling shareholders have set an
offering price of $0.20 until our shares are quoted on the OTC Bulletin Board
and thereafter at prevailing market prices or privately negotiated prices. See
"Selling Shareholders" on page 33 for more information about the selling
shareholders.
Our common stock is presently not traded on any market or securities
exchange. The offering price may not reflect the market price of our shares
after the offering.
INVESTING IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. A
DETAILED EXPLANATION OF THESE RISKS IS INCLUDED IN THE SECTION ENTITLED "RISK
FACTORS" 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.
____________, 2007
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.............................................................3
RISK FACTORS...................................................................5
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS..............................8
DILUTION.......................................................................8
DETERMINATION OF OFFERING PRICE................................................8
DIVIDEND POLICY................................................................9
USE OF PROCEEDS................................................................9
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION......................9
BUSINESS......................................................................20
MANAGEMENT....................................................................29
EXECUTIVE COMPENSATION........................................................31
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................36
DESCRIPTION OF SECURITIES.....................................................38
SELLING SHAREHOLDERS..........................................................38
PLAN OF DISTRIBUTION..........................................................41
LEGAL MATTERS.................................................................42
EXPERTS.......................................................................43
ADDITIONAL INFORMATION........................................................43
REPORTS TO SHAREHOLDERS.......................................................43
INDEX TO FINANCIAL STATEMENTS.................................................44
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.
V2K INTERNATIONAL, INC.
Through our wholly-owned subsidiaries, V2K Window Fashions, Inc., V2K
Technology, Inc., and V2K Manufacturing, Inc., we sell and support franchises in
the residential and commercial window fashion industry, develop and license
proprietary software that allows users to decorate windows for both residential
and commercial customers, and manufacture and sell the resulting soft window
treatment products. While exploring the possibility of using an offshore vendor
to reduce the cost of materials and manufacturing labor costs, we established a
relationship with a manufacturing source. We believe that other retail firms in
the window fashion industry would be interested in obtaining product from this
source. Accordingly, we formed Marketing Source International LLC, and we will
endeavor to generate revenues by acting as an exclusive sales agent for that
overseas window coverings manufacturing source.
Our current emphasis is in window fashions and accessories. Our
subsidiary, V2K Window Fashions, Inc. ("V2K Window Fashions") sells and supports
franchises in the window fashion industry. We began selling franchises in March
1997. Our first franchisee started operations in August 1997. After selling
several franchises, we halted our franchise sales activity while we refined our
business plan and secured outside financing. We began aggressively developing
the franchise business model in November 2001, at which point we had 9
franchisees. In August 2006, we opened our first company-owned franchise
location, incorporated as Window Fashions Franchise, LLC. Window Fashions
Franchise, LLC is a wholly owned subsidiary of V2K Window Fashions. As of March
31, 2007, we had 181 franchisees, operating in 41 states and the provinces of
Alberta and Manitoba.
Using our proprietary software developed at V2K Technology, Inc. ("V2K
Technology"), our franchisees sell window fashions of all kinds to both
commercial and residential customers. All sales orders made by our franchisees
are sent to us for fulfillment. Another subsidiary, V2K Manufacturing, Inc.
("V2K Manufacturing"), manufactures "soft" window fashions made up of fabric
treatments, such as drapes and curtains. "Hard" goods, such as blinds, cellular
shades, and shutters, are sourced to third party vendors. All items are shipped
directly from the manufacturer or vendor to the franchisee.
We intend to become the dominant company in the window decor and
accessory market. We intend to accomplish this goal by:
o introducing our exclusive, three-dimensional proprietary software
technology into the industry's sales channel and supply chain;
o growing the business aggressively through the franchise business model
and corporate license agreements;
o controlling the industry's distribution channel; and
o acquiring hard product manufacturing capabilities and becoming fully
vertically integrated.
Our long-term vision is to capture the majority of the home decor arena
into a scalable, three-dimensional, graphic technology, allowing our sources of
distribution to bring unique general economies of scale to flooring, wall
coverings, art, and accessory furnishings, among others. In addition, we have
license opportunities in related fields, such as the casement window industry,
paint industry, and other industries in the building and design trade. As of the
date of this prospectus, we have entered into discussions and letters of intent
with interested parties, but have not entered into any corporate license
agreements or license agreements in related fields.
Our corporate offices, which include V2K International, V2K Window
Fashions, V2K Technology, and Marketing Source International, are located at
1127 Auraria Parkway, Suite 204, Denver, Colorado 80204, and our telephone
number is (303) 202-1120. V2K Manufacturing is located at 685 South Jason
Street, Denver, Colorado, 80223. Our website is located at WWW.V2K.COM.
Information contained in our website is not part of this prospectus.
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THE OFFERING
Securities offered..................Up to 11,445,561 shares of common stock by
selling shareholders.
Use of proceeds.....................We will not receive any of the proceeds from
the selling shareholders of shares of our
common stock.
Securities outstanding..............31,147,336 shares of common stock as of
March 31, 2007.
Plan of distribution................The offering is made by the selling
shareholders named in this prospectus, to
the extent they sell shares. Sales may be
made in the open market or in private
negotiated transactions, at fixed or
negotiated prices. See "Plan of
Distribution."
RISK FACTORS
Investing in our shares involves a high degree of risk. You should
consider carefully the information under the caption "Risk Factors" in deciding
whether to purchase our shares.
SUMMARY FINANCIAL INFORMATION
The following summary financial data is derived from the interim
(unaudited) financial statements of V2K International (the "Company") for the
six months ended March 31, 2007 and 2006, the audited financial statements of
V2K International for the year ended September 30, 2006, and the audited
financial statements of V2K Window Fashions for the nine-month period ended
September 30, 2005 and the years ended December 31, 2004, 2003, and 2002. On
April 1, 2006, V2K International, in a share for share exchange, acquired 100%
ownership of V2K Window Fashions, but did not have any operations prior to the
acquisition. Accordingly, for accounting purposes, the historical consolidated
financial statements of V2K Window Fashions are the historical financial
statements of the Company.
We have prepared our financial statements in accordance with generally
accepted accounting principles. 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.
INCOME STATEMENT DATA:
SIX MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------------- NINE MONTHS -----------------------------------------------
YEAR ENDED ENDED
SEPTEMBER SEPTEMBER
(UNAUDITED) (UNAUDITED) 30, 2006 30, 2005 2004 2003 2002
------------- ------------- -------------- -------------- -------------- -------------- -------------
Revenues $ 3,969,305 $ 3,822,997 $ 8,158,542 $ 6,133,442 $ 6,043,843 $ 3,867,388 $ 1,581,561
Net income
(loss) $ (482,350) $ (316,819) $ (732,205) $ (78,114) $ (195,399) $ 69,195 $ (214,912)
Net income
(loss) per
common share
(basic) $ (0.0167) $ (0.0156) $ (0.0281) $ (0.0059) $ (0.015) $ 0.006 $ (0.019)
Weighted average
number of common
shares
outstanding
(basic) 28,856,436 20,353,101 26,094,657 13,290,440 12,920,690 12,062,870 11,035,700
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BALANCE SHEET DATA:
MARCH 31, SEPTEMBER 30, DECEMBER 31,
2007 --------------------------------------------------------------------------------------
(UNAUDITED) 2006 2005 2004 2003 2002
------------ ------------ ------------ ------------ ------------ ------------
Working capital
(deficit) $ 53,064 $ (182,258) $ 255,037 $ 98,435 $ 200,327 $ 148,732
Total assets $ 1,301,262 $ 1,506,978 $ 1,348,086 $ 1,206,389 $ 927,623 $ 385,603
Long-term debt $ -- $ 100,000 $ 210,110 $ 113,313 $ 63,485 $ 8,167
Stockholders'
equity (deficit) $ 129,098 $ (170,344) $ 243,071 $ 225,785 $ 327,384 $ 197,864
RISK FACTORS
Investing in our shares involves a high degree of risk. You should be
able to bear a complete loss of your investment. You should carefully consider
the following risk factors and other information in this prospectus before
deciding to invest in our securities.
WE HAVE INCURRED LOSSES AND CANNOT ASSURE YOU OF PROFITABILITY.
With the exception of net income of $69,195 for the year ended December
31, 2003, we have incurred net losses, including a loss of $732,205 for our most
recently completed fiscal year. As of March 31, 2007, our accumulated deficit
was $1,787,690. To date, we have not generated revenues sufficient to fund our
business and pay our ongoing expenses. We do not expect to be profitable for the
fiscal year ending September 30, 2007.
WE ARE DEPENDENT UPON OUTSIDE FINANCING.
We rely upon external sources of financing to fund future growth and
implementation of our business plan, including a complete re-write of our
proprietary software. Since our inception in July 1996, we have financed our
operations through internally generated revenues, the sale of our stock and by
borrowing from third parties and affiliates of our Company. While we believe
that our cash flow for the second half of the current fiscal year will provide
sufficient capital to maintain all current operations and to implement our
short-term plans, which would require approximately $100,000, we will likely
require external financing for our long-term plans for growth and the
development of our business plan. We have not yet developed a timeframe within
which to implement our long-term plans or a budget. Sources of external
financing may include short-term loans, bank borrowings, joint ventures, and
future debt and equity offerings. We do not know whether that financing will be
available on acceptable terms, or at all. Any additional financing may result in
dilution to our shareholders. Our failure to obtain external financing may have
a material adverse effect on our results of operations and financial condition.
If we cannot obtain external financing when needed, we may be forced to curtail
our plans to expand the business.
OUR CURRENT BUSINESS PLAN IS DEPENDENT UPON OUR ABILITY TO SELL FRANCHISES AND
TO HAVE SUCCESSFUL FRANCHISEES.
Our growth is dependent upon our continued ability to sell franchises.
Our existing franchise base of approximately 180 franchisees is too small to
produce enough royalty revenue and gross profit margin from sales of materials
and supplies to support our operations. Under our business plan, we plan to sell
45 franchises in fiscal 2007 and 100 franchises in fiscal 2008. To be
successful, we need to be able to identify suitable franchise candidates,
provide them with adequate training, and manage competently the infrastructure
to support the franchisees. In addition, our franchisees must be successful in
their business operations. If they are not successful, it will adversely impact
our sales of franchises and we will not generate sufficient royalty income
needed to operate.
We use franchise broker networks and Internet advertising to generate
leads to identify suitable franchise candidates. If prospective candidates
indicate a sufficient amount of interest, we encourage them to travel to our
offices for a "discovery day" and reimburse them for $300 of airfare and one
night of lodging. After our franchises attend a two-week basic training program,
which includes instruction pertaining to operating our proprietary
5
software, product knowledge and design, business management and sales and
marketing, we provide them with a 30-day "quick start" marketing program, as
well as a business coaching program. We also assign a franchise support person
to each new franchisee to follow-up on a franchisee's progress.
WE ARE AFFECTED BY ECONOMIC CONDITIONS AND CONSUMER TRENDS.
Our success will depend upon a number of factors relating to consumer
spending, including future economic conditions affecting disposable consumer
income, such as employment, business conditions, interest rates, and taxation.
If existing economic conditions deteriorate, consumer spending may decline,
thereby adversely affecting our business and results of operations.
We must be able to anticipate and respond to changing merchandise
trends and consumer demands in a timely manner. If we should miscalculate
consumers' purchasing habits and tastes, we will not be able to compete against
other window covering businesses.
WE FACE COMPETITION FROM EXISTING AND POTENTIAL COMPETITORS.
We face substantial competition in the overall window covering
industry, as well as competition from others offering franchises and business
opportunities. Due to our small size, it can be assumed that most if not all of
our competitors have significantly greater financial, technical, marketing and
other competitive resources. Many of our competitors and potential competitors
have greater name recognition and more extensive customer bases that could be
leveraged, for example, to position themselves as being more experienced, having
better products, and being more knowledgeable than us. To compete, we may be
forced to offer lower prices and narrow our marketing focus, resulting in
reduced revenues.
OUR SUCCESS AND ABILITY TO COMPETE DEPENDS UPON OUR ABILITY TO SECURE AND
PROTECT OUR PROPRIETARY TECHNOLOGY.
Our success depends on our ability to protect our proprietary
technology. In the event that a third party misappropriates or infringes on our
intellectual property, our business would be seriously harmed. Third parties may
independently discover or invent competing technologies or reverse engineer our
software. We expect that if we should successfully market franchises and
licenses to use our software, competitors may attempt to duplicate our
technology. While we have a pending patent application on the software, we would
still have to enforce our rights against those who might attempt to infringe on
our intellectual property. Such enforcement efforts are likely to be expensive
and time-consuming.
THE LOSS OF OUR OFFICERS AND DIRECTORS OR OUR FAILURE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends largely upon the efforts, abilities, and
decision-making of our executive officers and directors. Although we believe
that we maintain a core group sufficient for us to effectively conduct our
operations, the loss of any of our key personnel could, to varying degrees, have
an adverse effect on our operations and system development. We currently
maintain "key-man" life insurance on Victor Yosha, our president/chief executive
officer, and Mike Lee, the chief operating officer of our technology subsidiary.
However, there is no contract in place assuring their services for any length of
time. The loss of either of them would have a material adverse affect on us. We
do not have assurance that the services of any member of our management will
remain available to us for any period of time, or that we will be able to enter
into employment contracts with any of our management, or that any of our plans
to reduce dependency upon key personnel will be successfully implemented.
The knowledge and expertise of our officers and directors are critical
to our operations. There is no guarantee that we will be able to retain our
current officers and directors, or be able to hire suitable replacements in the
event that some or all of our current management leave our company. In the event
that we should lose key members of our staff, or if we are unable to find
suitable replacements, we may not be able to maintain our business and might
have to cease operations, in which case you might lose all of your investment.
6
WE USE OUTSIDE SUPPLIERS TO FULFILL THE ORDERS PLACED WITH US BY OUR
FRANCHISEES.
Orders placed with us by our franchisees are filled by outside
suppliers, with our three largest vendors constituting approximately 68% of
materials and supplies for the year ended September 30, 2006. We have chosen to
limit the number of suppliers that we use in order to obtain better pricing
terms from them and to insure the quality of the products delivered to our
franchisees' customers. We believe that if we were to lose any of these vendors,
we could replace the vendor(s) with others who provide the same materials and
supplies. However, we could incur disruption of processing orders from
franchisees while transitioning from one vendor to another and this could
negatively impact our business.
A LIMITED NUMBER OF SHAREHOLDERS COLLECTIVELY OWN A MAJORITY OF OUR COMMON STOCK
AND MAY ACT, OR PREVENT CERTAIN TYPES OF CORPORATE ACTIONS, TO THE DETRIMENT OF
OTHER SHAREHOLDERS.
As of the date of this prospectus, our directors, officers, and more
than 10% shareholders own beneficially more than 75.8% of our common stock.
Accordingly, these shareholders may, if they act together, exercise significant
influence over all matters requiring shareholder approval, including the
election of a majority of the directors and the determination of significant
corporate actions. This concentration could also have the effect of delaying or
preventing a change in control that could otherwise be beneficial to our
shareholders.
OUTSTANDING WARRANTS MAY NEGATIVELY IMPACT OUR ABILITY TO OBTAIN FUTURE
FINANCING.
We have outstanding warrants to purchase 4,553,750 shares of common
stock at $0.50 through September 30, 2008 and outstanding warrants to purchase
1,000,000 shares of common stock at $0.30 through January 5, 2009. As long as
these warrants remain unexercised and outstanding, the terms under which we may
be able to obtain additional capital financing may be adversely affected.
WE HAVE A SUBSTANTIAL NUMBER OF SHARES THAT MAY BECOME FREELY TRADABLE AND COULD
THEREFORE RESULT IN A REDUCED MARKET PRICE.
As of March 31, 2007, we had an aggregate of 31,147,336 shares of our
common stock issued and outstanding, all of which were "restricted securities".
Upon the date of this prospectus, the resale of 10,445,561 shares, currently
owned by existing shareholders, will be registered, thereby increasing the
number of shares that may become freely tradable. In addition, we are
registering the resale of 1,000,000 shares issuable upon the exercise of
warrants. The sale of a significant number of these shares in the public market
may adversely affect prevailing market prices of our shares.
OUR COMMON STOCK WILL BE SUBJECT TO PENNY STOCK REGULATION THAT MAY AFFECT THE
LIQUIDITY FOR OUR COMMON STOCK.
Once trading, our common stock is subject to regulations of the
Securities and Exchange Commission ("SEC") 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, as
some brokers refrain from trades involving penny stocks to avoid the additional
work to comply with these requirements. As a result, your ability to sell your
securities in the secondary market could be limited.
FUTURE EQUITY TRANSACTIONS, INCLUDING EXERCISE OF OPTIONS OR WARRANTS, COULD
RESULT IN DILUTION.
From time to time, we intend to sell restricted stock, warrants, and
convertible debt to investors in private placements. Because the stock will be
restricted, the stock will likely be sold at a greater discount to market prices
compared to a public stock offering, and the exercise price of the warrants is
likely to be at or even lower than market prices. These transactions will cause
dilution to existing shareholders. Also, from time to time, options will be
issued to officers, directors, or employees, with exercise prices equal to the
then prevailing market price. As of March 31, 2007, 28,075,110 options had been
granted to officers, directors and employees. Exercise of in-the-
7
money options and warrants will result in dilution to existing shareholders. The
amount of dilution will depend on the spread between the market and exercise
price, and the number of shares involved.
TRADING IN OUR COMMON STOCK MAY BE LIMITED THEREBY MAKING IT MORE DIFFICULT FOR
INVESTORS TO RESELL THEIR SHARES OF OUR COMMON STOCK.
We plan to apply to have our common stock quoted on the OTC Bulletin
Board. We do not know whether the OTC Bulletin Board will approve our
application. 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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements." All statements
other than statements of historical facts included or incorporated by reference
in this report, including, without limitation, statements regarding our future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
In addition, forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may," "will," "expect," "intend,"
"project," "estimate," "anticipate," "believe," or "continue" or the negative
thereof or variations thereon or similar terminology. Although we believe that
the expectations reflected in such forward-looking statements are reasonable, we
cannot give any assurance that such expectations will prove to have been
correct. Important factors that could cause actual results to differ materially
from our expectations ("Cautionary Statements") include, but are not limited to:
o our ability to generate sufficient capital to complete planned
acquisitions;
o the lack of liquidity of our common stock;
o the availability of capital;
o the strength and financial resources of our competitors;
o general economic conditions; and
o the securities or capital markets and other factors disclosed under
"Management's Discussion and Analysis or Plan of Operation," "Business"
and elsewhere in this prospectus.
All subsequent written and oral forward-looking statements attributable
to us, or persons acting on our behalf, are expressly qualified in their
entirety by the cautionary statements. We assume no duty to update or revise our
forward-looking statements based on changes in internal estimates or
expectations or otherwise.
DILUTION
The common stock to be sold by the selling shareholders is common stock
that is currently issued and outstanding. Accordingly, there will be no dilution
to our existing shareholders.
Existing shareholders will experience dilution to the extent that
holders exercise their warrants and purchase shares of common stock.
DETERMINATION OF OFFERING PRICE
The resale of the shares purchased in our recent private placement and
certain shares owned by existing shareholders is being registered, together with
1,000,000 shares issuable upon the exercise of warrants. The selling
shareholders have set an offering price of US$0.20 until our shares are quoted
on the OTC Bulletin Board and thereafter at prevailing market prices or
privately negotiated prices. This price was based on the fact that most of the
selling shareholders recently purchased their shares at that price and therefore
this may be the best indicator of
8
market price. The selling shareholders may not have perceived an increase in
value of their shares since the date of purchase.
DIVIDEND POLICY
To date, we have not declared or paid any dividends on our common
stock. We do not intend to declare or pay any dividends on our common stock in
the foreseeable future, but rather to retain any earnings to finance the growth
of our business. Any future determination to pay dividends will be at the
discretion of our board of directors and will depend on our results of
operations, financial condition, contractual and legal restrictions and other
factors the board of directors deems relevant.
USE OF PROCEEDS
We will not receive any of the proceeds from the selling shareholders
of shares of our common stock. However, we may receive the sale price of any
common stock we sell to the selling shareholders upon exercise of the warrants.
We expect to use the proceeds received from the exercise of warrants, if any,
for general working capital purposes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
financial statements and the related notes included in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ significantly from those
projected in the forward-looking statements as a result of many factors,
including those discussed in "Risk Factors", "Business" and elsewhere in this
prospectus.
HISTORY AND OVERVIEW
V2K International, Inc. ("International") was incorporated as a
Colorado corporation on March 13, 2006. Through our wholly owned subsidiaries,
V2K Window Fashions, Inc., V2K Technology, Inc., and V2K Manufacturing, Inc., we
sell and support franchises in the residential and commercial window fashion
industry, develop and licenses proprietary software that allows users to
decorate windows for both residential and commercial customers, and manufacture
and sell the resulting soft window treatment products.
Details of the Company's subsidiaries as of March 31, 2007 are
described below:
EFFECTIVE
PLACE OF INCORPORATION INTEREST
ENTITY NAME AND LEGAL ENTITY PRINCIPAL ACTIVITIES HELD
----------- ---------------- -------------------- ----
V2K Window Fashions, Inc. Colorado corporation Franchise sales and support 100%
V2K Technology, Inc. Colorado corporation Development and licensing of 100%
software
V2K Manufacturing, Inc. Colorado corporation Manufacture of soft window 100%
covering products
In April 2006, in a share for share exchange, we acquired all issued
and outstanding shares of V2K Window Fashion's preferred and common stock in
exchange for shares of common stock in V2K International on a 1 for 35 basis and
1 for 10 basis, respectively.
9
In August 2006, V2K Window Fashions opened its first company-owned
franchise location, incorporated as Window Fashions Franchise, LLC. Window
Fashions Franchise, LLC is a wholly owned subsidiary of V2K Window Fashions.
In April 2006, V2K Window Fashions transferred legal ownership of V2K
Manufacturing and the related equity interest to V2K International. V2K Window
Fashions had acquired V2K Manufacturing in January 2004.
In July 2006, in order to further protect the intellectual property
associated with the software and to facilitate future licensing agreements, the
software and software development team formerly held by V2K Window Fashions were
spun-off to form V2K Technology. V2K Technology is a wholly owned subsidiary of
V2K International and licenses a customized window fashions franchise software
to V2K Window Fashions.
In April 2007, we organized Marketing Source International LLC, a
Colorado limited liability company. This company will endeavor to generate
revenues by acting as an exclusive sales agent for an overseas window coverings
manufacturing source.
As of the date of this prospectus, V2K Window Fashions is our primary
operating subsidiary, making franchising our primary operations. V2K Window
Fashions was incorporated in July 1996 to offer licenses to use the "Pictures
and Prices" software, which had been developed by an affiliated company,
Pictures and Prices Corporation. The assets of Pictures and Prices Corporation
were later transferred to us in 1999. We packaged the software license with our
training manuals, policies, procedures, and knowledge and began selling
franchises in March 1997. After obtaining a core group of franchisees in 1998,
we focused our efforts on building our infrastructure to provide support to our
franchisees, refining our business model, and developing our business plan.
Since our inception through March 31, 2007, in order to fund the
development of our proprietary software and to develop our franchising
operations, we have obtained approximately $2,583,250 from: amounts contributed
by our officers and directors ($487,000); the sale of stock ($1,746,250); and
loans ($350,000). During the quarter ended March 31, 2007, $300,000 of the
$350,000 in loans were converted into equity. We believe that our real value
lies in our software. However, that value is not reflected in our financial
statements due to accounting policies (discussed below) pertaining to research
and development costs. We believe that our software has now been developed to
the point where it can be used for a variety of niches within the home decor
industry. To complete the current version of the software and to build a larger
franchise base in order to achieve more economies of scale and establish a
significant distribution network, we raised cash proceeds of $453,750 in a
recent private placement of our stock and warrants.
In addition, these proceeds are being used to provide the funds
necessary to implement the next step in our business plan, which is becoming a
publicly-traded company in the United States. Funds are being used for legal,
accounting, and corporate consulting services and working capital. We believe
that by becoming a publicly-traded company, we will enhance the visibility of
our products and services and our ability to obtain additional financing in the
future.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FRANCHISE OPERATIONS. As of March 31, 2007, we supported 181
independently owned franchises located in 41 states and two provinces in Canada.
A summary of franchise activity is as follows:
MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
2007 2006 2005
-------------- --------------- --------------
Franchises in operation - beginning of period 182 160 132
Franchises sold during the period 14 30 37
Franchises cancelled, terminated or repurchased during the period (15) (8) (9)
-------------- --------------- --------------
Franchises in operation - end of period 181 182 160
============== =============== ==============
10
Franchisees are required to pay us an initial franchise fee, royalty
fees aggregating between 4% and 8% of gross sales and an advertising
contribution fee of 2% of gross sales. In addition, all materials and goods sold
by franchisees are processed, billed and collected through us using approved
vendors and suppliers.
REVENUE RECOGNITION. Initial franchise fees are recognized as revenue
upon the commencement of operations by the franchisee, which is when we have
performed substantially all initial services required by the franchise
agreement. Unearned income represents franchise fees received for which we have
not yet performed all of our initial obligations under the franchise agreement.
Such obligations, consisting mostly of training, are generally fulfilled within
60 days of receipt of the initial franchise fee. Royalty fees are recognized as
earned.
Franchisees place all orders for materials and supplies with us and we
then place the corresponding orders with our vendors. The products are shipped
directly to the franchisees. We are liable to the vendors for payment and
collect the amounts due for the goods from the franchisees. In addition, we are
responsible to the franchisees for goods shipped by the vendors that do not meet
specifications. Thus, we act as a principal as defined in the Emerging Issues
Task Force, Issue 99-19, "Reporting Revenue Gross as a Principal versus Net as
an Agent." Revenue from materials and supplies sales is recorded upon shipment
to the franchisee by the vendor and represented approximately 72% and 65% of
total revenue for the year ended September 30, 2006 and nine months ended
September 30, 2005, respectively, and approximately 66% of total revenue for the
six months ended March 31, 2007 and 2006.
INVENTORY. Inventory is valued at the lower of cost, using the first in
first out method, or market and consists of manufacturing materials and
supplies.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost.
Depreciation of equipment is provided by use of the straight-line method over
the estimated useful lives of the related assets of three to five years.
Leasehold improvements are amortized using the straight-line method over the
life of the lease. Expenditures for replacements, renewals and betterments are
capitalized. Maintenance and repairs are charged to operations as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS. We have adopted Statement of Financial
Accounting Standards (SFAS) 144, "Accounting for the Impairment and Disposal of
Long-Lived Assets," which requires that long-lived assets to be held and used be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. We will assess the
recoverability of the carrying cost of long-lived assets based on a review of
projected undiscounted cash flows related to the asset held for use. If assets
are determined to be impaired, then the asset will be written down to its fair
value based on the present value of the discounted cash flows of the related
asset or other relevant measures. As of September 30, 2006, no impairment has
been recorded.
ADVERTISING COSTS. We expense all costs of advertising as incurred.
Total advertising expenses for the year ended September 30, 2006 and the nine
months ended September 30, 2005 were $196,292 and $178,492, respectively.
Advertising expense does not include expenditures on behalf of franchisees from
the National/Regional/Local Advertising Fund.
INCOME TAXES. We have adopted the provisions of SFAS 109, "Accounting
for Income Taxes." SFAS 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Temporary differences between the time of reporting certain items for
financial and tax reporting purposes consist primarily of depreciation of
equipment and allowance for uncollectible receivables.
We account for income taxes in interim periods as required by
Accounting Principles Board Opinion No. 28, "Interim Financial Reporting" and as
interpreted by FASB Interpretation No. 18, "Accounting for Income Taxes in
Interim Periods." We have determined an estimated annual effective tax rate. The
rate will be revised, if necessary, as of the end of each successive interim
period during our fiscal year to our best current estimate. The estimated annual
effective tax rate is applied to the year-to-date ordinary income (or loss) at
the end of the interim period.
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USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RESEARCH AND DEVELOPMENT COSTS. We have adopted the provisions of SFAS
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," which requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based on our product development process, technological feasibility is
established upon completion of a working model. Since we do not incur any costs
between the completion of the working model and the point at which the product
is ready for general release, all research and development costs are charged to
expense as incurred. Research and development expenses for the year ended
September 30, 2006 and the nine months ended September 30, 2005 were $433,201
and $308,648, respectively. Research and development expenses for the six months
ended March 31, 2007 and 2006 were $225,924 and $210,659, respectively.
VARIABLE INTEREST ENTITIES. The Financial Accounting Standards Board
("FASB") issued Interpretation 46 (revised 2003), "Consolidation of Variable
Interest Entities" and requires the primary beneficiary of a variable interest
entity to consolidate that entity. The primary beneficiary of a variable
interest entity is the party that absorbs a majority of the variable interest
entity's expected losses, receives a majority of the entity's expected residual
returns, or both, because of ownership, contractual or other financial interests
in the entity.
The primary entities in which we possess a variable interest are
franchise entities. We do not possess any ownership interests in franchise
entities, other than Window Fashions Franchise, LLC, which is consolidated, and
we do not generally provide financial support to the franchisees. Management has
reviewed the franchise entities and determined that we are not the primary
beneficiary of the entities, and therefore, these entities have not been
consolidated.
INCOME (LOSS) PER SHARE. Basic income (loss) per share is computed
based on the weighted average number of common shares outstanding during each
period. The computation of diluted earnings per share assumes the conversion,
exercise or contingent issuance of securities only when such conversion,
exercise or issuance would have a dilutive effect on income per share. The
dilutive effect of convertible securities is reflected in diluted earnings per
share by application of the "as if converted method." The dilutive effect of
outstanding options and warrants and their equivalents is reflected in diluted
earnings per share by application of the treasury stock method.
For the nine months ended September 30, 2005, year ended September 30,
2006 and for the six months ended March 31, 2007 and 2006, all outstanding
options and convertible preferred stock were excluded from the computation of
diluted loss per share as the effect of the assumed exercise and conversions
would be anti-dilutive.
SHARE BASED COMPENSATION. Prior to October 1, 2006 we accounted for our
share based compensation plans under the recognition and measurement provision
of APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and
related Interpretations, as permitted by FASB Statement No. 123, "Accounting for
Share-Based Compensation" (SFAS 123). Effective October 1, 2006, we adopted the
fair value recognition provisions to SFAS 123(R), using the modified-prospective
transition method. Results from prior periods have not been restated.
CASH EQUIVALENTS. For purposes of reporting cash flows, we consider as
cash equivalents all highly liquid investments with a maturity of three months
or less at the time of purchase. At September 30, 2006 and September 30, 2005,
there were no cash equivalents. At March 31, 2007 and 2006, there were no cash
equivalents.
Cash at September 30, 2006 and September 30, 2005 included $117,983 and
$145,538, respectively, of cash restricted for advertising and marketing. Cash
at March 31, 2007 and 2006 included $38,524 and $57,591, respectively, of cash
restricted for advertising and marketing. Such funds were contributed by
franchisees to a National/Regional/Local Advertising Fund pursuant to franchise
agreements, and may not be used for our general operations.
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SHIPPING AND HANDLING FEES AND COSTS. All amounts billed to franchisees
for shipping and handling represent revenues earned and are reported as
revenues, and the costs incurred by us for shipping and handling are reported as
an expense.
FAIR VALUE. The carrying amount reported on the balance sheet for cash,
accounts receivable, inventory, accounts payable and accrued liabilities
approximates fair value because of the immediate or short-term maturity of these
financial instruments.
The carrying amounts of notes receivable approximate fair value as the
effective rates for those instruments are comparable to market rates at year
end.
Based upon the borrowing rates currently available to us for loans with
similar terms and average maturities, the fair value of long-term debt
approximates its carrying value.
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially
subject us to concentrations of credit risk consist of cash, trade accounts
receivable and notes receivable.
We maintain cash accounts at a single financial institution. At
September 30, 2006, we had $267,705 on deposit in excess of the federally
insured amount. We periodically evaluate the credit worthiness of financial
institutions, and maintain cash accounts only in large high quality financial
institutions, thereby minimizing exposure for deposits in excess of federally
insured amounts. We believe that credit risk associated with cash is minimal.
We have recorded trade accounts receivable from business operations. We
periodically evaluate the collectibility of trade receivables and have provided
an allowance for potentially uncollectible accounts.
We have recorded notes receivable from business operations. We
periodically evaluate the collectibility of our notes receivable and have deemed
all outstanding notes to be collectible.
For the year ended September 30, 2006 and the nine months ended
September 30, 2005, approximately 68% and 73%, respectively, of materials and
supplies were acquired from three major vendors, the largest vendor's activity
representing 34% and 47%, respectively, of the total. The related accounts
payable to the largest vendor was approximately $309,927 as of September 30,
2006, and $146,754 as of September 30, 2005.
SEGMENT REPORTING. SFAS 131, "Disclosures about Segment Reporting of an
Enterprise and Related Information," establishes standards for the way public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosure about
products and services, geographic areas and major customers. We conduct business
in four operating segments. V2K Window Fashions sells and supports franchisees
in the residential and commercial window fashion industry; V2K Technology
develops and licenses proprietary software that allows users to decorate windows
for both residential and commercial customers; and V2K Manufacturing
manufactures soft product window treatments exclusively for Windows franchisees.
Identified assets by industry are those assets that are used in our
operations in each industry. Our assets are principally cash, accounts
receivable and equipment.
We have adopted SFAS 131 which requires the presentation of descriptive
information about reportable segments which is consistent with that made
available to our management to assess performance. V2K Window Fashions derives
its revenues from sales of franchises, royalty and sales of materials and
supplies to franchisees. V2K Manufacturing receives its income from the sale of
labor on soft product window treatments to Window's franchisees.
CRITICAL ACCOUNTING POLICIES
As stated above, the preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts
13
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. At this time, our operations are such that
there are two primary areas of estimates and assumptions that could potentially
have a material impact to the financial statements if significantly
miscalculated. These areas are the allowance for doubtful accounts and share-
based compensation.
The allowance for doubtful accounts incorporates protection against
write-offs for bad debt with respect to both notes receivable and accounts
receivable. This allowance is calculated based on historical write-offs as a
percentage of these accounts and from current analysis of our existing franchise
base. We believe that the current allowance is adequate for these potential
write-offs based on these assumptions. This account is reviewed in great detail
monthly and adjusted as needed. At March 31, 2007 and September 30, 2006,
allowance for doubtful accounts was $61,150 and $43,150, respectively.
The potential risk of these estimates can be material to the financial
statements, because the receivables are the largest assets on the balance sheet.
If we were to incur adjustments for write-offs that were not covered under the
allowance it would be posted through the bad debt line item on the financial
statements in the operating expenses, and the offset would reduce the related
receivables balance on the balance sheet. Based on the average receivable
balances for the last 24 months, if the estimate was significantly miscalculated
it could have a negative impact of $100,000 to $200,000 to the financial
statements. We believe based on our knowledge and ongoing review that the risk
of miscalculating to this level is low, barring any unforeseen economic
downturn.
Share-based compensation involves calculating the value of stock
options granted under our stock option plan, following calculation methods
prescribed by SFAS 123R. We use the Black-Scholes stock option pricing model,
which requires assumptions for expected option life, a risk-free interest rate,
dividend yield, and volatility. Expected option life represents the period of
time that options granted are expected to be outstanding, the risk-free interest
rate is based on the U.S. Treasury market, and volatility is derived from an
analysis of trading prices of the stock of a peer company. For the six months
ended March 31, 2007, share-based compensation was $123,043. Share-based
compensation is included in selling, general and administrative expenses as an
operating expense and therefore has a significant impact on results of
operations.
RESULTS OF OPERATIONS
At this point in our development, our results of operations are
impacted primarily by the sales of franchises, as our existing franchise base is
too small to generate enough royalty revenue and gross profit margin from sales
of materials and supplies to support our operations. While revenues from sales
of material and supplies comprise 65% to 75% of total revenues, the margin on
these sales ranges from 2% to no more than 6%. Our margins are relatively low
because we do not have enough volume to obtain better pricing from our vendors.
We limit our mark-up to our franchisees so that they can be competitive in
quoting prices to customers and also operate profitably.
In January of 2005, we began to focus primarily on developing the
retail sales of existing franchisees, as opposed to increasing sales of
franchise units. We believed that by doing so, we would increase both royalty
revenues and the dollar amount of margin made on sales of materials and
supplies. Also with increased retail sales, we would be able to leverage our
buying power with our vendors, thereby allowing us to increase our margins made
on sales of materials and supplies. More importantly, we believed that we would
be able to increase the sale of franchises. If our existing franchisees can
increase their retail sales, they would provide better validation our franchise
concept for those interested in purchasing a franchise from us and investigating
the merits of our franchise compared to others.
With the beginning of the current fiscal year ending September 30,
2007, we have established a formal franchise development department and are
placing our efforts both on sales of franchises and making our existing
franchisees more successful. The results of operations described below reflect
these efforts.
SIX MONTHS ENDED MARCH 31, 2007 AS COMPARED TO SIX MONTHS ENDED MARCH
31, 2006. For the six months ended March 31, 2007, sales of franchises decreased
by $122,423 (12%) from the corresponding period of the previous fiscal year.
During the quarter ended March 31, 2006, we sold an unusually high number of
franchises. We believe that revenue from sales of franchises for the six months
ended March 31, 2007 is more representative of our ongoing sales efforts. Our
gross margin on sales of franchises was 43% for the 2007 period, as compared to
47% for 2006.
14
For the 2007 period, royalty and advertising fees increased by $140,198
(44%). Sales of materials and supplies increased by $128,533 (5%), reflecting
the larger number of franchisees in operation (181 at March 31, 2007, as
compared to 176 at March 31, 2006) and the fact that with every year, our
franchise base becomes more tenured.
While our revenues increased by $146,308 (4%), our operating expenses
increased by $311,459 (8%), resulting in an increase of $165,151 (54%) in loss
from operations.
Selling, general and administrative expenses increased by $230,269
(24%), with the most significant increases being in stock compensation expense
($118,743) as the result of our adoption of SFAS 123(R), "Share-Based
Compensation" effective October 1, 2006, and in payroll (approximately $100,000)
and benefits (approximately $12,000) from additional staffing. Research and
development expenses increased by only $15,265 (7%).
We increased our bad debts provision by $14,666 (290%) in 2007 due to
our more stringent monitoring of accounts receivable described below.
Interest expense increased by $3,183 (27%) for the 2007 period,
primarily due to the bridge loan of $200,000 incurred in January 2006. Interest
on the bridge loan accrued at four percent over the prime rate and was $10,208
for the six months ended March 31, 2007.
As a result of the above, our net loss for the six months ended March
31, 2007 was $482,350, as compared to $316,819 for the comparable 2006 period,
an increase of $165,531 (52%).
YEAR ENDED SEPTEMBER 30, 2006 AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2005. We changed our fiscal year end to September 30 in 2005 to
facilitate our ability to meet annual updating deadlines for our franchise
offering circular under federal law and annual registration renewal filing
deadlines under state laws. Accordingly, our fiscal "year" consists of only nine
months for 2005, as compared to a year for 2006.
We sold 30 franchises for the year ended September 30, 2006, as
compared to 37 for the nine months ended September 30, 2005, as reflected by the
decrease in sales of franchises of $161,590 (10%). Our margin on sales of
franchises was 45% for 2006, as compared to 53% for 2005. The most significant
component of cost of franchise sales is the selling commission. If we obtain the
sale of a franchise through the assistance of a broker, we pay a commission
equal to 40% of the franchise purchase price, with an additional 7.2% commission
paid to our in-house sales personnel. If we obtain the sale of a franchise
without the assistance of a broker, we pay a 12% commission to our in-house
sales personnel. Approximately 85% of our sales of franchises are generated
through brokers. Other components of cost of franchise sales are the costs of
training that we provide (such as lodging and travel expenses), equipment
provided to the franchisee (laptop computer, printer and carrying case), books
of fabric samples, and starter sets of marketing materials. The decrease in
margin on the sale of franchise units in 2006 was primarily the result of
additional items we provided to new franchisees during the 2006 fiscal year.
These items included a business coaching program provided by a third party, an
increased allotment of start-up marketing materials, and reimbursement of the
franchisees' marketing budget up to a certain amount. There were also
incremental increases in the cost of the other items we have always provided in
conjunction with the purchase of a franchise. The additional items were provided
on a test basis and may not be continued through the current fiscal year.
In 2006, royalty fees and sales of materials and supplies increased by
$343,883 (68%) and $1,842,807 (46%), respectively. We believe that the increase
is due to the fact that more of our franchisees were in business for a longer
period in 2006, and that this business experience resulted in more sales. In
addition, there were 182 franchisees at September 30, 2006, as compared to 160
at September 30, 2005. Our management believes that it takes the average
franchisee two years to establish its franchise business. At September 30, 2006,
approximately 60% of our franchisees had been in business for two years or
longer, as compared to September 30, 2005, at which approximately 37% of our
franchisees had been in business for two years or longer.
While our revenues increased by $2,025,100 (33%), our operating
expenses increased by $2,662,100 (43%), resulting in the operating loss $723,738
in 2006.
15
Selling, general and administrative expenses increased by $661,659
(49%), primarily due to the change in fiscal year, as well as approximately
$80,000 spent for a national convention of franchisees, approximately $36,000 in
additional legal expenses, approximately $40,000 in additional accounting
expenses, approximately $50,000 for additional advertising expenses, and
approximately $100,000 for additional staffing. Research and development costs
were $433,201 in 2006, compared to $308,648 in 2005.
Interest expense increased by $19,670 (193%), primarily due to the
$200,000 bridge loan incurred in January 2006. Interest on the bridge loan was
$17,932 for 2006.
As a result of the above, our net loss for the year ended September 30,
2006 was $732,205, as compared to a net loss of $78,114 for the nine months
ended September 30, 2005, an increase in the net loss of $654,091.
LIQUIDITY AND FINANCIAL CONDITION
We have incurred negative operating cash flows, operating losses, and
negative working capital. We have relied upon sales of our common stock and
borrowing in the form of bridge loans and convertible debentures to address our
liquidity needs. To a lesser extent, we have also used bank financing.
Some of the key components to our operating cash flows are the changes
in accounts receivable and accounts payable. As we are essentially a product
distributor, our level of activity is reflected in our accounts receivable and
accounts payable. We receive invoices from vendors for product and
simultaneously bill our franchisees. The Days Sales Outstanding ("DSO") as of
September 30, 2006 and March 31, 2007 was 42 days and 35 days, respectively, as
compared to 49 days at September 30, 2005. We have hired a new accounts
receivable clerk and have implemented full utilization of our existing credit
policies and procedures. This has allowed us to improve our DSO to only 35 days
at March 31, 2007. These changes include putting franchisees on hold, charging
interest on past due invoices, and consistently sending out statements to all
franchisees. We have cancelled three franchise agreements in this new
environment and have turned these balances over to collections. The total dollar
amount on these accounts is less than $20,000. We anticipate that these changes
should allow us to improve our DSO even more, thereby improving our cash flows,
while reducing the amount of write-offs when compared to previous years.
AS OF SEPTEMBER 30, 2006. At September 30, 2006, we had a working
capital deficiency of $182,258, as compared to a working capital surplus of
$255,037 at September 30, 2005. The decrease in working capital was due
primarily to the loss of $732,205 incurred for the year. Our increase in
accounts payable and accrued expenses of $311,549 were only partially offset by
an increase in accounts receivable of $223,097. Additionally, we borrowed
$200,000 in January 2006, which remained outstanding at September 30, 2006. We
also had an increase of $64,674 in unearned income. Note payable - other became
a current liability at September 30, 2006. This note consists of the currently
deferred portion of our rent obligation under an office lease entered into
effective September 15, 2002. Under the terms of the lease, the landlord
deferred a portion of the monthly rent aggregating $140,000 over the period from
September 15, 2002 to August 15, 2007. The deferred portion is evidenced by a
non-interest bearing promissory note, which is payable in cash or shares of our
common stock at the option of the landlord. We accrete the deferred portion of
the monthly rent utilizing an imputed interest rate of 5.75%. The note increased
$27,000 and $21,000 during the year ended September 30, 2006 and nine months
ended September 30, 2005, respectively. The balance at September 30, 2006 and
September 30, 2005 of $124,167 and $97,167, respectively, represents the
remaining deferral and related imputed interest.
Unearned income represents franchise fees received for which we are
performing our initial obligations under the franchise agreement. Our primary
obligation under the franchise agreement is providing training for two persons
for each franchise. We reimburse the franchisee for airfare for one person (up
to $500) and pay lodging expenses for one person to attend the training as part
of the franchisee fee. At the training, the franchisee receives equipment (a
laptop computer, portable printer and carrying case), software (both V2K's
proprietary software and non-proprietary software such as Windows Office and
QuickBooks), manuals (training, as well as policy and procedure), and an
electronic marketing kit. Samples of fabric and hard products and a starter set
of printed materials (business cards, stationery and promotional materials) are
shipped to the franchisee when training occurs.
16
Accordingly, since we perform substantially all initial obligations required by
the franchise agreement once training is completed, we recognize initial
franchise fees as revenues at that time.
For the year ended September 30, 2006, we used cash of $380,683 for
operating activities, as compared to $49,138 for the nine months ended September
30, 2005. Financing activities provided cash of $456,227 in 2006, primarily
through proceeds from the sale of common stock of $257,000 and the proceeds from
bridge loans from both third parties and related parties in the aggregate amount
of $200,000 received in January 2006. The bridge loans were evidenced by
convertible promissory notes that required quarterly interest payments in
arrears at the rate of four percent plus the prime rate. During the year ended
September 30, 2006, we paid interest of $17,932. We issued warrants to the
bridge loan lenders to purchase a total of 1,000,000 shares of common stock at
$0.30 per share, and charged $7,655 to other expense. In 2005, financing
activities provided cash of $106,157, primarily through the sale of convertible
debentures in the aggregate amount of $100,000. These convertible debentures
were issued in February 2005 to one of our officers and directors and to one of
our shareholders and required quarterly interest payments at the prime rate plus
one percent. Interest accrued and paid on the debentures for the year ended
September 30, 2006 and nine months ended September 30, 2005 were $8,875 and
$4,721, respectively. There were no cross-default provisions contained in the
bridge loan notes, convertible debentures or bank loan.
AS OF MARCH 31, 2007. At March 31, 2007, we had working capital of
$53,064, as compared to a deficiency of $182,258 at September 30, 2006. The
increase in working capital was due primarily to our receipt of cash proceeds
from our private placement of $453,750, which is reflected in cash of $398,270
at March 31, 2007, as compared to $330,547 at September 30, 2006.
For the six months ended March 31, 2007, we used cash of $348,345 for
operating activities, as compared to $229,146 for the comparable period in 2006.
However, financing activities, principally the proceeds from the sale of common
stock in our private placement, provided cash of $349,092 in 2007. In
comparison, financing activities provided cash of $183,584 in 2006, primarily
from the proceeds of a $200,000 bridge loan.
During the six months ended March 31, 2007, holders of the $200,000 in
bridge loans and $100,000 in convertible debentures converted their debt into
equity. The bank facility that we have utilized in the past will be completely
satisfied at May 31, 2007.
PLAN OF OPERATIONS
We are projecting a positive cash flow of approximately $230,000 for
the second half of the current fiscal year that ends September 30, 2007. This
cash flow should provide the capital necessary for all current operations
without utilizing external sources of cash. Our projection is based on sales of
21 franchises for the second half of the year, as compared to 13 for the first
half. A portion of the proceeds from the private placement was used for lead
generation and we are already seeing an increase in leads from this expenditure.
This projection is also based on increased retail sales by our franchisees due
to seasonality and the increased number of established franchisees. An increase
in retail sales will generate more royalty revenues and margin from the sale of
materials and supplies. In addition, we implemented programs in April 2007 with
all of our major vendors that will increase our rebates and discount percentages
from around 2% to 8% for most of the second half of the year. Lastly, we have
implemented a company-wide cost reduction program that we estimate will result
in approximately $8,000 to $15,000 per month in reduced expenses.
Our primary focus for the remainder of the current fiscal year will be
to increase the retail sales of our franchise base, to continue with our rollout
of our three-dimensional software and to launch Market Source International. As
discussed above, increasing retail sales results in increased royalty revenues
and margin made on sales of materials and supplies, as well as increased sales
of franchises.
While we believe that our cash flow for the second half of the current
fiscal year will provide sufficient capital to maintain all current operations,
including our focus to increase retail sales and continue rollout of our
three-dimensional software, we will need financing of approximately $100,000 to
implement our short-term growth plan of launching our new subsidiary, Marketing
Source International LLC. This subsidiary will endeavor to generate revenues by
acting as an exclusive sales agent for an overseas window coverings
manufacturing source.
17
We believe that such funds can be raised from certain of our existing
shareholders. Bank financing is limited, as most of our asset base consists of
accounts receivable from franchisees.
Our plans for growth for the next fiscal year include continuing to
develop our software to include all aspects of home decor and seeking to develop
additional applications for our software including, but not limited to, an
e-commerce/web-based version of the software and a kiosk application. While we
will likely add to our programming staff, we believe that the cost of this
addition will be offset by revenues generated from licensing our software for
other applications. We have not established a timetable for the development of
our software to cover these other aspects or additional applications. These
plans are in the early stages and we have not quantified the estimated costs of
these projects.
We will also seek to accelerate the growth of our franchise base and
develop additional environments for the distribution of our products.
Accordingly, we will likely add other employees to assist in the support of our
franchisees. We estimate that we will add four to six employees over the next
twelve to fifteen months.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements",
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. Where applicable, SFAS 157 simplifies and codifies
related guidance within GAAP and does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier adoption is encouraged. We do not expect the adoption of SFAS 157
to have a significant effect on our financial position or results of operation.
In June 2006, the FASB issued FASB Interpretation 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement 109" ("FIN
48"), which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We do not expect the adoption of FIN 48 to
have a material impact on our financial reporting, and we are currently
evaluating the impact, if any, the adoption of FIN 48 will have on our
disclosure requirements.
In March 2006, the FASB issued SFAS 156, "Accounting for Servicing of
Financial Assets--an Amendment of FASB Statement 140." This statement requires
an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract in any of the following situations: a transfer of the
servicer's financial assets that meets the requirements for sale accounting; a
transfer of the servicer's financial assets to a qualifying special-purpose
entity in a guaranteed mortgage securitization in which the transferor retains
all of the resulting securities and classifies them as either available-for-sale
securities or trading securities in accordance with SFAS 115; or an acquisition
or assumption of an obligation to service a financial asset that does not relate
to financial assets of the servicer or its consolidated affiliates. The
statement also requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable and permits
an entity to choose either the amortization or fair value method for subsequent
measurement of each class of servicing assets and liabilities. This statement is
effective for fiscal years beginning after September 15, 2006, with early
adoption permitted as of the beginning of an entity's fiscal year. Management
believes the adoption of this statement will not impact our financial condition
or results of operations.
In February 2006, the FASB issued SFAS 155, "Accounting for Certain
Hybrid Financial Instruments, an Amendment of SFAS 133 and 140". This statement
established the accounting for certain derivatives embedded in other
instruments. It simplifies accounting for certain hybrid financial instruments
by permitting fair value remeasurement for any hybrid instrument that contains
an embedded derivative that otherwise would require bifurcation under SFAS 133
as well as eliminating a restriction on the passive derivative instruments that
a qualifying special-purpose entity ("SPE") may hold under SFAS 140. This
statement allows a public entity to irrevocably elect to initially and
subsequently measure a hybrid instrument that would be required to be separated
into a host contract and derivative in its entirety at fair value (with changes
in fair value recognized in earnings) so long as that instrument is not
designated as a hedging instrument pursuant to the statement. SFAS 140
previously prohibited a qualifying
18
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for fiscal years beginning after
September 15, 2006, with early adoption permitted as of the beginning of an
entity's fiscal year. Management believes the adoption of this statement will
have no immediate impact on our financial condition or results of operations.
In May 2005, the FASB issued SFAS 154. This Statement replaces APB
Opinion 20, "Accounting Changes", and SFAS 3, "Reporting Accounting Changes in
Interim Financial Statements", and changes the requirements for the accounting
for and reporting of a change in accounting principle. This Statement applies to
all voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions should
be followed. In April 2006, V2K Window Fashions transferred legal ownership of
V2K Manufacturing and the related equity interest to V2K International (see Note
1 of the Notes to the Financial Statements). Under SFAS 154 this transaction is
deemed to be a change in reporting entity. As required, the operating results
from V2K Manufacturing have been included in the consolidated financial
statements.
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment."
SFAS 123(R) amends SFAS 123, "Accounting for Stock-Based Compensation," and APB
Opinion 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires
that the cost of share-based payment transactions (including those with
employees and non-employees) be recognized in the financial statements. SFAS
123(R) applies to all share-based payment transactions in which an entity
acquires goods or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an ESOP) or by
incurring liabilities (1) in amounts based (even in part) on the price of the
entity's shares or other equity instruments, or (2) that require (or may
require) settlement by the issuance of an entity's shares or other equity
instruments. This statement is effective (1) for public companies qualifying as
SEC small business issuers, as of the first fiscal year beginning after December
15, 2005, or (2) for all other public companies, as of the first fiscal year or
interim period beginning after June 15, 2005, or (3) for all nonpublic entities,
as of the first fiscal year beginning after December 15, 2005. Effective October
1, 2006, we adopted the fair value recognition provisions of SFAS 123(R), using
the modified-prospective transition method. Results from prior periods will not
be restated.
19
BUSINESS
OVERVIEW
We were incorporated on March 13, 2006 in the State of Colorado. On
April 1, 2006, in a share for share exchange, we acquired all of the issued and
outstanding shares of V2K Window Fashions, Inc., a company incorporated in
Colorado on July 24, 1996, and V2K Manufacturing, Inc., a company incorporated
in Colorado on September 21, 1994. On July 1, 2006, we transferred the software
and our software development team into a separate entity named V2K Technology,
Inc., a wholly-owned subsidiary and a Colorado corporation. In August 2006, V2K
Window Fashions opened its first company owned franchise location, incorporated
as Window Fashions Franchise, LLC. Window Fashions Franchise, LLC is a wholly
owned subsidiary of V2K Window Fashions. On April 6, 2007, we organized
Marketing Source International LLC, a Colorado limited liability company.
Through our wholly-owned subsidiaries, V2K Window Fashions, Inc., V2K
Technology, Inc., and V2K Manufacturing, Inc., we sell and support franchises in
the residential and commercial window fashion industry, develop and license
proprietary software that allows users to decorate windows for both residential
and commercial customers, and manufacture and sell the resulting soft window
treatment products. While exploring the possibility of using an offshore vendor
to reduce the cost of materials and manufacturing labor costs, we established a
relationship with a manufacturing source. We believe that other retail firms in
the window fashion industry would be interested in obtaining product from this
source. Accordingly, we formed Marketing Source International LLC, and we will
endeavor to generate revenues by acting as an exclusive sales agent for that
overseas window coverings manufacturing source.
Our current emphasis is in window fashions and accessories. Our
subsidiary, V2K Window Fashions, Inc. ("V2K Window Fashions") sells and supports
franchises in the window fashion industry. We began selling franchises in March
1997. Our first franchisee started operations in August 1997. After selling
several franchises, we halted our franchise sales activity while we refined our
business plan and secured outside financing. We began aggressively developing
the franchise business model in November 2001, at which point we had 9
franchisees. As of March 31, 2007, we had 181 franchisees, operating in 41
states and the provinces of Alberta and Manitoba.
Using our proprietary software developed at V2K Technology, Inc. ("V2K
Technology"), our franchisees sell window fashions of all kinds to both
commercial and residential customers. All sales orders made by our franchisees
are sent to us for fulfillment. Another subsidiary, V2K Manufacturing, Inc.
("V2K Manufacturing"), manufactures "soft" window fashions made up of fabric
treatments, such as drapes and curtains. "Hard" goods, such as blinds, cellular
shades, and shutters, are sourced to third party vendors. All items are shipped
directly from the manufacturer or vendor to the franchisee.
We intend to become the dominant company in the window decor and
accessory market. We intend to accomplish this goal by:
o introducing our exclusive, three-dimensional proprietary software
technology into the industry's sales channel and supply chain;
o growing the business aggressively through the franchise business model
and corporate license agreements;
o controlling the industry's distribution channel; and
o acquiring hard product manufacturing capabilities and becoming fully
vertically integrated.
Our long-term vision is to capture the majority of the home decor arena
into a scalable, three-dimensional, graphic technology, allowing our sources of
distribution to bring unique general economies of scale to flooring, wall
coverings, art, and accessory furnishings, among others. In addition, we have
license opportunities in related fields, such as the casement window industry,
paint industry, and other industries in the building and design trade.
Our corporate offices, which include V2K International, V2K Window
Fashions, V2K Technology, and Marketing Source International, are located at
1127 Auraria Parkway, Suite 204, Denver, Colorado 80204, and our telephone
number is (303) 202-1120. V2K Manufacturing is located at 685 South Jason
Street, Denver, Colorado 80223.
20
OUR PROPRIETARY SOFTWARE
We have developed proprietary software that enables the user to
decorate interiors of homes and other buildings on a computer screen. By using
the same type of graphics engine utilized by computer games, the user "sees" a
three-dimensional image of a room, drawn to scale, on the computer screen.
Window coverings and accessories can be placed in the room, allowing the user to
see the end result of the decorating effort. Moreover, our software prices the
items and prints the necessary purchase orders. We are in the process of rolling
out the three-dimensional version of this software to our franchise base, as the
earlier version used only two-dimensional images.
As our current emphasis is in window fashions, the software has been
customized to enable the user to:
o design virtually any window covering style to scale on a
computer or digital TV screen;
o adjust or redraw the window covering;
o calculate the price of the window covering immediately; and
o print a customer sales order for the window covering, as well
as purchase orders for the vendors, production orders for the
workroom, and installation instructions for the installer.
We believe that our software is unique and provides users with two
distinct advantages:
o Customers can see what the window coverings will look like on
their windows before they buy. A sales agent can stay with the
customer, showing the customer exactly what the window
treatment will look like, to scale, and how much it will cost,
until the customer finds a satisfactory style and a price.
o The time-consuming calculation and paperwork commonly
associated with the window covering business has been
eliminated. With one keystroke and no additional data entry,
the sales agent can create the purchase orders for the vendors
and the production order for the workroom.
We plan to develop a web-based version of the software that will allow
customers to design their own window coverings on the Internet, and a kiosk
version of our technology to be used in big box stores. We also plan to expand
the existing software to provide a variety of interior and exterior design
functions. We have not established any timetables for these plans.
CURRENT APPLICATION OF SOFTWARE
Franchisees go into the homes or businesses of prospective customers
equipped with a laptop computer. In their vehicles are samples of fabrics that
we offer. After measuring the windows and entering the data into the computer,
the franchisee can then put the whole room, including the ceiling, floor,
windows, and walls to scale in the computer. A window library resides in the
software containing almost any shape or style of window that exists. The
franchisee may then enter the colors and texture of the walls, floor and
ceiling, as well as show the room under a variety of lighting conditions.
The franchisee then begins to decorate the window electronically on the
screen in the desired style specified by the customer. The software contains a
fabric library that the franchisee can retrieve to show on the window treatment.
While the windows are being decorated on the screen, the software computes the
sales price of the treatment, gross margin, and percent of profit to the
franchisee. The customer can know immediately the sales price of each window
treatment and the order as a whole. The franchisee can see the margins and
percent of profit and adjust the sales price down if necessary in order to get
the sale.
Once the customer sees a design and price that is acceptable, the
franchisee can bring in an actual sample of the fabric for the customer to see
and touch. The software generates a sales order for the customer to sign. The
franchisee generally collects 50% of the total purchase price as a deposit. We
offer 3-, 6- and 12-month, no-payment, deferred interest consumer financing
plans through a national financial institution. We receive from the national
financial institution an amount agreed upon by the customer (gross financed)
less a financing cost of approximately 8%. We then deduct this financing cost
from the amount sent to the franchisee plus a small administrative fee of up to
1%. Administrative fees that we earned for the year ended September 30, 2006 and
for
21
the nine months ended September 30, 2005, were $1,000 and $1,000, respectively,
on amounts financed of $32,000 and $8,000, respectively.
With an order in hand, the franchisee can send the order to us
electronically. One of our product specialists then audits the order to make
sure it conforms to the product being sold, and verifies the pricing. Upon
approval by a product specialist, the order is then broken down by vendor and
the materials are ordered. The vendor then processes the order and ships the
finished hard products directly to the franchisee. In the case of soft products,
the fabric is shipped to V2K Manufacturing where the soft products are made. At
those times when the volume of orders exceeds the capacity of our workroom, we
send the orders to an outside workroom with which we have a working
relationship. At completion, the finished soft products are shipped to the
franchisee. Upon receipt of the finished goods, the franchisee arranges for
third party installation at the customer's home or office.
THE INTERIOR DECORATING MARKET
The U.S. market for interior decor, including window fashions, is
fragmented in terms of competition and established distribution channels. For
example, according to a market research report, WINDOW TREATMENTS AND
WALLCOVERINGS, by Catalina Research, published January 1, 2004, soft product
window fashion sales were distributed as follows:
o discount or mass merchandising department stores - 27%
o conventional and national chain department stores - 10.8%
o window treatment stores - 15.3% o warehouse clubs - 9.5%
o electronic, mail order and direct selling retailers - 6.4%
o other home furnishing stores - 6.3%
o home centers, other building material dealers - 6.2%
o specialty floor covering retailers - 4.5%
o family clothing stores - 4.3%
o general merchandisers - 2.6%
o paint and wallpaper stores - 2.1%
o furniture stores - 1.5%
o hardware stores - 0.9%
o piece goods stores - 0.8%
o other retailers - 1.8%
This fragmentation has limited the implementation of technology as a
competitive component in the window fashion industry. The industry is not
automated at the point of sale and industry participants have, up to now, relied
on antiquated manual systems for selling and administrating window fashions,
resulting in quality control errors and higher operating margins.
Typically, a sales agent, decorator, or designer goes to a potential
customer's home and attempts to sketch or draw a treatment in which the customer
is interested. In the case of "hard" treatments involving non-fabric items, the
agent uses a yellow pad and calculator to provide the customer an approximate
price. This is a long and tedious process. If the customer objects to the price
or wants to explore other alternatives, a different treatment is selected and
the pricing process begins anew. In the case of "soft" treatments involving the
use of fabric, the agent will most likely have to meet with the manager of a
workroom in order to calculate yardage, width cuts, repeats, and a variety of
other variables, before he or she can get back to the customer with a price.
This process may take as many as 3 to 5 days. If the customer objects to the
price, the agent must either discount the price or start the entire process over
again. Once the customer decides on a treatment, the agent will literally spend
hours writing purchase orders for the vendors, and in the case of soft
treatments, production orders for the workroom. It is inevitable that mistakes
are made along the way.
22
FRANCHISE AND LICENSING OPERATIONS
We do not sell window fashions directly to the customer. Instead, we
have chosen to grow our business by selling franchise and license agreements.
We started selling franchises in March 1997. As of March 31, 2007,
we had 181 franchisees, operating in 41 states and the provinces of Alberta and
Manitoba. ENTREPRENEUR magazine rated us 50th in its Top Homebased Franchises
2006 Rankings and 189th in its Franchise 500 2006 Rankings. Potential investors
should not conclude from this preceding statement that the magazine is actively
endorsing or promoting our company.
We sell franchise units based on a territory size of 30,000 households.
Franchisees may purchase one or more additional areas of primary responsibility
if they are not in default under their franchise agreements, if the additional
areas are available, and if we approve. Additional areas may have more or less
than 30,000 households. We will determine the fee for each additional area at
the time of purchase, but will be less than the initial franchise fee. As of the
date of this memorandum, the current fee for each additional area is $1.05 per
household, but we may change this fee at any time.
We also make available a Small Market Franchise, based on a territory
size of up to 15,000 households, in sparsely populated areas where a territory
of 30,000 households would be difficult to cover because of the distances
involved.
We currently charge a franchise fee of $59,900, and $29,950 for a Small
Market Franchise, for which the franchisee receives the following:
o a laptop computer, portable printer, and carrying case
o V2K's proprietary software, including an exclusive price
management program
o non-proprietary software
o samples of fabric, hard products and decorative hardware
o starter set of printed materials, including business cards,
stationery, and promotional materials o training manual, policy
and procedure manual and electronic marketing kit and
o the exclusive right to advertise in a designated area.
We also provide basic training for up to two persons for each
franchise. We reimburse the franchisee for airfare for one person (up to $500)
and pay lodging expenses for one person to attend the training as part of the
franchise fee. The franchisee is liable for meals, travel, and lodging expenses
for any additional person(s).
In addition to the franchise fee, we require franchisees to pay a
non-refundable continuing royalty based on a percentage of the franchisee's
annual gross sales in each franchise year, according to the following schedule:
o first $200,000 of gross sales - 8%
o next $100,000 of gross sales - 7%
o amount over $300,000 of gross sales - 4%
The first franchise year commences on the first day of the first full
month following the franchisee's satisfactory completion of basic training or on
any other date we may designate. Each subsequent one-year period is another
franchise year.
The minimum annual royalty fee in the first franchise year is $2,500,
$5,000 in the second franchise year, and $10,000 each franchise year thereafter.
In the case of a Small Market Franchise, the minimum annual royalty fee is
$1,250 in the first year, $2,500 in the second year, and $5,000 per year
thereafter.
In addition, we require franchisees to pay us the following:
23
- ----------------------------------------------------------------------------------------------------------------------------
TYPE OF FEE OR EXPENSE AMOUNT DUE DATE REMARKS
- ----------------------------------------------------------------------------------------------------------------------------
National/Regional/Local 2% of total gross sales, Payable every 30 days We and/or our contractors
Advertising Fund(1)<F1> which percentage may be administer the Fund for
increased by us to up to the benefit of our
5% of gross sales; subject system.
to minimum annual fees(2)<F2>
- ----------------------------------------------------------------------------------------------------------------------------
Showroom participation(1)<F1> Up to $150 per month Monthly as billed Note (3)<F3>
- ----------------------------------------------------------------------------------------------------------------------------
Central telephone service(1)<F1> Varies(4)<F4> Monthly as billed If the franchise is
located in a central
telephone service area, as
designated by us, the
franchisee must pay its
proportionate share of the
costs of maintaining the
service.(4)<F4>
- ----------------------------------------------------------------------------------------------------------------------------
Basic training(5)<F5> Varies - We estimate that As incurred No training fee is charged
the cost of travel, for up to two persons.(6)<F6>
lodging and meals for each The training fee for
person attending Basic additional persons will be
Training will range from determined by us. We
$200 to $1,200. The reimburse the franchisee
actual cost for each for airfare for one person
person may be higher or (up to $500), and for
lower depending upon the lodging expenses for one
distance traveled, and the attendee. The franchisee
meals and lodging selected. pays the cost of meals for
one attendee and pays all
travel, lodging and meals
expenses for any other
attendees.
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------
<FN>
(1)<F1> These fees are imposed by and payable to us. These fees are
non-refundable. Late payment interest of 18% may begin after the due date. We
may impose a late fee of $25.00 if the franchisee does not submit reports to us
within 3 days of the due date.
(2)<F2> The Minimum National/Regional/Local Advertising Fund Fees are
$50 per month in the first year, $100 per month in the second year, and $150 per
month thereafter (including all months in any renewal terms); except if the
franchisee qualifies for, and pays, the Small Market Franchise fee, the Minimum
National/Regional/Local Advertising Fund Fees are $25 per month in the first
year, $50 per month in the second year, and $75 per month thereafter (including
all amounts in any renewal terms). We may require franchisees to participate in
a regional advertising cooperative, in which case all or part of this fee will
be paid to the cooperative. To date, participation has not been required. If a
cooperative were to be established, the cooperative would determine the amount
of the fee.
(3)<F3> Upon 30 days written notice to franchisees, we may provide a
showroom in the franchisees' metropolitan or regional area for the franchisee to
show the products and services provided by the franchisees. In that case, the
franchisees will be billed for its pro-rata rental fee, not to exceed $150 per
month.
(4)<F4> Central telephone service is available in some areas in some
states. With central telephone service, one telephone number is used for all
franchisees in the service area. The provider's software routes each call to the
appropriate franchisee for the caller's location. The fee imposed by the
provider of this service is split among the franchisees in the service area.
(5)<F5> Payable to third parties that provide goods or services to the
franchisee.
(6)<F6> The training fee for each additional person the franchisee
sends to basic training at any time is $250.
</FN>
24
- ----------------------------------------------------------------------------------------------------------------------------
TYPE OF FEE OR EXPENSE AMOUNT DUE DATE REMARKS
- ----------------------------------------------------------------------------------------------------------------------------
Mandatory meetings and Varies - We estimate that As incurred No more than 1 mandatory
additional mandatory the cost per person for meeting/training program
training(5)<F5> travel, lodging and meals will be scheduled each
to attend a one-day year. No attendance fee
meeting will be $20 to is charged by us, but the
$600. The actual cost for franchisee pays the cost
each person may be higher of travel, lodging and
or lower depending upon meals.(7)<F7>
the distance traveled, the
meals and lodging
selected, and the length
of the meetings.
- ----------------------------------------------------------------------------------------------------------------------------
Optional training(1)<F1>, Varies(8)<F8> - We estimate 2 weeks prior to beginning We may, but are not
(5)<F5> that the cost person for of training required to, offer
travel, lodging and meals optional training programs
to attend a one-day that the franchisee may
optional training program attend.
will be $20 to $600 (plus
the program fee). The
actual cost for each
person may be higher or
lower depending upon the
distance traveled, the
meals and lodging
selected, and the length
of the training program.
- ----------------------------------------------------------------------------------------------------------------------------
Product sample updates Varies(9)<F9> As incurred Note 9
- ----------------------------------------------------------------------------------------------------------------------------
Technology fee(1)<F1> $75 per month; subject to Monthly, as billed. As of This fee may be assessed
an annual increase at our the date of this by us for website and
sole determination, but prospectus, we do not e-mail hosting by us, for
not more than 10% per year. charge this fee, but may future web-based system
do so upon at least 30 integration, and for other
days prior written notice technology related
to the franchisee. services.
- ----------------------------------------------------------------------------------------------------------------------------
- --------------------------
<FN>
(7)<F7> If a franchisee fails to attend a mandatory meeting that is
designated by us as an annual meeting, we may, at our sole determination,
require the franchisee to pay a $500 missed annual meeting fee, which fee will
be due within 30 days of notice by us to the franchisee.
(8)<F8> We will charge a fee for this training, which fee will depend
on the training provided. The franchisee will also be responsible for paying for
his/her travel, lodging, and meals.
(9)<F9> The amount can vary widely from one year to the next, but
currently the amount is estimated to be from $600 to $1,000 per year. As of the
date of this prospectus, all updates are optional, but we may in the future
mandate that the franchisee purchase certain updates.
</FN>
25
- ----------------------------------------------------------------------------------------------------------------------------
TYPE OF FEE OR EXPENSE AMOUNT DUE DATE REMARKS
- ----------------------------------------------------------------------------------------------------------------------------
Transfer/training fee(1)<F1> The transfer fee is $7,000 Prior to completing the Payable upon transfer of
plus any brokerage transfer the franchise. No charge
commissions, finder's fees if the franchisee
or similar charges that we transfers to a business
are required to pay to any entity that it controls.
third party that is not an
affiliate of ours. The
training fee is $1,000.
(10).<F10>
- ----------------------------------------------------------------------------------------------------------------------------
Audit(1)<F1> Cost of audit and Immediately upon billing Payable only if audit
underpayment amount, plus shows an understatement of
interest. at least 2% of gross sales
for any month.
- ----------------------------------------------------------------------------------------------------------------------------
Credit/debit card Varies - We charge 3% of As incurred Note (11)<F11>
authorization and the amount of the debit or
administrative fee(1)<F1> credit.
- ----------------------------------------------------------------------------------------------------------------------------
Insufficient funds fee(1)<F1> Varies As incurred Note (12)<F12>
- ----------------------------------------------------------------------------------------------------------------------------
Insurance(5) Varies - Insurance in Varies Franchisee must obtain our
Denver costs about $50 per approval of insurance
month. The franchisee's carrier. We have
cost may be higher or appointed an approved
lower, depending upon its carrier and established
location and the insurance minimum required covered
carrier selected amounts.
- ----------------------------------------------------------------------------------------------------------------------------
Indemnification Varies - The franchisee Varies The franchisee must
will pay the amount of the reimburse us for any
liability assessed against liability and costs
us plus the expenses incurred by us by reason
incurred in defending us. of the franchisees or our
operation of the business
on the franchisee's behalf.
- ----------------------------------------------------------------------------------------------------------------------------
Franchisees place all orders for products with us. We in turn place
them with our vendors. Finished products are shipped to our franchisees, but
billed to us, generally on terms of net 30 days. Terms of payment with our
franchisees are net 15 days. We believe that this arrangement results in quality
control of the products being sold to the customer and provides us with a way to
monitor our franchisees' operations. In addition, franchisees commencing
business do not have to identify and establish accounts with product vendors.
We believe the advantages to our franchisees are the following:
o Start-up costs are $75,000 - $80,000.
o The franchisee does not have to have any industry-specific
knowledge or prior experience.
- -------------------------
<FN>
(10)<F10> The transferee pays all travel, food, and lodging expenses
to attend training. However, if the transferee is an existing V2K franchisee who
has successfully completed basic training, we may waive the requirement that the
transferee pay this fee and attend basic training.
(11)<F11> If the franchisee is more than 10 days late for payment of
any fees, we may, upon 48 hours notice to the franchisee by facsimile, activate
a direct charge to the franchisee's credit or debit card for the fee, and bill
the franchisee for any costs incurred by us in administering this program.
(12)<F12> If any check the franchisee sends to us is returned to us by
a financial institution (or other entity), or if we cannot charge the
franchisee's credit or debit card for the full amount owed to us (in accordance
with Note 11 above), because of insufficient funds, the account being closed or
otherwise, we may charge the franchisee a fee of the lesser of $20, or the
highest rate permitted by applicable law.
</FN>
26
o We provide the franchisee with extensive training and support.
o The franchisee has no inventory to purchase or maintain, no
receivables, and minimal general and administrative expenses.
o The franchisee receives a complete business start up package.
o Our software product allows franchisees to set themselves apart
from the way others in the industry do business. To the best of
our knowledge and information there is no software product
currently on the market that is comparable with that of V2K.
o Our software product provides franchisees with a marketing
advantage. Customers can determine what a treatment will look
like on their windows before they purchase.
o Our software product provides franchisees with a sales and
closing advantage. Our franchisees can stay with a customer
until that customer is satisfied. Our franchisees do not have
to check back with a workroom to calculate pricing.
o Our software product enables franchisees to administrate the
sale of window treatments more efficiently and accurately than
others in the industry.
Our management believes that it takes the average franchisee two years
to establish its franchise business. At September 30, 2006, approximately 60% of
our franchisees had been in business for two years or longer, as compared to
September 30, 2005, at which approximately 37% of our franchisees had been in
business for two years or longer. Our franchisee retention rates were 96% and
94% for the year ended September 30, 2006 and nine months ended September 30,
2005, respectively.
We also propose to sell domestic and international license agreements
for the use of our software to a limited number of major retailers who have
shown interest in our system both domestically and internationally. It is
envisioned that our license agreements will include a one-time license fee and a
monthly royalty or user fee. As of the date of this prospectus, we have entered
into discussions and letters of intent with interested parties, but have not
entered into any corporate license agreements or license agreements in related
fields.
MANUFACTURING AND SOURCING
Franchisees submit all purchase orders to us. We place the orders for
the products with a number of vendors, including our own workroom for the
manufacture of soft items. We acquired V2K Manufacturing, formerly Drapery
Workroom by TLC, Inc., in order to have more control over the quality of the
soft good products.
For the year ended September 30, 2006 and the nine months ended
September 30, 2005, approximately 68% and 73%, respectively, of materials and
supplies were acquired from three major vendors (Lafayette Venetian Blind, Inc.,
Krohn's Coverings, Inc., and DSC Window Fashions), with the largest vendor,
Lafayette Venetian Blind, Inc., representing 34% and 47%, respectively, of the
total. The related accounts payable to the largest vendor was approximately
$309,900 as of September 30, 2006 and $146,800 as of September 30, 2005. We
believe that if we were to lose any of these vendors, we could replace the
vendor(s) with others who provide the same materials and supplies. However, we
could incur disruption of processing orders from franchisees while transitioning
from one vendor to another and this could negatively impact our business.
TRADEMARKS AND COPYRIGHTS
We have registered our "V2K" logo with the United States Patent and
Trademark office. The registration date is April 9, 2002, and our registration
number is 2,559,601, for Computer Software and Business Services. We also
registered the logo for Retail Store Services and Design for Others of Window
Coverings and Treatments on March 29, 2005, registration number 2,935,943.
We are the owner of the V2K Window Fashions software, which is
copyrighted with Certificate of Registration No. TX5200930, effective date noted
as February 29, 2000.
We have received a patent pending status on our new three-dimensional
technology. The patent pending number is 11/030445.
27
RESEARCH AND DEVELOPMENT
We incurred research and development expenses of $433,201 for the year
ended September 30, 2006 and $308,648 for the nine months ended September 30,
2005.
COMPETITION
We assess our competitive conditions as follows:
o We compete against other companies that offer franchise
opportunities. There are numerous franchise and business
opportunities offered by others in all industries.
o We compete against other companies in the window fashion
industry and others offering window fashions. As described
above, the market for window fashions is fragmented. We
compete with many different types of retailers that sell many
or most of the items sold by us, including department stores,
mass merchandisers, mail order, specialty retail stores, and
other retailers. In some cases these competitors have
substantially greater financial and other resources than us,
including, in some cases, more profitable retail economics or
better name recognition.
Budget Blinds appears to be our closest competitor, in the sense that
it is engaged in the window covering industry, and offers franchises. Also, a
few other companies are starting to offer custom window treatments.
We are aware of three other companies that offer a software product
having some of the functions of our proprietary software:
o DreamDraper(R) by Evan Marsh Designs, Inc. is an application
that a designer can use to create a visual two-dimensional
representation. DreamDraper(R) comes with hundreds of static
two-dimensional line drawing graphics of windows and window
treatments. The designer can go to the catalog of
two-dimensional line drawing pieces and manually create a
representation of the window and window treatments utilizing
the Microsoft PowerPoint application. DreamDraper(R) has no
integrated pricing component. However, it did come out with a
quick quote system recently, but the two systems are
independent of each other.
o Minutes Matter is very similar to DreamDraper(R) in that it is
used by designers to create a representation of windows and
window treatments. Minutes Matter does not rely on Microsoft
PowerPoint, but has its own design environment. It has a
catalog of hundreds of static two-dimensional line drawing
pieces that the user chooses from and then manually assembles
the window and window treatments. Minute Matters does not have
a pricing component.
o Solatech, Inc. has introduced a software product similar in
some ways to V2K's. Solatech is a two-dimensional photo
rendering software that has very limited soft goods
capability, with no scaling or visuals that represent what the
product selection will look like in the customer's home.
We cannot assure you that additional competitors will not enter our
line of business. Increased competition by existing or future competitors,
resulting in our having to reduce prices in an effort to gain or retain market
share, could result in reductions in our sales and profitability, which could
have a material adverse effect on our business and financial condition.
GOVERNMENT REGULATION
To offer and sell franchises, we must comply with the rules and
regulations of the Federal Trade Commission, as well as the laws of the states
in which offers and sales are made. The Federal Trade Commission franchise rule
requires that we furnish potential franchisees with written disclosures
containing information about the franchised business, the franchise
relationship, and us. We have made these disclosures by following the Uniform
Franchise Offering Circular Guidelines prepared by state franchise law
officials. We must provide a potential franchisee with the written disclosures
upon the earlier of (1) the first personal meeting with the prospective
purchaser; (2) ten business days before signing any binding agreement; or (3)
ten business days before any payment to us.
28
The Federal Trade Commission does not review or approve any
disclosures, advertising, or agreements. However, 15 states have franchise
investment laws that require us to provide pre-sale disclosures. Of the 15
states, 13 treat the sale of a franchise like the sale of a security and
generally prohibit the offer or sale of a franchise within their state until a
franchise offering circular has been filed with, and registered by, the
designated state agency. We estimate that the registration renewal fees to
maintain compliance with such state laws costs us approximately $7,500 per year.
EMPLOYEES
We had 41 full-time and 5 part-time employees as of March 31, 2007.
FACILITIES
Our principal offices are located at 1127 Auraria Parkway, Suite 204,
Denver, Colorado 80204. We lease approximately 4,000 square feet under a
five-year lease that commenced September 15, 2002.
Our workroom facilities are located at 785 Jason Street, Denver,
Colorado. We lease approximately 6,000 square feet under a three-year lease that
commenced February 15, 2004 and extends through May 31, 2007, with an option to
extend to August 31, 2007. We currently pay rent of $3,425 per month.
We are currently looking for new office space in the Denver
metropolitan area that would house both our corporate offices and workroom
facilities.
LEGAL PROCEEDINGS
There are no legal proceedings pending and, to the best of our
knowledge, there are no legal proceedings contemplated or threatened that are
deemed material to us or our business.
MANAGEMENT
OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our officers, directors and key employees are as follows:
NAME AGE POSITION
Victor J. Yosha 60 President, Chief Executive Officer, and
Director
Gordon E. Beckstead 70 Chairman of the Board of Directors and
Treasurer
Samuel Smith 40 Vice President
Jerry A. Kukuchka 40 Chief Financial Officer
R. J. Wittenbrink 71 Secretary, General Counsel and Director
Tom Grimm 61 Director
Carlyle Griffin 62 Director
The term of office of each director ends at the next annual meeting of
our shareholders or when such director's successor is elected and qualifies. The
term of office of each officer ends at the next annual meeting of our board of
directors, expected to take place immediately after the next annual meeting of
shareholders, or when such officer's successor is elected and qualifies. Our
last annual meeting of shareholders was held on September 21, 2005 in Lakewood,
Colorado.
29
VICTOR J. YOSHA has been our president and chief executive officer and
a director since the inception of V2K Window Fashions in July 1996. From 1994 to
1999, Mr. Yosha served initially as a consultant to, and later as the chief
executive officer of, Pictures and Prices Corporation, a private corporation
owned and controlled by Robert and Lynda Leo. Pictures and Prices Corporation
developed and distributed proprietary software technology for the window fashion
industry. From 1988 to 1994, Mr. Yosha and was president and chairman of Seattle
Office Systems, Inc., a company which he co-founded to sell and service office
equipment. Seattle Office Systems eventually grew to 80 employees with revenues
in excess of $6,000,000 annually and was sold to a company now known as Danka
Business Systems PLC. In 1970, Mr. Yosha co-founded American Office Equipment
Company, Denver, Colorado, which sold and serviced office equipment. He was
president of that company until 1987. That company eventually grew to 300
employees with annual revenues in excess of $25,000,000 and was one of the
largest distributors of Minolta Copier products in the world.
GORDON E. BECKSTEAD has been our chairman of the board of directors
since May 2001. He has been a business consultant since December 1984, providing
financing and management advice. From June 1984 to December 1986, Mr. Beckstead
was the chairman of ATE, Inc., a long distance reseller based in Las Vegas,
Nevada, with operations in Nevada, Idaho, Washington, and California. In
addition, he was a director of Citizens National Bank of Boise, Idaho, from
April 1981 to December 1986. From 1977 to 1984, Mr. Beckstead was a partner in
an accounting firm which he founded. Prior to 1977 he was a partner in the
international accounting firm then known as Deloitte Haskins & Sells. He
received a bachelor's degree from Utah State University in 1959.
SAMUEL SMITH has been our vice president since March 2006. From
November 2001 to March 2006, he was our chief financial officer. Mr. Smith came
to us in November 2001 from the Horizons Real Estate Group, where he
concentrated on brokering commercial loans, strategic planning, and website
development. From 1997 to 2000, Mr. Smith owned and operated a small business
consulting firm that specialized in writing business plans and financing
proposals for start-up entities. Mr. Smith received his bachelor's degrees in
economics and political science from Middlebury College in 1988, and an MBA from
the Johnson Graduate School of Management at Cornell University in 1996.
JERRY A. KUKUCHKA, CPA, became our chief financial officer in March
2006. From August 2004 to January 2006, he was the director of accounting for
LMC Resources, Inc., Denver, Colorado, a human resources outsourcing company
with approximately 4,000 employees in 35 states. Mr. Kukuchka provided
consulting services in the areas of accounting and internal control
documentation as an independent contractor from March 2004 to August 2004. From
June 1998 to February 2004, he was the VP Finance for PW Eagle (formerly
Extrusion Technologies, Inc.), Denver, Colorado, where he was responsible for
all financial reporting functions, budgeting, forecasting, and tax compliance
requirements for a PVC pipe manufacturer with 3 plants and 300 employees. He was
the regional controller for Pinon Management, Inc., Lakewood, Colorado, from
February 1997 to March 1998. This company operated four nursing homes in the
Denver area and had over 300 employees. Mr. Kukuchka worked for a Denver area
public accounting firm from October 1992 to June 1996. He is a member of the
Colorado Society of Certified Public Accountants and graduated from Metropolitan
State College in 1989 with a bachelor's degree in accounting.
R. J. WITTENBRINK has been our secretary and general counsel since our
inception and a director since April 1997. Mr. Wittenbrink has been practicing
law in the Denver, Colorado area since 1963. During the last 25 years, he has
concentrated both as an attorney and principal in the formation and operation of
small business and real estate development. Mr. Wittenbrink received a
bachelor's degree from St. Louis University in 1959 and a juris doctor law
degree from the University of Denver in 1963.
TOM GRIMM has been a director since March 2006, and the owner of a V2K
Window Fashions franchise since May 2004. Mr. Grimm currently sits on the Board
of Directors of Naartjie children's clothing store, and from March 2003 to March
2006 was the Chairman of the Board of Governors for Operation Smile. From
October 1998 to September 2002 he was Executive Vice President of Wal-Mart
Stores, Inc. and President and CEO of Sam's Club. Prior to that Mr. Grimm served
as President and CEO of the Pace Warehouse Club Division of Kmart Stores, Inc.
in Denver, Colorado, and was the founder, President and CEO of Price Savers
Wholesale Warehouse, Inc. in Salt Lake City, Utah. Mr. Grimm is a graduate of
Weber State University in Ogden, Utah.
CARLYLE GRIFFIN has been a director since October 2006. Since his
"retirement" in 1999, Mr. Griffin has started his own consulting firm and
remains active in the business community. During a thirty-one year career at
30
IBM he held numerous marketing and marketing management positions, and managed a
multi-state area for IBM Credit Corporation. Mr. Griffin received his Bachelor
of Science degree in Business Management from Penn State University in 1966, and
an MBA from Penn Sate University in 1968.
No other directorships are held by each director in any company with a
class of securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934 or any company registered as an investment company, under the
Investment Company Act of 1940.
Messrs. Yosha and Beckstead may be deemed to be organizers and "control
persons" of the Company, as those terms are in defined in the Securities Act of
1933.
DIRECTOR INDEPENDENCE
As of the date of this prospectus, our common stock does not trade in
any market. As such, we are not currently subject to corporate governance
standards of listed companies, which require, among other things, that the
majority of the board of directors be independent. Since we are not currently
subject to corporate governance standards relating to the independence of our
directors, we choose to define an "independent" director in accordance with the
NASDAQ Global Market's requirements for independent directors (NASDAQ
Marketplace Rule 4200). The NASDAQ independence definition includes a series of
objective tests, such as that the director is not an employee of the company and
has not engaged in various types of business dealings with the company.
Tom Grimm and Carlyle Griffin are considered independent directors
under the above definition. We do not list that definition on our Internet
website.
CONFLICTS OF INTEREST
Our two non-officer directors, Tom Grimm and Carlyle Griffin, are
associated with other firms involved in a range of business activities.
Consequently, there are potential inherent conflicts of interest in their acting
as directors of our company. While these directors are engaged in other business
activities, we anticipate that such activities will not interfere in any
significant fashion with the affairs of our business, in terms of having
adequate time to devote to the business of the company. Messrs. Grimm and
Carlyle devote less than 10% of their working in their roles as directors. All
of our officers devote 100% of their working time to V2K.
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.
EXECUTIVE COMPENSATION
The table below sets forth information the remuneration of our chief
executive officer during our last two completed fiscal years (nine months ended
September 30, 2005 and year ended September 30, 2006). There were no executive
officers whose total annual salary and bonus equaled or exceeded $100,000.
31
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------------------
NON-EQUITY NONQUALIFIED
INCENTIVE DEFERRED
NAME AND STOCK OPTION PLAN COMPENSA- ALL OTHER
PRINCIPAL SALARY AWARDS AWARDS COMPENSA- TION COMPENSA-
POSITION YEAR ($) BONUS ($) ($) ($) TION ($) EARNINGS ($) TION ($) TOTAL ($)
- -------------------------------------------------------------------------------------------------------------------------------
Victor J. 2006 60,000 -0- -0- 37,454 (1)<F1> -0- -0- -0- 97,454
Yosha, 2005 45,000 -0- -0- 28,010 (1)<F1> 73,010
President and
CEO
- -------------------------------------------------------------------------------------------------------------------------------
- -----------------------
<FN>
(1)<F1> The options were valued using the Black-Scholes stock option pricing
model with the following assumptions used:
o Expected option life-years: 3.00 - 7.50
o Risk-free interest rate: 5.125%
o Dividend yield: 0
o Volatility: 0.28
</FN>
Mr. Yosha was originally granted options to purchase 6,500,000 shares
by V2K Window Fashions in July 2004. Upon the reorganization of V2K Window
Fashions into V2K International in April 2006, these options were replaced with
options to purchase common stock of V2K International on comparable terms. At
the time of the replacement, options to purchase 2,500,000 shares had vested,
options to purchase 2,000,000 shares vested in July 2006, and options to
purchase 2,000,000 shares will vest in July 2007.
We granted Mr. Yosha options to purchase 50,000 shares at $0.20 per
share in May 2006 for his service as a director. These options vest in May 2007
and are exercisable until May 2011. In June 2006, we granted Mr. Yosha options
to purchase 1,000,000 shares at $0.20 per share. One-third of these options vest
annually beginning June 2007 and are exercisable until June 2011.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
- -----------------------------------------------------------------------------------------------------------------------------
OPTION AWARDS STOCK AWARDS
- -----------------------------------------------------------------------------------------------------------------------------
EQUITY
INCENTIVE
PLAN EQUITY
AWARDS: INCENTIVE
NUMBER PLAN
0F AWARDS:
EQUITY UNEARNED MARKET OR
INCENTIVE SHARES, PAYOUT
PLAN NUMBER MARKED UNITS VALUE OF
AWARDS: OF VALUE OF OR UNEARNED
NUMBER OF NUMBER OF SHARES SHARES OTHER SHARES,
SECURITIES NUMBER OF SECURITIES OR UNITS OR UNITS RIGHTS UNITS OR
UNDERLYING SECURITIES UNDERLYING OF STOCK OF STOCK THAT OTHER
UNEXERCISED UNDERLYING UNEXERCISED THAT THAT HAVE RIGHTS
OPTIONS UNEXERCISED UNEARNED OPTION OPTION HAVE NOT HAVE NOT NOT THAT HAVE
(#) OPTIONS (#) OPTIONS EXERCISE EXPIRATION VESTED VESTED VESTED NOT VESTED
NAME EXERCISABLE UNEXERCISABLE (#) PRICE ($) DATE (#) ($) (#) (#)
- -----------------------------------------------------------------------------------------------------------------------------
Victor J. 4,500,000 2,000,000 (1)<F1> -0- 0.05 07/09/2014 N/A N/A N/A N/A-
Yosha -0- 50,000 (2)<F2> -0- 0.20 05/02/2011
-0- 1,000,000 (3)<F3> -0- 0.20 06/30/2011
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------
<FN>
(1)<F1> These options vest on July 9, 2007.
(2)<F2> These options vest on May 2, 2007.
(3)<F3> One-third of these options vest on June 30, 2007, one-third vests on
June 30, 2008, and the remaining third vests on June 30, 2009.
</FN>
COMPENSATION OF DIRECTORS
Each of our non-employee directors receives reimbursement for expenses
of attendance for each scheduled meeting that requires physical attendance.
32
Compensation for our directors for our last completed fiscal year is
set forth below, with the exception of Victor J. Yosha, whose compensation has
been disclosed above.
DIRECTOR COMPENSATION
- ------------------------------------------------------------------------------------------------------------------------
NON-EQUITY
INCENTIVE NON-QUALIFIED
FEES EARNED PLAN DEFERRED ALL OTHER
OR PAID IN STOCK OPTION COMPENSATION COMPENSATION COMPENSATION
NAME CASH ($) AWARDS ($) AWARDS ($) ($) EARNINGS ($) ($) TOTAL ($0)
- ------------------------------------------------------------------------------------------------------------------------
Gordon E. -0- -0- 54,923 (1)<F1> -0- -0- -0- 54,923
Beckstead
- ------------------------------------------------------------------------------------------------------------------------
Carlyle Griffin -0- -0- 8,750 (2)<F2> -0- -0- -0- 8,750
- ------------------------------------------------------------------------------------------------------------------------
Tom Grimm -0- -0- 1,074 (3)<F3> -0- -0- -0- 1,074
- ------------------------------------------------------------------------------------------------------------------------
R.J. -0- -0- 11,574(4)<F4> -0- -0- -0- 11,574
Wittenbrink
- ------------------------------------------------------------------------------------------------------------------------
- -------------------
<FN>
(1)<F1> Mr. Beckstead was originally granted options to purchase 7,000,000
shares by V2K Window Fashions in July 2004. Upon the reorganization of
V2K Window Fashions into V2K International in April 2006, these options
were replaced with options to purchase common stock of V2K
International on comparable terms. At the time of the replacement,
options to purchase 2,666,670 shares had vested, options to purchase
2,166,670 shares vested in July 2006, and options to purchase 2,166,660
shares will vest in July 2007. These options are exercisable at $0.05
per share until July 9, 2014. We granted Mr. Beckstead options to
purchase 50,000 shares at $0.20 per share in May 2006 for his service
as a director. These options vest on May 2, 2007 and are exercisable
until May 2, 2011. On June 30, 2006, we granted Mr. Beckstead options
to purchase 1,000,000 shares at $0.20 per share. One-third of these
options vest annually beginning June 30, 2007 and are exercisable until
June 30, 2011.
(2)<F2> Mr. Griffin was originally granted options to purchase 1,250,000 shares
by V2K Window Fashions in July 2004. Upon the reorganization of V2K
Window Fashions into V2K International in April 2006, these options
were replaced with options to purchase common stock of V2K
International on comparable terms. At the time of the replacement,
options to purchase 416,670 shares had vested, options to purchase
416,670 shares vested in July 2006, and options to purchase 416,660
shares will vest in July 2007. These options are exercisable at $0.05
per share until July 9, 2014.
(3)<F3> We granted Mr. Grimm options to purchase 50,000 shares at $0.20 per
share on May 2, 2006 for his service as a director. These options vest
on May 2, 2007 and are exercisable until May 2, 2011.
(4)<F4> Mr. Wittenbrink was originally granted options to purchase 1,500,000
shares by V2K Window Fashions in July 2004. Upon the reorganization of
V2K Window Fashions into V2K International in April 2006, these options
were replaced with options to purchase common stock of V2K
International on comparable terms. At the time of the replacement,
options to purchase 500,000 shares had vested, options to purchase
500,000 shares vested in July 2006, and options to purchase 500,000
shares will vest in July 2007. These options are exercisable at $0.05
per share until July 9, 2014. We granted Mr. Wittenbrink options to
purchase 50,000 shares at $0.20 per share in May 2006 for his service
as a director. These options vest on May 2, 2007 and are exercisable
until May 2, 2011.
</FN>
EMPLOYMENT AGREEMENTS
We do not have employment agreements with any of our executive
officers.
STOCK OPTION PLAN
Our shareholders adopted the 2006 Stock Option Plan on March 31, 2006
that permits the granting of options to purchase up to 30,000,000 shares.
Options may be granted to officers, directors, employees, and consultants on a
case-by-case basis. This Plan will remain in effect until it is terminated by
the board of directors or, if so appointed by the board, a committee of two or
more disinterested directors administering the Plan, except that no incentive
stock option will be granted after March 31, 2016.
33
The 2006 Stock Option Plan is intended to (i) encourage ownership of
shares by our employees and directors of and certain consultants to the company;
(ii) induce them to work for the benefit of the company; and (iii) provide
additional incentive for such persons to promote the success of the company.
The board of directors or committee may amend, suspend or discontinue
the Plan at any time or from time to time; provided that no action of the board
will cause incentive stock options granted under this Plan not to comply with
Section 422 of the Internal Revenue Code unless the board specifically declares
such action to be made for that purpose and provided further that without the
approval of our shareholders, no such action may: (i) materially increase the
maximum aggregate number of shares that may be issued under options granted
pursuant to the Plan, (ii) materially increase the benefits accruing to Plan
participants, or (iii) materially modify eligibility requirements for the
participants. Moreover, no such action may alter or impair any option previously
granted under the Plan without the consent of the holder of such option.
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, stock splits or combinations.
Each option granted under the Plan will be evidenced by a written
option agreement between us and the optionee. The option price of any incentive
stock option or non-qualified 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 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.
"Fair Market Value" per share as of a particular date is defined in the Plan as
the closing price of our common stock as reported on a national securities
exchange or the last transaction price on the reporting system or, if none, the
average of the closing bid and asked prices of our common stock in the
over-the-counter market or, if such quotations are unavailable, the value
determined by the board in its discretion in good faith.
The exercise period of incentive stock options or non-qualified 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.
To exercise an option, the optionee must pay the full exercise price in
cash, by check or such other legal consideration as may be approved by the
Committee. Such other consideration may consist of shares of common stock having
a fair market value equal to the option price, cashless exercise, a personal
recourse note, or in a combination of cash, shares, cashless exercise and a
note, subject to approval of the Committee.
An option may not be exercised unless the optionee then is an employee,
consultant, officer, or director of our company or its subsidiaries, and unless
the optionee has remained continuously as an employee, consultant, officer, or
director of our company since the date of grant of the option. If the optionee
ceases to be an employee, consultant, officer, or director of our company or its
subsidiaries 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, consultant, officer or director of our company.
If the employee is terminated "for cause" (as that term is defined in
the Plan), such employee's options will terminate immediately on the date the
optionee ceases employment or association.
If an optionee dies while an employee, consultant, officer or director
of our company, or if the optionee's employment, consultant, officer, or
director 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.
As of March 31, 2007, 28,075,110 options were outstanding under the
Plan.
34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides certain information as to our officers and
directors individually and as a group, and the holders of more than 5% of our
common stock, as of January 31, 2007.
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS (1)<F1>
- ------------------------------------ -------------------- --------------------
Victor J. Yosha 9,650,480 (2)<F2> 26.9%
1127 Auraria Parkway, Suite 204
Denver, Colorado 80204
Gordon E. Beckstead 9,590,960 (3)<F3> 26.5%
1127 Auraria Parkway, Suite 204
Denver, Colorado 80204
Robert & Lynda Leo 4,683,020 (4)<F4> 14.4%
1127 Auraria Parkway, Suite 204
Denver, Colorado 80204
James Blyth 4,000,000 12.8%
3131 Soco Road
Maggie Valley, North Carolina 28751
R.J. Wittenbrink 3,515,040 (5)<F5> 10.9%
1127 Auraria Parkway, Suite 204
Denver, Colorado 80204
Lea Blohm 2,060,535 (6)<F6> 6.6%
P.O. Box 3740
Parker, Colorado 80134
Carlyle Griffin 1,668,060 (7)<F7> 5.2%
1127 Auraria Parkway, Suite 204
Denver, Colorado 80204
Sam Smith 620,860 (8)<F8> 2.0%
1127 Auraria Parkway, Suite 204
Denver, Colorado 80204
Tom Grimm 500,000 (9)<F9> 1.6%
1895 Stone Hollow Drive
Bountiful, Utah 84010
Jerry A. Kukuchka 100,000 (10)<F10> 0.3%
1127 Auraria Parkway, Suite 204
Denver, Colorado 80204
All officers and directors as a group (7 persons) 25,645,400 (11)<F11> 58.4%
- ------------------
<FN>
(1)<F1> Where persons listed on this table have the right to obtain additional
shares of common stock through the exercise of outstanding options or
warrants or the conversion of convertible securities within 60 days
from March 31, 2007, these additional shares are deemed to be
outstanding for the purpose of computing the percentage of class owned
by such person, but are not deemed to be outstanding for the purpose of
computing the percentage of any other person. Percentages are based on
31,147,336 shares outstanding.
35
(2)<F2> Includes 4,500,000 shares issuable upon the exercise of vested stock
options and 250,000 shares issuable upon the exercise of warrants.
(3)<F3> Includes 4,833,340 shares issuable upon exercise of vested stock
options and 250,000 shares issuable upon exercise of warrants.
(4)<F4> Includes 1,333,340 shares issuable upon vested stock options.
(5)<F5> Includes 1,000,000 shares issuable upon the exercise of vested stock
options and 250,000 shares issuable upon the exercise of warrants.
(6)<F6> Includes 250,000 shares issuable upon exercise of warrants.
(7)<F7> Includes 833,340 shares issuable upon exercise of vested stock options.
(8)<F8> Includes 550,860 shares issuable upon exercise vested stock options and
25,000 shares issuable upon the exercise of warrants.
(9)<F9> Includes 250,000 shares issuable upon exercise of warrants.
(10)<F10>Includes 50,000 shares issuable upon exercise of warrants.
(11)<F11>Includes 11,717,540 shares issuable upon exercise of vested stock
options and 1,075,000 shares upon the exercise of warrants.
</FN>
CHANGES IN CONTROL
There are no agreements known to management that may result in a change
of control of our company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 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.
PROMOTERS AND ORGANIZERS. James Blyth may be deemed to be a "promoter,"
as that term is defined in the rules and regulations of the Securities and
Exchange Commission. We issued Mr. Blyth 4,000,000 shares of common stock upon
the incorporation of V2K International, Inc. in March 2006 in consideration for
$4,000.
Gordon Beckstead and Victor J. Yosha may be deemed to be the organizers
of V2K International, Inc. due to their role in organizing the business of the
company and control persons due to their ownership of a significant percentage
of voting securities. Messrs. Beckstead and Yosha, together with all of the
other shareholders of V2K Window Fashions, Inc., received 35 shares of V2K
International common stock for every share of V2K Window Fashions preferred
stock and 10 shares of V2K International common stock for every share of V2K
Window Fashions common stock owned by them in April 2006 when V2K International
acquired V2K Window Fashions. In addition, they, together with all of the other
holders of stock options in V2K Window Fashions, received replacement stock
options from V2K International in this acquisition transaction. Other
transactions between us and Messrs. Beckstead and/or Yosha are described below.
CONVERTIBLE DEBENTURES. In February 2005, Gordon Beckstead, an officer,
director and principal shareholder, and one of our shareholders each loaned us
$50,000 pursuant to the terms of a three-year convertible promissory note.
Interest accrues at the rate of one percent plus the prime rate as announced in
the WALL STREET JOURNAL and is paid quarterly. We paid Mr. Beckstead interest of
$2,312, $4,438 and $2,361 for the six months ended March 31, 2007, year ended
September 30, 2006 and nine months ended September 30, 2005, respectively. The
holders had the right to convert the notes at any time into shares of common
stock at a price of $0.20 per share. We agreed to register the shares issuable
upon conversion in this registration statement of which this prospectus is a
part. On January 31, 2007, Mr. Beckstead and the other lender each converted
their debentures into 250,000 shares of common stock. These shares are included
in this registration statement of which this prospectus is a part.
36
FRANCHISE. In July 2004, the board of directors of V2K Window Fashions
granted Bob Leo, a founder, and at the time, an officer of V2K Window Fashions,
an option to purchase a franchise for $10, as part of a proposed employee
package. Mr. Leo exercised the option in August 2005. The amount of this benefit
is estimated to be approximately $44,500.
BRIDGE LOAN. In January 2006, Gordon Beckstead, Victor J. Yosha, and
R.J. Wittenbrink each loaned us $25,000 as part of a bridge loan we obtained in
the aggregate amount of $200,000. Messrs. Beckstead, Yosha and Wittenbrink are
officer, directors, and principal shareholders of the company. Their loans were
made on the same terms as those received from non-affiliated third party
lenders. The associated loan agreement and promissory note called for quarterly
interest payments in arrears at the rate of four percent plus the prime rate as
published in the Money Rate Table of the Western Edition of the Wall Street
Journal. Repayment of the promissory note was to commence upon the earlier of
(a) the completion of our private placement or (b) July 5, 2006. At the option
of the lenders, at any time prior to consummation of the private placement, the
lenders could convert all or any of the principal amounts into the securities on
the same terms as those offered in the private placement. Upon the minimum
portion of the private placement having been sold, the lenders were required to
convert at least 50% of the note principal. In August 2006, all of the lenders
entered into an amendment to the loan agreement and promissory note, whereby
they agreed to convert the entire amount of the note immediately prior to the
closing of the private placement, so long as the minimum offering was sold. We
further agreed that if we had failed to close the private placement by January
5, 2007, we would repay half of the principal amount of the notes by January 31,
2007 and the remainder by applying $3,000 from the sale of each franchise until
the notes were paid in full. Messrs. Beckstead, Yosha and Wittenbrink agreed to
defer repayment of their loans until the non-affiliated lenders had been paid.
In January 2007, all of the lenders extended the deadline for closing the
private placement to January 31, 2007.
Effective January 31, 2007, all of the lenders, including Messrs.
Beckstead, Yosha, and Wittenbrink, converted their loans into securities on the
same terms as those offered in our recent private placement. Each of Messrs.
Beckstead, Yosha and Wittenbrink received 125,000 shares of common stock and
warrants to purchase 125,000 shares of common stock. The warrants are
exercisable at $0.50 per share until September 30, 2008. We granted registration
rights with respect to all of the shares purchased in the private placement.
Accordingly, the 125,000 shares issued to each of Messrs. Beckstead, Yosha and
Wittenbrink are included in this registration statement of which this prospectus
is a part.
For the sixe months ended March 31, 2007 and the year ended September
30, 2006, we paid interest of $1,276 and $2,242 to each of Messrs. Beckstead,
Yosha and Wittenbrink, respectively.
We issued warrants to purchase an aggregate of 1,000,000 shares of
common stock to all of the lenders when the loans were made. The warrants are
exercisable at $0.30 per share and expire January 5, 2009. We granted piggyback
registration rights (on a "best efforts" basis) with respect to the shares
issuable upon exercise of these warrants. These shares are included in this
registration statement of which this prospectus is a part.
The table below summarizes the shares and warrants that were issued:
- -------------------------------------------------------------------------------------------------------------------------
WARRANTS @ $0.30 SHARES ISSUED WARRANTS @ $0.50
ISSUED WHEN UPON CONVERSION ISSUED UPON
LENDER AMOUNT OF LOAN LOANS WERE MADE* OF LOAN* CONVERSION OF LOAN
- -------------------------------------------------------------------------------------------------------------------------
Gordon E. Beckstead $25,000 125,000 125,000 125,000
- -------------------------------------------------------------------------------------------------------------------------
Victor J. Yosha $25,000 125,000 125,000 125,000
- -------------------------------------------------------------------------------------------------------------------------
Robert J. Wittenbrink $25,000 125,000 125,000 125,000
- -------------------------------------------------------------------------------------------------------------------------
George A. Johnson $50,000 250,000 250,000 250,000
- -------------------------------------------------------------------------------------------------------------------------
John D. Kucera $25,000 125,000 125,000 125,000
- -------------------------------------------------------------------------------------------------------------------------
Robert M. Nieder $50,000 250,000 250,000 250,000
- -------------------------------------------------------------------------------------------------------------------------
- ------------------
* Registered for resale in this prospectus
FUTURE TRANSACTIONS. All future affiliated transactions will be made or
entered into on terms that are no less favorable to us than those that can be
obtained from any unaffiliated third party. A majority of the independent,
disinterested members of our board of directors will approve future affiliated
transactions.
37
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 100,000,000 shares of common stock,
$0.001 par value per share. As of March 31, 2007, there were 31,147,336 shares
of common stock outstanding, which were held of record by approximately 100
shareholders. 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 shareholders. 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 shareholders. 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 10,000,000 shares of preferred stock,
$0.001 par value per share. There are no shares of preferred stock issued or
outstanding. Our board of directors has the power to fix and determine the
designations, rights, preferences, or other variations of each class or series
within each class of capital stock of the company.
WARRANTS
We have issued a total of 4,553,750 warrants exercisable to purchase an
aggregate of 4,553,750 shares of our common stock for $0.50 per share through
September 30, 2008, and 1,000,000 warrants exercisable to purchase an aggregate
of 1,000,000 shares for $0.30 per share through January 5, 2009.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare
Trust Company, Inc. Its address is 350 Indiana Street, Suite 800, Golden,
Colorado 80401, and its telephone number is (303) 262-0600.
SELLING SHAREHOLDERS
This prospectus relates to the resale of 10,445,561 shares of common
stock held by existing shareholders and 1,000,000 shares issuable upon the
exercise of warrants. We are registering the shares in order to permit the
selling shareholders to offer the shares of common stock for resale from time to
time. The selling shareholders have not had any material relationship with us
within the past three years, except as noted in the table below.
Except for eight shareholders listed in the table, all of the
shareholders purchased units from the company, each unit consisting of one share
of common stock and one common stock purchase warrant, in a private placement
from September 2006 to January 2007, at a price of $0.20 per unit. We relied
upon the exemption from registration contained in Rule 506 of Regulation D, as
the offering was made to no more than 35 non-accredited investors. We agreed to
register the shares for resale. Six of the eight shareholders, Gordon E.
Beckstead, George A. Johnson, John D. Kucera, Robert M. Nieder, Robert J.
Wittenbrink, and Victor J. Yosha, converted their bridge loans to the company
into units on the same terms as those offered in the private placement. Gordon
E. Beckstead and Glen Henglefelt each converted $50,000 of convertible
debentures they held into shares of common stock at $0.20 per share. Mr.
Henglefelt also purchased 250,000 units in the private placement. James Blyth
and DeCh'in Partners LLC were the initial shareholders of the company at its
inception. It is the view of the SEC that Mr. Blyth and DeCh'in Partners are
underwriters and that Rule 144 is unavailable to them for their resale
transactions. Accordingly, the resale of their shares is covered in this
prospectus.
38
The table below lists the selling shareholders and other information
regarding the beneficial ownership of the common stock by the selling
shareholders. The second column lists the number of shares of common stock held.
The third column lists the shares of common stock being offered by this
prospectus by the selling shareholders. We will file a prospectus supplement to
name successors to any named selling shareholders who are able to use this
prospectus to resell the shares.
OWNERSHIP AFTER OFFERING
------------------------------------
NUMBER OF
SHARES NUMBER OF
BENEFICIALLY SHARES NUMBER OF
OWNED REGISTERED FOR SHARES
NAME OF SELLING SHAREHOLDER (1)<F1>(2)<F2> RESALE (1)<F1>(2)<F2> PERCENT
- --------------------------------------------------------------------------------------------------------------------
A Room With A View Inc. (3)<F3>(4)<F4> 100,000 50,000 50,000 *
Hester Auyeung (5)<F5> 70,000 35,000 35,000 *
Tai Auyeung (5)<F5> 60,000 30,000 30,000 *
Tawny Auyeung (5)<F5> 20,000 10,000 10,000 *
Charles V. and Nancy S. Banwart (4)<F4> 20,000 10,000 10,000 *
Gordon E. Beckstead (6)<F6>(7)<F7> 9,590,960 500,000 9,090,960 25.2%
Lea Blohm 1,810,535 250,000 1,560,535 5.0%
James Blyth 4,000,000 4,000,000 - -
Lisa M. and John R. Bowers (4)<F4> 50,000 25,000 25,000 *
Joseph Cammarota (4)<F4> 10,000 5,000 5,000 *
Malinda Cammisa (4)<F4> 80,000 40,000 40,000 *
Cynthia J. Carrillo (4)<F4> 10,000 5,000 5,000 *
Sharon K. and Roger L. Chilson (4)<F4> 10,000 5,000 5,000 *
Joan Chung 10,000 5,000 5,000 *
Steven A. and Barbara L. Cole (4)<F4> 10,000 5,000 5,000 *
William B. Conrad 10,000 5,000 5,000 *
Deborah L. Culp (4)<F4> 25,000 12,500 12,500 *
Theresa Davis (4)<F4> 75,000 37,500 37,500 *
DeCh'in Partners LLC (8)<F8> 1,391,811 1,391,811 - -
Shelly L. DeMarie-Carani 50,000 25,000 25,000 *
Chuck DiPrima (4)<F4> 60,000 30,000 30,000 *
H Alan Dill 250,000 125,000 125,000 *
Lawrence E. and Shawna Dunn 200,000 100,000 100,000 *
Brent Alan Fedrizzi 50,000 25,000 25,000 *
Chris Fong 20,000 10,000 10,000 *
KC Fong 50,000 25,000 25,000 *
Lilian Fong 260,000 130,000 130,000 *
Clifford E. Godfrey 20,000 10,000 10,000 *
Arnold Goldblatt 40,000 20,000 20,000 *
Richard Grande (4)<F4> 20,000 10,000 10,000 *
Barbara D. Gray (4)<F4> 10,000 5,000 5,000 *
Peter Griffin (4)<F4> 150,000 75,000 75,000 *
Thomas R Grimm TTEE (4)<F4>(7)<F7> 500,000 250,000 250,000 *
Martin Gross 100,000 50,000 50,000 *
Wayne W Ha 10,000 5,000 5,000 *
Randy and Carol Heller 50,000 25,000 25,000 *
39
OWNERSHIP AFTER OFFERING
------------------------------------
NUMBER OF
SHARES NUMBER OF
BENEFICIALLY SHARES NUMBER OF
OWNED REGISTERED FOR SHARES
NAME OF SELLING SHAREHOLDER (1)<F1>(2)<F2> RESALE (1)<F1>(2)<F2> PERCENT
- --------------------------------------------------------------------------------------------------------------------
Glen Henglefelt (6)<F6> 1,348,820 500,000 848,820 2.7%
Lindell S. Herrick (4)<F4> 20,000 10,000 10,000 *
Jerry Horta 80,000 40,000 40,000 *
John J Horvat 100,000 50,000 50,000 *
Wilmot J. Jenkins and John P. Tang (4)<F4> 200,000 100,000 100,000 *
George A. Johnson (6)<F6> 750,000 500,000 250,000 *
Brian D. Jones 100,000 50,000 50,000 *
John D. Kucera (6)<F6> 375,000 250,000 125,000 *
Jerry A. and Kimberly D. Kukuchka (7)<F7> 100,000 50,000 50,000 *
Jeffrey T. and Victoria M. Lilly (4)<F4> 100,000 50,000 50,000 *
Geoffrey Mann 150,000 75,000 75,000 *
Sandra Matlin (4)<F4> 2,500 1,250 1,250 *
Deborah A. Melnick (9)<F9> 50,000 25,000 25,000 *
Sandy Melnick (9)<F9> 50,000 25,000 25,000 *
Patricia L. and Stanley B. Miles (4)<F4> 20,000 10,000 10,000 *
Douglas Miller 524,370 25,000 499,370 1.6%
Richard and Tammy Myerly 100,000 50,000 50,000 *
Steven F. Neira 10,000 5,000 5,000 *
Robert M. Nieder (6)<F6> 750,000 500,000 250,000 *
James Lee Pardee 50,000 25,000 25,000 *
Rick Peterson 50,000 25,000 25,000 *
Harold D. and Angelia C. Pickett (4)<F4> 30,000 15,000 15,000 *
Dale Riedesel 120,000 60,000 60,000 *
David Schanin 250,000 125,000 125,000 *
Mike M. Schizas 25,000 12,500 12,500 *
The Shane A Ortell Family Trust (4)<F4>(10)<F10> 500,000 250,000 250,000 *
Silleck Investments, LLC (11)<F11> 50,000 25,000 25,000 *
Bart C and Delores L Silver 80,000 40,000 40,000 *
Diana Davis Smith 25,000 12,500 12,500 *
Samuel Smith (6)<F6> 620,860 25,000 595,860 1.9%
Camille Stockdale 300,000 150,000 150,000 *
Donald Strasburg 50,000 25,000 25,000 *
Larry and Catherine Summer 200,000 100,000 100,000 *
Brian Temple 50,000 25,000 25,000 *
Theodore Thiro (4)<F4> 15,000 7,500 7,500 *
Brian and Susan Tjarks 300,000 150,000 150,000 *
Michael P. and Nicole C. Ward 150,000 75,000 75,000 *
Jeremy Watada 10,000 5,000 5,000 *
Sean and Kathy Williams (4)<F4> 250,000 125,000 125,000 *
Robert J. Wittenbrink (6)<F6>(7)<F7> 3,515,040 250,000 3,265,040 10.1%
Charles Wong 20,000 10,000 10,000 *
Victor J. Yosha (6)<F6>(7)<F7> 9,640,480 250,000 9,400,480 26.3%
40
*Less than 1%
- ---------------------
<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> Includes shares underlying warrants and/or vested stock options.
(3)<F3> Michelle Gonella exercises voting and/or dispositive power over these
shares.
(4)<F4> Owner of a V2K Window Fashions franchise.
(5)<F5> Hester Auyeung is the brother of Tai Auyeung. Tai Auyeung and Tawny
Auyeung are husband and wife.
(6)<F6> Lender to the company. See "Certain Relationships and Related
Transactions."
(7)<F7> An officer and/or director of the company.
(8)<F8> Randy J. Sasaki exercises voting and/or dispositive power over these
securities.
(9)<F9> Deborah A. Melnick is the mother-in-law of Sandy Melnick.
(10)<F10>Shane Ortell exercises voting and/or dispositive power over these
securities.
(11)<F11>R. Haydn Silleck exercises voting and/or dispositive powers over these
securities.
</FN>
PLAN OF DISTRIBUTION
The selling shareholders may sell some or all of their shares of common
stock in one or more transactions, including block transactions:
o on such public markets or exchanges as the common stock may from time
to time be trading;
o in privately negotiated transactions;
o through the writing of options on the common stock;
o in short sales; or
o in any combination of these methods of distribution.
The selling shareholders have set an offering price of $0.20 per share
until our shares are quoted on the OTC Bulletin Board and thereafter at
prevailing market prices or privately negotiated prices. Except for the shares
owned by James Blyth and DeCh'in Partners, the shares may also be sold in
compliance with the Securities and Exchange Commission's Rule 144.
In the event of the transfer by the selling shareholders of their
shares to any pledgee, donee, or other transferee, we will amend this prospectus
and the registration statement of which this prospectus forms a part by the
filing of a post-effective registration statement in order to name the pledgee,
donee, or other transferee in place of the selling shareholder who has
transferred his shares.
The selling shareholders may also sell their shares directly to market
makers acting as principals or brokers or dealers, who may act as agent or
acquire the common stock as a principal. Any broker or dealer participating in
such transactions as agent may receive a commission from the selling shareholder
or, if they act as agent for the purchaser of such common stock, from such
purchaser. The selling shareholder will likely pay the usual and customary
brokerage fees for such services. Brokers or dealers may agree with the selling
shareholder to sell a specified number of shares at a stipulated price per share
and, to the extent such broker or dealer is unable to do so acting as agent for
the selling shareholder, to purchase, as principal, any unsold shares at the
price required to fulfill the respective broker's or dealer's commitment to the
selling shareholder. Brokers or dealers who acquire shares as principals may
thereafter resell such shares from time to time in transactions in a market or
on an exchange, in negotiated transactions or otherwise, at market prices
prevailing at the time of sale or at negotiated prices, and in connection with
such resales may pay or receive commissions to or from the purchasers of such
shares. These
41
transactions may involve cross and block transactions that may involve sales to
and through other brokers or dealers. We can provide no assurance that all or
any of the common stock offered will be sold by the selling shareholders.
If, after the date of this prospectus, a selling shareholder enters
into an agreement to sell his shares to a broker-dealer as principal and the
broker-dealer is acting as an underwriter, we will need to file a post-effective
amendment to the registration statement of which this prospectus is a part. We
will need to identify the broker-dealer, provide required information on the
plan of distribution, and revise the disclosures in that amendment, and file the
agreement as an exhibit to the registration statement. Also, the broker-dealer
would have to seek and obtain clearance of the underwriting compensation and
arrangements from the NASD Corporate Finance Department.
We are bearing all costs relating to the registration of the common
stock, which are estimated at $40,000. The selling shareholders, however, will
pay any commissions or other fees payable to brokers or dealers in connection
with any sale of the common stock.
We are paying the expenses of the offering because we seek to: (i)
become a reporting company with the Commission under the Securities Exchange Act
of 1934 (the "Exchange Act"); and (ii) enable our common stock to be traded on
the OTC Bulletin Board. We believe that the registration of the resale of shares
on behalf of existing shareholders may facilitate the development of a public
market in our common stock if our common stock is approved for trading on the
OTC Bulletin Board.
We consider that the development of a public market for our common
stock will make an investment in our common stock more attractive to future
investors. In order for us to continue with our business plan, we will in the
near future need to raise additional capital through private placement
offerings. We believe that obtaining reporting company status under the Exchange
Act and trading on the OTC Bulletin Board should increase our ability to raise
these additional funds from investors.
The selling shareholders must comply with the requirements of the
Securities Act and the Exchange Act in the offer and sale of the common stock.
In particular, during such times as the selling shareholders may be deemed to be
engaged in a distribution of the common stock, and therefore be considered to be
underwriters, they must comply with applicable law and may, among other things:
o Not engage in any stabilization activities in connection with our
common stock;
o Furnish each broker or dealer through which common stock may be
offered, such copies of this prospectus, as amended from time to time,
as may be required by such broker or dealer; and
o Not bid for or purchase any of our securities or attempt to induce any
person to purchase any of our securities other than as permitted under
the Securities Exchange Act.
In particular, the selling shareholders and any other person
participating in such distribution will be subject to applicable provisions of
Regulation M of the Exchange Act, which may limit the timing of purchases and
sales of any of the shares of common stock by the selling shareholders and any
other participating person. Regulation M may also restrict the ability of any
person engaged in the distribution of the shares of common stock to engage in
market-making activities with respect to the shares of common stock. All of the
foregoing may affect the marketability of the shares of common stock and the
ability of any person or entity to engage in market-making activities with
respect to the shares of common stock.
LEGAL MATTERS
Dill Dill Carr Stonbraker & Hutchings, P.C., Denver, Colorado, has
given an opinion on the validity of the securities. Fay M. Matsukage, an officer
and shareholder of Dill Dill Carr Stonbraker & Hutchings, P.C., is married to
Gordon E. Beckstead, an officer, director and principal shareholder of the
company.
42
EXPERTS
The financial statements as of September 30, 2006 and for the year
ended September 30, 2006 and nine months ended September 30, 2005 included in
this prospectus and registration statement have been audited by Gordon, Hughes &
Banks, LLP, an independent registered public accounting firm, to the extent and
for the periods indicated in their report, and are included in reliance upon
such report and upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have not previously been subject to the reporting requirements of
the Securities and Exchange Commission. We have filed with the Commission a
registration statement on Form SB-2 under the Securities Act with respect to the
shares offered hereby. This prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules thereto.
For further information with respect to our securities and us you should review
the registration statement and the exhibits and schedules thereto. Statements
made in this prospectus regarding the contents of any contract or document filed
as an exhibit to the registration statement describe all of the material
provisions of such contracts or documents, but do not necessarily describe all
of the provisions. You should review the copy of such contract or document so
filed.
You can inspect the registration statement and the exhibits and the
schedules thereto filed with the commission, without charge, at the office of
the Commission at 100 F Street, NE, Washington, D.C. 20549. You can also obtain
copies of these materials from the public reference section of the commission at
100 F Street, NE, Washington, D.C. 20549, at prescribed rates. You can obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The Commission maintains a web site on the Internet that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the Commission at
http://www.sec.gov.
REPORTS TO SHAREHOLDERS
Upon the effectiveness of the registration statement of which this
prospectus is a part, we will be subject to the reporting requirements of the
federal securities laws, and will be required to file periodic reports 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 and quarterly reports
containing unaudited financial information for the first three quarters of each
fiscal year following the end of such fiscal quarter.
43
INDEX TO FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2007:
Condensed Consolidated Balance Sheet at March 31, 2007 (unaudited).........f-1
Condensed Consolidated Statements of Operations for the six months
ended March 31, 2007 and March 31, 2006 (unaudited)......................f-2
Condensed Consolidated Statements of Cash Flows for the six months
ended March 31, 2007 and March 31, 2006 (unaudited)......................f-3
Notes to Condensed Consolidated Financial Statements (unaudited)...........f-5
YEAR ENDED SEPTEMBER 30, 2006 AND NINE MONTHS ENDED SEPTEMBER 30, 2005:
Report of Independent Registered Public Accounting Firm...................ff-1
Consolidated Balance Sheets at September 30, 2006 and September
30, 2005................................................................ff-2
Consolidated Statements of Operations for the year ended
September 30, 2006 and the nine months ended September 30, 2005.........ff-3
Consolidated Statement of Stockholders' Equity (Deficit) for
the year ended September 30, 2006 and the nine months ended
September 30, 2005......................................................ff-4
Consolidated Statements of Cash Flows for the year ended
September 30, 2006 and the nine months ended September 30, 2005.........ff-5
Notes to Consolidated Financial Statements................................ff-7
44
V2K INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2007
(UNAUDITED)
ASSETS
2007
-----------------
CURRENT ASSETS
Cash and cash equivalents $ 398,270
Cash - restricted 38,524
Accounts receivable, net of allowance for 558,805
doubtful accounts of $61,150
Current portion of notes receivable 86,165
Inventory 11,619
Prepaid expenses and other 131,845
-----------------
Total Current Assets 1,225,228
PROPERTY AND EQUIPMENT, at cost, net of accumulated 63,189
depreciation of $253,720
NOTES RECEIVABLE - net of current portion 12,845
-----------------
Total Assets $ 1,301,262
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 901,907
Note payable - bank 3,290
Note payable - other 132,167
Unearned income 134,800
-----------------
Total Current Liabilities 1,172,164
-----------------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value,
Authorized - 100,000,000 shares
Issued and outstanding - 31,147,336 shares 31,147
Additional paid-in capital 1,885,641
Accumulated (deficit) (1,787,690)
-----------------
Total Stockholders' Equity 129,098
-----------------
Total Liabilities and Stockholders' Equity $ 1,301,262
=================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
f-1
V2K INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2007 AND MARCH 31, 2006
(UNAUDITED)
2007 2006
----------------- -----------------
REVENUES
Sales of franchises $ 874,769 $ 997,192
Royalty and advertising fees 457,718 317,520
Sales of materials and supplies 2,636,818 2,508,285
----------------- -----------------
3,969,305 3,822,997
----------------- -----------------
OPERATING EXPENSES
Cost of franchise sales 502,065 525,100
Cost of materials and supplies 2,518,020 2,429,060
Research and development expenses 225,924 210,659
Selling, general and administrative expenses 1,196,667 966,398
----------------- -----------------
Total Operating Expenses 4,442,676 4,131,217
----------------- -----------------
(LOSS) FROM OPERATIONS (473,371) (308,220)
----------------- -----------------
OTHER INCOME (EXPENSES)
Interest (expense) (14,815) (11,632)
Interest and other income 5,836 3,788
(Loss) on disposition of assets - (755)
Total Other Income (Expense) (8,979) (8,599)
----------------- -----------------
NET (LOSS) BEFORE INCOME TAXES (482,350) (316,819)
PROVISION FOR INCOME TAX - -
----------------- -----------------
NET (LOSS) $ (482,350) $ (316,819)
================= =================
NET (LOSS) PER SHARE -
Basic and diluted $ (0.0167) $ (0.0156)
================= =================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 28,856,436 20,353,101
================= =================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
f-2
V2K INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2007 AND MARCH 31, 2006
(UNAUDITED)
2007 2006
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (482,350) $ (316,819)
Adjustments to reconcile net (loss) to net cash
provided (used) by operations
Depreciation and amortization 39,837 37,905
Bad debt provision 19,716 5,050
Rent expense satisfied with debt 8,000 14,000
Stock issued for services - 14,300
Stock compensation expense 123,043 4,300
Loss on disposal of assets - 755
Changes in assets and liabilities
Decrease in accounts receivable 182,197 18,799
(Increase) decrease in prepaid expenses and other (30,641) 7,146
(Increase) decrease in notes receivable (1,853) 4,657
(Increase) in inventory (2,794) (3,086)
(Decrease) increase in accounts payable and accrued expenses (192,125) 35,348
(Decrease) in unearned income (11,375) (51,501)
---------------- -----------------
Net cash provided (used) by operating activities (348,345) (229,146)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (12,482) (14,285)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options - 143
Net proceeds from sale of common stock 388,749 -
(Decrease) in subscriptions receivable (30,000) -
Proceeds from bridge loan - 200,000
(Payments) on capital lease obligation - (7,507)
(Payments) on bank loan (9,658) (9,052)
---------------- -----------------
Net cash provided by financing activities 349,091 183,584
---------------- -----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (11,736) (59,847)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 448,530 409,741
---------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 436,794 $ 349,894
================ =================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
f-3
V2K INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2007 AND MARCH 31, 2006
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the six month periods ended March 31, 2007 and March 31, 2006, the
Company paid cash of $17,166 and $4,897, respectively, for interest on
debt.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the six month period ended March 31, 2007, the Company: incurred
$123,043 of stock compensation expense; converted $200,000 in bridge
loans to 1,000,000 Units of a private placement, each Unit consisting of
one share of common stock at $0.20 and one warrant to purchase one share
of common stock at $0.50 (see Notes 2 and 5); and converted $100,000 in
debentures into 500,000 shares of common stock ($0.20 per share, see Note
3).
During the six month period ended March 31, 2006, the Company issued
71,500 shares of common stock for services, valued at $14,300 and
incurred $4,300 of stock compensation expense.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents at March 31, 2007 and March 31, 2006 consist
of:
2007 2006
----------------- -----------------
Cash $ 398,270 $ 292,303
Restricted cash (Note 1) 38,524 57,591
----------------- -----------------
$ 436,794 $ 349,894
================= =================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
f-4
V2K INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
V2K International, Inc. ("International") was incorporated as a
Colorado corporation on March 13, 2006. The Company, through its
subsidiary companies, V2K Window Fashions, Inc., V2K Technology, Inc.,
and V2K Manufacturing, Inc., sells and supports franchises in the
residential and commercial window fashion industry, develops and
licenses proprietary software that allows users to decorate windows for
both residential and commercial customers, and manufactures and sells
the resulting soft window treatment products.
International and subsidiaries are hereinafter collectively referred to
as the "Company".
Details of the Company's subsidiaries as of March 31, 2007 are
described below:
PLACE OF EFFECTIVE
INCORPORATION INTEREST
ENTITY NAME AND LEGAL ENTITY PRINCIPAL ACTIVITIES HELD
----------- ---------------- -------------------- ----
V2K Window Fashions, Inc. Colorado corporation Franchise sales and support 100%
("Windows")
V2K Technology, Inc. Colorado corporation Development and licensing of 100%
("Technology") software
V2K Manufacturing, Inc. ("Manufacturing") Colorado corporation Manufacture of soft window 100%
covering products
In April 2006, International, in a share for share exchange, acquired
all issued and outstanding shares of Window's preferred and common
stock. Shares of Window's preferred and common stock were exchanged for
shares of common stock in International on a 1 for 35 basis and 1 for
10 basis, respectively. Windows sells and supports franchises in the
residential and commercial window fashion industry. Franchisees sell
and install window treatments for retail and commercial clients using
software licensed from Technology, training manuals, policies,
procedures and knowledge. Franchisees are located throughout the United
States and in two Canadian provinces.
In August 2006, Windows opened its first company-owned franchise
location, incorporated as Window Fashions Franchise, LLC. Window
Fashions Franchise, LLC is a wholly owned subsidiary of Windows.
In April 2006, Windows transferred legal ownership of Manufacturing and
the related equity interest to International. Windows had acquired
Manufacturing in January 2004.
In July 2006, in order to further protect the intellectual property
associated with the software and to facilitate future licensing
agreements, the software and software development team formerly held by
Windows were spun-off to form V2K Technology, Inc. Technology is a
wholly owned subsidiary of International, and licenses a customized
window fashions franchise software to Windows.
f-5
V2K INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the financial statements of International and its subsidiaries
as of March 31, 2007 and for the six-month periods ended March 31, 2007
and March 31, 2006 and have been prepared in accordance with generally
accepted accounting principles in the United States of America ("US
GAAP") for interim financial information. They do not include all of
the information and footnotes for complete consolidated financial
statements as required by US GAAP. In management's opinion, all
adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. The
results of operations for the periods ended March 31, 2007 and 2006
presented are not necessarily indicative of the results to be expected
for the year. These financial statements should be read in conjunction
with the annual audited financial statements. All significant
inter-company transactions have been eliminated in consolidation.
All information presented in the foregoing financial statements and
these footnotes are for the six-month periods ended March 31, 2007 and
March 31, 2006.
FRANCHISE OPERATIONS
At March 31, 2007, the Company had 181 independently owned franchises
located in 41 states and the provinces of Alberta and Manitoba.
REVENUE RECOGNITION
Initial franchise fees are recognized upon the commencement of
operations by the franchisee, which is when the Company has performed
substantially all initial services required by the franchise agreement.
Unearned income represents franchise fees received for which the
Company has not completed its initial obligations under the franchise
agreement. Such obligations, consisting mostly of training, are
generally fulfilled within 60 days of receipt of the initial franchise
fee. Royalties and advertising fees are recognized as earned.
Franchisees place all orders for materials and supplies with the
Company, who then places the corresponding orders with its vendors. The
products are shipped directly to the franchisees. The Company is liable
to the vendors for payment and collects the amounts due for the goods
from the franchisees. In addition, the Company is responsible to the
franchisees for goods shipped by the vendors that do not meet
specifications. Thus, the Company acts as a principal as defined in the
Emerging Issues Task Force, Issue 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent". Revenue from materials and supplies
sales is recorded upon shipment to the franchisee by the vendor and
represents approximately 66% of total revenue for the six months ended
March 31, 2007 and March 31, 2006.
INCOME TAXES
The Company accounts for income taxes in interim periods as required by
Accounting Principles Board Opinion No. 28, "Interim Financial
Reporting" and as interpreted by FASB Interpretation No. 18,
"Accounting for Income Taxes in Interim Periods". The Company has
determined an estimated annual effective tax rate. The rate will be
revised, if necessary, as of the end of each successive interim period
during the Company's fiscal year to the Company's best current
estimate.
f-6
V2K INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
The estimated annual effective tax rate is applied to the year-to-date
ordinary income (or loss) at the end of the interim period.
INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed based on the weighted average
number of common shares outstanding during each period. The computation
of diluted earnings per share assumes the conversion, exercise or
contingent issuance of securities only when such conversion, exercise
or issuance would have a dilutive effect on income per share. The
dilutive effect of convertible securities is reflected in diluted
earnings per share by application of the "as if converted method." The
dilutive effect of outstanding options and warrants and their
equivalents is reflected in diluted earnings per share by application
of the treasury stock method. For the six months ended March 31, 2007
and March 31, 2006, all outstanding options and convertible preferred
stock were excluded from the computation of diluted loss per share as
the effect of the assumed exercise and conversions would be
anti-dilutive.
RESEARCH AND DEVELOPMENT COSTS
The Company has adopted the provisions of Statement of Financial
Accounting Standards (SFAS) 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," which requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's
product development process, technological feasibility is established
upon completion of a working model. Since the Company does not incur
any costs between the completion of the working model and the point at
which the product is ready for general release, all research and
development costs are charged to expense as incurred. Research and
development expenses for the six months ended March 31, 2007 and March
31, 2006 were $225,924 and $210,659, respectively.
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers as cash
equivalents all highly liquid investments with a maturity of three
months or less at the time of purchase. At March 31, 2007 and March 31,
2006, there were no cash equivalents.
Cash at March 31, 2007 and March 31, 2006 includes $38,524 and $57,591,
respectively, of cash restricted for advertising and marketing. Such
funds were contributed by franchisees to a National/Regional/Local
Advertising Fund pursuant to franchise agreements, and may not be used
for the general operations of the Company.
RECLASSIFICATION
Certain amounts in the six-month period ended March 31, 2006 financial
statements have been reclassified to conform to the six-month period
ended March 31, 2007 financial statement presentation.
f-7
V2K INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - BRIDGE LOAN
In January 2006, the Company issued $200,000 of convertible promissory
notes for cash, including $75,000 to officers of the Company (see Note
7). The notes require quarterly interest payments in arrears at the
rate of four percent plus the prime rate as published in the Money Rate
Table of the Western Edition of the Wall Street Journal. Repayment of
the notes was to commence upon the earlier of (a) the completion of a
private placement or (b) July 5, 2006. If repayment were to commence
pursuant to the completion of the private placement, the entire amount
of the notes, except for any amounts that had been converted (see
below) would be repaid from the proceeds of the private placement (see
Note 5). At the option of the lenders, at any time prior to the
consummation of the private placement, the lenders could convert all or
any of the principal amounts into the securities in the private
placement. Upon the minimum portion of the private placement having
been sold, the lenders were required to convert at least fifty percent
of the note into the private placement.
On January 31, 2007, the Company closed the private placement (see Note
5) and all of the bridge loan lenders converted the entire amount of
the note into 1,000,000 units ($0.20 per unit), consisting of 1,000,000
shares of common stock and 1,000,000 warrants to purchase shares of
common stock at $0.50 per share.
Interest accrued and paid on the bridge loan for the six months ended
March 31, 2007 and March 31, 2006 was $8,167 and $5,682, respectively.
The lenders were issued warrants to purchase a total of 1,000,000
shares of common stock in International at $0.30 per share. The
warrants expire January 5, 2009. The Company granted piggyback
registration rights (on a "best efforts" basis) with respect to the
shares issuable upon exercise of these warrants. The fair value of the
warrants was estimated as of the issue date under the Black-Scholes
pricing model, with the following assumptions: common stock based on a
market price of $0.20 per share, zero dividends, expected volatility of
28%, risk free interest rate of 6.00% and expected life of 1.5 years.
The fair value of the warrants of $7,655 was included as other expense
during the fiscal year ended September 30, 2006.
The Company evaluated the warrants and concluded that the warrants meet
the scope limitation found in SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," and are appropriately classified
as equity. The Company also evaluated the registration rights and
concluded that the rights do not meet the definition of derivative
instruments under SFAS 133.
NOTE 3 - CONVERTIBLE DEBENTURES
In 2005, the Company issued $100,000 of convertible debentures for
cash, including $50,000 to an officer of the Company. The debentures
have a three-year term maturing in February 2008, require quarterly
interest only payments at the Wall Street Journal prime rate plus 1%,
and are redeemable at the option of the Company in whole or in part
prior to the due date. The holder(s) of the convertible debentures have
the option, at any time, to convert all or any portion of the
debentures into common stock of the Company at $0.20 per share.
On January 31, 2007, the debenture holders converted $100,000 in
debentures into 500,000 shares of common stock ($0.20 per share).
Interest accrued and paid on the debentures for the six months ended
March 31, 2007 and March 31, 2006 was $2,312 and $3,563, respectively.
f-8
V2K INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY
COMMON STOCK
During the six-month period ended March 31, 2007 the Company: sold
2,268,750 shares of common stock for cash of $453,750 ($0.20 per
share); accepted the conversion of a $200,000 bridge loan (see Note 2)
into 1,000,000 shares of common stock ($0.20 per share); and accepted
the conversion of $100,000 of convertible debentures (see Note 3) into
500,000 shares of common stock ($0.20 per share).
Prior to the share for share exchange with Windows (see Note 1 -
Organization), the Company issued 5,391,811 shares of common stock in
conjunction with the recapitalization of V2K International, Inc.
During the six-month period ended March 31, 2006 the Company: issued
71,500 shares of common for services valued at $14,300 ($0.20 per
share); accepted the recision of sale of 116,660 shares of common stock
for cash of $35,000 ($0.30 per share); sold 175,000 shares of common
stock for cash of $35,000 ($0.20 per share); issued 2,860 shares of
common stock for exercise of stock options for cash of $143 ($0.05 per
share); and issued 20,701,775 of common stock to acquire all the issued
and outstanding shares of preferred and common stock of Windows (see
Note 1 - Organization).
STOCK OPTION PLAN
The Company has adopted the V2K International, Inc. 2006 Stock Option
Plan (the Plan). Under the Plan, the Board of Directors, in its
discretion, may issue options to officers, directors, employees, and
consultants on a case-by-case basis. In general, options may be
exercised by payment of the option price by either (i) cash, (ii)
tender of shares of its common stock which have a fair market value
equal to the option price, or (iii) by such other consideration as the
Board of Directors may approve at the time the option is granted. The
Company has reserved an aggregate 30,000,000 shares of its common stock
for options granted under the Plan.
Prior to October 1, 2006 the Company accounted for its share based
compensation plans under the recognition and measurement provision of
APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and related Interpretations, as permitted by FASB Statement No.
123, "Accounting for Share-Based Compensation" (SFAS 123). Effective
October 1, 2006, the Company adopted the fair value recognition
provisions to SFAS 123(R), using the modified-prospective transition
method. Under that transition method, the employee compensation cost of
$123,043 recognized in the six months ended March 31, 2007 includes:
(i) compensation cost for all share-based payments granted prior to,
but not yet vested as of October 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123;
and (ii) compensation cost for all share-based payments granted
subsequent to October 1, 2006 based on the grant date fair value
estimated in accordance with the provision of SFAS 123(R). Results from
prior periods have not been restated.
f-9
V2K INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - PRIVATE PLACEMENT
In a Private Offering Memorandum dated September 6, 2006, the Company
began offering for sale 3,750,000 Units, each Unit consisting of one
share of common stock and one common stock purchase warrant, which are
immediately detachable, at $0.20 per Unit pursuant to exemptions from
registration contained in Section 3(b) and Rule 506 of Regulation D of
the Securities Act of 1933 and the securities laws of certain states,
for a total of $750,000. Each warrant entitles the holder to purchase
one share of common stock at an exercise price of $0.50 per share
through December 31, 2007. All warrants are automatically redeemable by
the Company at $0.001 if the common stock is then listed on a
recognized stock exchange or trading at $1.00 per share for 20
consecutive trading days.
The minimum offering amount was $150,000, which was received and the
escrow account was broken in the amount of $257,000 on September 29,
2006.
On January 31, 2007, the Company closed the private placement, having
sold 3,553,750 Units for $710,750 ($0.20 per unit), including $15,000
to officers of the Company (see Note 7).
NOTE 6 - SEGMENT INFORMATION
The Company and its subsidiaries (see Note 1 - Organization), operate
in four industry segments. Parent Holding (International) provides the
corporate vehicle for raising capital for the subsidiaries and will
fulfill the Company's existence as a public reporting company, assuming
that the Company attains that status; Windows sells and supports
franchises in the residential and commercial window fashion industry;
Technology develops and licenses proprietary software that allows users
to decorate windows for both residential and commercial customers; and
Manufacturing manufactures soft product window treatments exclusively
for Windows franchisees.
Identified assets by industry are those assets that are used in our
operations in each industry. The Company's assets are principally cash,
accounts receivable and equipment.
The Company has adopted SFAS 131 which requires the presentation of
descriptive information about reportable segments which is consistent
with that made available to the management of the Company to assess
performance.
Windows derives its revenues from sales of franchises, royalty and
sales of materials and supplies to franchisees. Manufacturing receives
its income from the sale of labor on soft product window treatments to
Window's franchisees.
During the six months ended March 31, 2007 and March 31, 2006,
inter-segment revenues were $296,447 and $283,234, respectively. The
accounting policies applied by each segment are the same as those used
by the Company in general.
There have been no material changes in the amount of assets of any
operating segment since the last annual report.
f-10
V2K INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - SEGMENT INFORMATION (CONTINUED)
Segment information for the six months ended March 31, 2007 and March
31, 2006 consists of the following:
PARENT MANU-
HOLDING WINDOWS TECHNOLOGY FACTURING TOTAL
-------------- -------------- -------------- --------------- ---------------
Revenues
2007 - 3,969,305 - - 3,969,305
2006 - 3,822,997 - - 3,822,997
Inter-segment revenues
2007 - - - 296,447 296,447
2006 - - - 283,234 283,234
Net (loss)
2007 (117,633) (70,007) (225,924) (68,786) (482,350)
2006 - (244,656) - (72,163) (316,819)
Identifiable assets (net)
2007 1,709,541 1,239,800 - 79,328 3,028,669
2006 - 1,195,852 - 72,946 1,268,798
Depreciation and amortization
charged to identifiable assets
2007 - 27,540 - 12,297 39,837
2006 - 25,659 - 12,246 37,905
Interest revenue
2007 - 4,640 - - 4,640
2006 - 3,575 - - 3,575
Interest expense
2007 - 14,592 - 223 14,815
2006 - 10,946 - 686 11,632
Reconciliation of segment totals to consolidated amounts:
2007 2006
---------------- ----------------
Total revenues for reportable segments $ 4,265,782 $ 4,106,231
Elimination of inter-segment revenues (296,477) (283,234)
---------------- ----------------
Total Consolidated Revenues $ 3,969,305 $ 3,822,997
================ ================
Reconciliation of segment totals to consolidated amounts (continued):
2007 2006
---------------- ----------------
Identifiable assets (net) $ 3,028,669 $ 1,268,798
Elimination of intercompany assets (1,727,407) (37,500)
---------------- ----------------
Total Consolidated Assets $ 1,301,262 $ 1,231,298
================ ================
f-11
V2K INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - RELATED PARTY TRANSACTIONS
In 2006, $75,000 in bridge loans (see Note 2) were issued to officers
of the Company and $15,000 in subscriptions (see Note 5) were received
from officers of the Company.
NOTE 8 - SUBSEQUENT EVENTS
On April 6, 2007, the Company formed Marketing Source International,
LLC ("MSI"). MSI is a wholly-owned subsidiary of International, and
will endeavor to generate revenues by acting as a sales agent for
overseas window covering manufacturers.
f-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
V2K International, Inc.
Denver, Colorado
We have audited the consolidated balance sheets of V2K International, Inc. and
subsidiaries (the "Company") as of September 30, 2006 and 2005 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year ended September 30, 2006 and nine months ended September 30,
2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that out audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of V2K
International, Inc. and subsidiaries as of September 30, 2006 and 2005, and the
consolidated results of their operations and cash flows for the year ended
September 30, 2006 and nine months ended September 30, 2005 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 15 of the accompanying notes to the financial statements,
the financial statements as of September 30, 2006 and 2005 have been restated to
properly record the issuance of a franchise to an employee.
/s/ GORDON, HUGHES & BANKS, LLP
Greenwood Village, Colorado
February 7, 2007
ff-1
V2K INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005
2006 2005
(RESTATED) (RESTATED)
ASSETS ---------------- ----------------
CURRENT ASSETS
Cash $ 330,547 $ 264,203
Cash - restricted 117,983 145,538
Accounts receivable, net of allowance for
doubtful accounts of $43,150 (2006) and $34,400 (2005) 760,718 607,034
Current portion of notes receivable 75,787 69,628
Inventory 8,825 11,963
Prepaid expenses and other 101,204 51,576
---------------- ----------------
Total Current Assets 1,395,064 1,149,942
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation of $213,882 (2006) and $140,229 (2005) 90,544 127,442
NOTES RECEIVABLE - net of current portion 21,370 70,702
---------------- ----------------
Total Assets $ 1,506,978 $ 1,348,086
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,094,032 $ 782,483
Current portion of capital lease obligations - 12,519
Current portion of note payable - bank 12,948 18,402
Current portion of note payable - other 124,167 -
Bridge loan 200,000 -
Unearned income 146,175 81,501
---------------- ----------------
Total Current Liabilities 1,577,322 894,905
---------------- ----------------
LONG TERM LIABILITIES
Note payable - bank, net of current portion - 12,943
Note payable - other, net of current portion - 97,167
Convertible debentures 100,000 100,000
---------------- ----------------
Total Long Term Liabilities 100,000 210,110
---------------- ----------------
Total Liabilities 1,677,322 1,105,015
---------------- ----------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - $1.00 par value
Series A - authorized 500,000 shares, issued
and outstanding 0 shares (2006) and 200,001 shares (2005) - 200,001
Subscriptions receivable (150,000 shares) 30,000 -
Common stock - $.001 par value, authorized 100,000,000 shares
Issued and outstanding 27,378,586 shares (2006) and
13,569,040 shares (2005) 27,379 13,570
Additional paid-in capital 1,077,617 602,635
Accumulated (deficit) (1,305,340) (573,135)
---------------- ----------------
Total Stockholders' Equity (Deficit) (170,344) 243,071
---------------- ----------------
Total Liabilities and Stockholders' Equity (Deficit) $ 1,506,978 $ 1,348,086
================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
ff-2
V2K INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2006
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2005
2006 2005
(RESTATED)
----------------- ----------------
REVENUES
Sales of franchises $ 1,463,992 $ 1,625,582
Royalty and advertising fees 847,635 503,752
Sales of materials and supplies 5,846,915 4,004,108
----------------- ----------------
8,158,542 6,133,442
----------------- ----------------
OPERATING EXPENSES
Cost of franchise sales 799,277 768,701
Cost of materials and supplies 5,625,008 3,779,696
Research and development expenses 433,201 308,648
Selling, general and administrative expenses 2,024,794 1,363,135
----------------- ----------------
Total Operating Expenses 8,882,280 6,220,180
----------------- ----------------
(LOSS) FROM OPERATIONS (723,738) (86,738)
----------------- ----------------
OTHER INCOME (EXPENSES)
Interest expense (29,850) (10,180)
Other income 21,383 19,153
Loss on disposition of assets - (349)
----------------- ----------------
Total Other Income (Expense) (8,467) 8,624
----------------- ----------------
NET (LOSS) BEFORE INCOME
TAXES (732,205) (78,114)
PROVISION FOR INCOME TAX - -
----------------- ----------------
NET (LOSS) $ (732,205) $ (78,114)
================= ================
NET (LOSS) PER SHARE -
BASIC AND DILUTED $ (0.0281) $ (0.0059)
================= ================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 26,094,657 13,290,440
================= ================
The accompanying notes are an integral part of these
consolidated financial statements.
ff-3
V2K INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED SEPTEMBER 30, 2006
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2005
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN SUBSCRIPTIONS RECEIVABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT
----------- ----------- ------------- ------------ ------------- ------------- -------------
BALANCE, JANUARY 1, 2005 200,001 $ 200,001 13,079,570 $ 13,080 $ 507,725 - $ -
Issuance of common stock
for services at $0.30 per share - - 29,970 30 8,970 - -
Sale of common stock for
cash at $0.20 per share - - 150,000 150 29,850 - -
Recission of common stock
for cash at $0.30 per share - - (83,330) (83) (24,917) - -
Exercise of stock options for
cash at $0.05 per share - - 300,000 300 14,700 - -
Sale of common stock for
cash at $0.30 per share - - 33,330 33 9,967 - -
Issuance of common stock
for services at $0.20 per share - - 59,500 60 11,840 - -
Fair value of franchise
provided employee - - - - 44,500 - -
Net income - - - - - - -
----------- ----------- ------------- ------------ ------------ ------------- -------------
BALANCE, SEPTEMBER 30, 2005 200,001 200,001 13,569,040 13,570 602,635 - -
Issuance of common stock
in conjunction with the
re-capitalization of V2K
International, Inc. - - 5,391,811 5,392 - - -
Issuance of common stock
for services at $0.20 per share - - 71,500 71 14,229 - -
Stock options issued
as compensation - - - - 4,300 - -
Exercise of stock options
for cash at $0.05 per share - - 2,860 3 140 - -
Recission of common stock
for cash at $0.30 per share - - (116,660) (117) (34,883) - -
Sale of common stock for
cash at $0.20 per share - - 175,000 175 34,825 - -
Warrants issued for services - - - - 7,655 - -
Conversion of preferred stock
into common stock at $0.0286
per share (200,001) (200,001) 7,000,035 7,000 193,001 - -
Sale of common stock for
cash at $0.20 per share - - 1,285,000 1,285 255,715 - -
Subscriptions receivable - - - - - 150,000 30,000
Net (loss) - - - - - - -
----------- ----------- ------------- ------------ ------------ ------------- -------------
BALANCE, SEPTEMBER 30, 2006 - $ - 27,378,586 $ 27,379 $ 1,077,617 150,000 $ 30,000
=========== =========== ============= ============ ============ ============= =============
ACCUMULATED
(DEFICIT) TOTAL
----------------- ---------------
BALANCE, JANUARY 1, 2005 $ (495,021) $ 225,785
Issuance of common stock
for services at $0.30 per share - 9,000
Sale of common stock for
cash at $0.20 per share - 30,000
Recission of common stock
for cash at $0.30 per share - (25,000)
Exercise of stock options for
cash at $0.05 per share - 15,000
Sale of common stock for
cash at $0.30 per share - 10,000
Issuance of common stock
for services at $0.20 per share - 11,900
Fair value of franchise
provided employee - 44,500
Net (loss) (78,114) (78,114)
----------------- ---------------
BALANCE, SEPTEMBER 30, 2005 (573,135) 243,071
Issuance of common stock
in conjunction with the
re-capitalization of V2K
International, Inc. - 5,392
Issuance of common stock
for services at $0.20 per share - 14,300
Stock options issued
as compensation - 4,300
Exercise of stock options
for cash at $0.05 per share - 143
Recission of common stock
for cash at $0.30 per share - (35,000)
Sale of common stock for
cash at $0.20 per share - 35,000
Warrants issued for services - 7,655
Conversion of preferred stock
into common stock at $0.0286
per share - -
Sale of common stock for
cash at $0.20 per share - 257,000
Subscriptions receivable - 30,000
Net (loss) (732,205) (732,205)
----------------- ---------------
BALANCE, SEPTEMBER 30, 2006 $ (1,305,340) $ (170,344)
================= ===============
The accompanying notes are an integral part of these
consolidated financial statements.
ff-4
V2K INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 2006
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2005
2006 2005
(RESTATED)
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (732,205) $ (78,114)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operations
Depreciation and amortization 73,653 58,816
Bad debt provision 69,413 67,647
Rent expense satisfied with debt 27,000 21,000
Stock issued in re-capitalization 5,392 -
Stock issued for services 14,300 20,900
Stock compensation expense 11,955 -
Fair value of franchise provided employee - 44,500
Loss on disposal of assets - 349
Changes in assets and liabilities
(Increase) in accounts receivable (223,097) (139,439)
(Increase) in prepaid expenses and other (49,628) (36,985)
Decrease (increase) in notes receivable 43,173 (33,218)
Decrease (increase) in inventory 3,138 (1,848)
Increase in accounts payable and accrued expenses 311,549 103,453
Increase (decrease) in unearned income 64,674 (76,199)
---------------- ----------------
Net cash (used) by operating activities (380,683) (49,138)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (36,755) (16,093)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options 143 -
Proceeds from sale of common stock 257,000 30,000
Increase in subscriptions receivable 30,000 -
Proceeds from sale of convertible debentures - 100,000
Proceeds from bridge loan 200,000 -
(Payments) on capital lease obligation (12,519) (10,798)
(Payments) on bank loan (18,397) (13,045)
---------------- ----------------
Net cash provided by financing activities 456,227 106,157
---------------- ----------------
NET INCREASE IN CASH 38,789 40,926
CASH, BEGINNING OF PERIOD 409,741 368,815
---------------- ----------------
CASH, END OF PERIOD $ 448,530 $ 409,741
================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
ff-5
V2K INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 2006
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2005
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the year ended September 30, 2006 and the nine month period
ended September 30, 2005, the Company paid cash of $22,791 and $7,756,
respectively, for interest on debt.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents at September 30, 2006 and September 30, 2005
consist of:
2006 2005
---------------- ----------------
Cash $ 330,547 $ 264,203
Restricted cash (Note 1) 117,983 145,538
---------------- ----------------
$ 448,530 $ 409,741
================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
ff-6
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
V2K International, Inc. ("International") was incorporated as a
Colorado corporation on March 13, 2006. The Company, through its
subsidiary companies, V2K Window Fashions, Inc., V2K Technology, Inc.,
and V2K Manufacturing, Inc., sells and supports franchises in the
residential and commercial window fashion industry, develops and
licenses proprietary software that allows users to decorate windows for
both residential and commercial customers, and manufactures and sells
the resulting soft window treatment products.
International and subsidiaries are hereinafter collectively referred to
as the "Company".
Details of the Company's subsidiaries as of September 30, 2006 are
described below:
PLACE OF EFFECTIVE
INCORPORATION INTEREST
ENTITY NAME AND LEGAL ENTITY PRINCIPAL ACTIVITIES HELD
----------- ---------------- -------------------- ----
V2K Window Fashions, Inc. Colorado corporation Franchise sales and 100%
("Windows") support
V2K Technology, Inc. Colorado corporation Development and 100%
("Technology") licensing of software
V2K Manufacturing, Inc. Colorado corporation Manufacture of soft 100%
("Manufacturing") window covering products
In April 2006, International, in a share for share exchange, acquired
all issued and outstanding shares of Window's preferred and common
stock. Shares of Window's preferred and common stock were exchanged for
shares of common stock in International on a 1 for 35 basis and 1 for
10 basis, respectively. Windows sells and supports franchises in the
residential and commercial window fashion industry. Franchisees sell
and install window treatments for retail and commercial clients using
software licensed from Technology, training manuals, policies,
procedures and knowledge. Franchisees are located throughout the United
States and in two Canadian provinces.
In August 2006, Windows opened its first company-owned franchise
location, incorporated as Window Fashions Franchise, LLC. Window
Fashions Franchise, LLC is a wholly owned subsidiary of Windows.
In April 2006, Windows transferred legal ownership of Manufacturing and
the related equity interest to International. Windows had acquired
Manufacturing in January 2004.
In July 2006, in order to further protect the intellectual property
associated with the software and to facilitate future licensing
agreements, the software and software development team formerly held by
Windows were spun-off to form V2K Technology, Inc. Technology is a
wholly owned subsidiary of International, and licenses a customized
window fashions franchise software to Windows.
ff-7
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRIVATE OFFERING MEMORANDUM
In a Private Offering Memorandum dated September 6, 2006, the Company
began offering for sale 3,750,000 Units, each Unit consisting of one
share of common stock and one common stock purchase warrant, which are
immediately detachable, at $0.20 per Unit pursuant to exemptions from
registration contained in Section 3(b) and Rule 506 of Regulation D of
the Securities Act of 1933 and the securities laws of certain states,
for a total of $750,000. Each warrant entitles the holder to purchase
one share of common stock at an exercise price of $0.50 per share
through September 30, 2008. All warrants are automatically redeemable
by the Company at $0.001 if the common stock is then listed on a
recognized stock exchange or trading at $1.00 per share for 20
consecutive trading days.
The minimum offering amount was $150,000, which was received and the
escrow account was broken in the amount of $257,000 on September 29,
2006. As of September 30, 2006 the Company had received subscriptions
totaling $287,000, including $15,000 from officers of the Company (see
Note 12) and $30,000 for which the corresponding shares of common stock
(150,000 shares) had not been issued.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the Company
and its wholly owned subsidiaries. All significant inter-company
transactions have been eliminated in consolidation.
During 2005, the Company's Board of Directors approved the change of
the Company's fiscal year end from December 31st to September 30th. The
change was affected to help the Company meet the annual updating
deadline for the franchise offering circular under federal law and
several state franchise registration renewal filing deadlines. All
information presented in the foregoing financial statements and these
footnotes which are presented for the fiscal year ended September 30,
2005 covers a period of nine months.
FRANCHISE OPERATIONS
The Company currently supports independently owned franchises located
in forty-three states and two providences in Canada. A summary of
franchise activity is as follows:
SEPTEMBER 30, SEPTEMBER 30,
2006 2005
-------------- --------------
Franchises in operation - beginning of period 160 132
Franchises sold during the period 30 37
Franchises cancelled, terminated or repurchased
during the period (8) (9)
-------------- --------------
Franchises in operation - end of period 182 160
============== ==============
Franchisees are required to pay the Company an initial franchise fee,
royalty fees aggregating between 4% and 8% of gross sales and an
advertising contribution fee of 2% of gross sales. In addition, all
materials and goods sold by franchisees are processed, billed and
collected through the Company using approved vendors and suppliers.
ff-8
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Initial franchise fees are recognized upon the commencement of
operations by the franchisee, which is when the Company has performed
substantially all initial services required by the franchise agreement.
Unearned income represents franchise fees received for which the
Company has not completed its initial obligations under the franchise
agreement. Such obligations, consisting mostly of training, are
generally fulfilled within 60 days of receipt of the initial franchise
fee. Royalties and advertising fees are recognized as earned.
Franchisees place all orders for materials and supplies with the
Company, who then places the corresponding orders with its vendors. The
products are shipped directly to the franchisees. The Company is liable
to the vendors for payment and collects the amounts due for the goods
from the franchisees. In addition, the Company is responsible to the
franchisees for goods shipped by the vendors that do not meet
specifications. Thus, the Company acts as a principal as defined in the
Emerging Issues Task Force, Issue 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent." Revenue from materials and supplies
sales is recorded upon shipment to the franchisee by the vendor and
represents approximately 72% and 65% of total revenue for the year
ended September 30, 2006 and the nine months ended September 30, 2005,
respectively.
INVENTORY
Inventory is valued at the lower of cost, using the first in first out
method, or market and consists of manufacturing materials and supplies.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation of equipment
is provided by use of the straight-line method over the estimated
useful lives of the related assets of three to five years. Leasehold
improvements are amortized using the straight-line method over the life
of the lease. Expenditures for replacements, renewals and betterments
are capitalized. Maintenance and repairs are charged to operations as
incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards
(SFAS) 144, "Accounting for the Impairment and Disposal of Long-Lived
Assets," which requires that long-lived assets to be held and used be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
The Company will assess the recoverability of the carrying cost of
long-lived assets based on a review of projected undiscounted cash
flows related to the asset held for use. If assets are determined to be
impaired, then the asset will be written down to its fair value based
on the present value of the discounted cash flows of the related asset
or other relevant measures. As of September 30, 2006, no impairment has
been recorded.
ADVERTISING COSTS
The Company expenses all costs of advertising as incurred. Total
advertising expense for the year ended September 30, 2006 and the nine
months ended September 30, 2005 was $196,292 and $178,492,
respectively. Advertising expense does not include expenditures on
behalf of franchisees from the National/Regional/Local Advertising Fund
(see Note 1 - Cash Equivalents).
ff-9
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company has adopted the provisions of SFAS 109, "Accounting for
Income Taxes." SFAS 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.
Temporary differences between the time of reporting certain items for
financial and tax reporting purposes consist primarily of depreciation
of equipment and allowance for uncollectible receivables.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
RESEARCH AND DEVELOPMENT COSTS
The Company has adopted the provisions of SFAS 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
which requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Based on
the Company's product development process, technological feasibility is
established upon completion of a working model. Since the Company does
not incur any costs between the completion of the working model and the
point at which the product is ready for general release, all research
and development costs are charged to expense as incurred. Research and
development expenses for the year ended September 30, 2006 and the nine
months ended September 30, 2005 were $433,201 and $308,648,
respectively.
VARIABLE INTEREST ENTITIES
The Financial Accounting Standards Board ("FASB") issued Interpretation
46 (revised 2003), "Consolidation of Variable Interest Entities" and
requires the primary beneficiary of a variable interest entity to
consolidate that entity. The primary beneficiary of a variable interest
entity is the party that absorbs a majority of the variable interest
entity's expected losses, receives a majority of the entity's expected
residual returns, or both, because of ownership, contractual or other
financial interests in the entity.
The primary entities in which the Company possesses a variable interest
are franchise entities. The Company does not possess any ownership
interests in franchise entities, other than one wholly-owned franchise,
which is consolidated, and the Company does not generally provide
financial support to the franchisees. Management has reviewed the
franchise entities and determined that the Company is not the primary
beneficiary of the entities, and therefore, these entities have not
been consolidated.
INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed based on the weighted average
number of common shares outstanding during each period. The computation
of diluted earnings per share assumes the conversion, exercise or
contingent issuance of securities only when such conversion, exercise
or issuance would have a dilutive effect on income per share. The
dilutive effect of convertible securities is reflected in diluted
ff-10
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME (LOSS) PER SHARE (CONTINUED)
earnings per share by application of the "as if converted method." The
dilutive effect of outstanding options and warrants and their
equivalents is reflected in diluted earnings per share by application
of the treasury stock method.
For the year ended September 30, 2006 and for the nine months ended
September 30, 2005, all outstanding options and convertible preferred
stock were excluded from the computation of diluted loss per share as
the effect of the assumed exercise and conversions would be
anti-dilutive.
SHARE BASED COMPENSATION
In October 1995, SFAS 123 "Accounting for Stock-Based Compensation" was
issued. This standard defines a fair value based method of accounting
for an employee stock option or similar equity instrument. This
statement gives entities a choice of recognizing related compensation
expense to employees by adopting the fair value method or to continue
to measure compensation using the intrinsic value approach under
Accounting Principles Board (APB) Opinion 25. The Company has elected
to utilize APB 25 for measurement; and will, pursuant to SFAS 123,
disclose on a supplemental basis the pro forma effects on net income
and earnings per share of using the fair value measurement criteria.
Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards
under those plans consistent with the method prescribed in SFAS 123,
the Company's net (loss) per share for the year ended September 30,
2006 and the nine months ended September 30, 2005 would have been
increased to the pro forma amounts indicated below:
2006 2005
--------------- ---------------
Net (loss) as reported $ (732,205) $ (78,114)
Add stock based compensation included in
reported net (loss) 11,955 -
Deduct stock based compensation expense
determined under fair value method (158,884) (86,295)
--------------- ---------------
Pro forma net (loss) $ (879,134) $ (164,409)
=============== ===============
Net (loss) per share
As reported
Basic and diluted $ (0.0281) $ (0.0059)
=============== ===============
Pro forma
Basic and diluted $ (0.0337) $ (0.0124)
=============== ===============
The calculated value of stock options granted under these plans,
following calculation methods prescribed by SFAS 123, uses the
Black-Scholes stock option pricing model with the following assumptions
used:
2006 2005
-------------- ---------------
Expected option life-years 3.00 - 7.50 none issued
Risk-free interest rate 5.125% none issued
Dividend yield 0 none issued
Volatility 28% none issued
ff-11
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers as cash
equivalents all highly liquid investments with a maturity of three
months or less at the time of purchase. At September 30, 2006 and
September 30, 2005, there were no cash equivalents.
Cash at September 30, 2006 and September 30, 2005 includes $117,983 and
$145,538, respectively, of cash restricted for advertising and
marketing. Such funds were contributed by franchisees to a
National/Regional/Local Advertising Fund pursuant to franchise
agreements, and may not be used for the general operations of the
Company.
SHIPPING AND HANDLING FEES AND COSTS
All amounts billed to a customer in a sales transaction related to
shipping and handling represent revenues earned and are reported as
revenue, and the costs incurred by the Company for shipping and
handling are reported as an expense.
FAIR VALUE
The carrying amount reported on the balance sheet for cash, accounts
receivable, inventory, accounts payable and accrued liabilities
approximates fair value because of the immediate or short-term maturity
of these financial instruments.
The carrying amounts of notes receivable approximate fair value as the
effective rates for those instruments are comparable to market rates at
year end.
Based upon the borrowing rates currently available to the Company for
loans with similar terms and average maturities, the fair value of
long-term debt approximates its carrying value.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash, trade accounts
receivable and notes receivable.
The Company maintains cash accounts at a single financial institution.
At September 30, 2006, the Company had $267,705 on deposit in excess of
the federally insured amount. The Company periodically evaluates the
credit worthiness of financial institutions, and maintains cash
accounts only in large high quality financial institutions, thereby
minimizing exposure for deposits in excess of federally insured
amounts. The Company believes that credit risk associated with cash is
minimal.
The Company has recorded trade accounts receivable from business
operations. The Company periodically evaluates the collectibility of
trade receivables and has provided an allowance for potentially
uncollectible accounts.
The Company has recorded notes receivable from business operations. The
Company periodically evaluates the collectibility of its notes
receivable and has deemed all outstanding notes to be collectible.
ff-12
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK (CONTINUED)
For the year ended September 30, 2006 and the nine months ended
September 30, 2005, approximately 68% and 73%, respectively, of
materials and supplies were acquired from three major vendors, the
largest vendor's activity representing 34% and 47%, respectively, of
the total. The related accounts payable to the largest vendor was
approximately $309,927 as of September 30, 2006, and $146,754 as of
September 30, 2005.
SEGMENT REPORTING
SFAS 131, "Disclosures about Segment Reporting of an Enterprise and
Related Information," establishes standards for the way public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for
related disclosure about products and services, geographic areas and
major customers. The Company conducts business in four operating
segments. (See Note 11.)
RECLASSIFICATION
Certain amounts in the nine month period ended September 30, 2005
financial statements have been reclassified to conform to the year
ended September 30, 2006 financial statement presentation.
RECENT PRONOUNCEMENTS
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements",
which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. Where applicable, SFAS 157
simplifies and codifies related guidance within GAAP and does not
require any new fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. Earlier
adoption is encouraged. The Company does not expect the adoption of
SFAS 157 to have a significant effect on its financial position or
results of operation.
In June 2006, the FASB issued FASB Interpretation 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement 109"
("FIN 48"), which prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company does not expect the adoption of FIN 48 to have a material
impact on its financial reporting, and the Company is currently
evaluating the impact, if any, the adoption of FIN 48 will have on its
disclosure requirements.
In March 2006, the FASB issued SFAS 156, "Accounting for Servicing of
Financial Assets--an Amendment of FASB Statement 140." This statement
requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial
asset by entering into a servicing contract in any of the following
situations: a transfer of the servicer's financial assets that meets
the requirements for sale accounting; a transfer of the servicer's
financial assets to a qualifying special-purpose entity in a guaranteed
mortgage securitization in which the transferor retains all of the
resulting securities and classifies them as either available-for-sale
securities or trading securities in accordance with
ff-13
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT PRONOUNCEMENTS (CONTINUED)
SFAS 115; or an acquisition or assumption of an obligation to service a
financial asset that does not relate to financial assets of the
servicer or its consolidated affiliates. The statement also requires
all separately recognized servicing assets and servicing liabilities to
be initially measured at fair value, if practicable and permits an
entity to choose either the amortization or fair value method for
subsequent measurement of each class of servicing assets and
liabilities. This statement is effective for fiscal years beginning
after September 15, 2006, with early adoption permitted as of the
beginning of an entity's fiscal year. Management believes the adoption
of this statement will not impact the Company's financial condition or
results of operations.
In February 2006, the FASB issued SFAS 155, "Accounting for Certain
Hybrid Financial Instruments, an Amendment of SFAS 133 and 140". This
statement established the accounting for certain derivatives embedded
in other instruments. It simplifies accounting for certain hybrid
financial instruments by permitting fair value remeasurement for any
hybrid instrument that contains an embedded derivative that otherwise
would require bifurcation under SFAS 133 as well as eliminating a
restriction on the passive derivative instruments that a qualifying
special-purpose entity ("SPE") may hold under SFAS 140. This statement
allows a public entity to irrevocably elect to initially and
subsequently measure a hybrid instrument that would be required to be
separated into a host contract and derivative in its entirety at fair
value (with changes in fair value recognized in earnings) so long as
that instrument is not designated as a hedging instrument pursuant to
the statement. SFAS 140 previously prohibited a qualifying
special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative
financial instrument. This statement is effective for fiscal years
beginning after September 15, 2006, with early adoption permitted as of
the beginning of an entity's fiscal year. Management believes the
adoption of this statement will have no immediate impact on the
Company's financial condition or results of operations.
In May 2005, the FASB issued SFAS 154. This Statement replaces APB
Opinion 20, "Accounting Changes", and SFAS 3, "Reporting Accounting
Changes in Interim Financial Statements", and changes the requirements
for the accounting for and reporting of a change in accounting
principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. When a pronouncement
includes specific transition provisions, those provisions should be
followed. In April 2006, Windows transferred legal ownership of
Manufacturing and the related equity interest to International (see
Note 1 - Organization). Under SFAS 154 this transaction is deemed to be
a change in reporting entity. The operating results from Manufacturing
have been included in these consolidated financial statements.
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment."
SFAS 123(R) amends SFAS 123, "Accounting for Stock-Based Compensation,"
and APB Opinion 25, "Accounting for Stock Issued to Employees." SFAS
123(R) requires that the cost of share-based payment transactions
(including those with employees and non-employees) be recognized in the
financial statements. SFAS 123(R) applies to all share-based payment
transactions in which an entity acquires goods or services by issuing
(or offering to issue) its shares, share options, or other equity
instruments (except for those held by an ESOP) or by incurring
liabilities (1) in amounts based (even in part) on the price of the
entity's shares or other equity instruments, or (2) that require (or
may require) settlement by the issuance of an entity's shares or other
equity instruments. This statement is effective (1) for public
companies qualifying as SEC small business issuers, as of the first
fiscal year beginning after December 15, 2005, or (2) for all other
public companies, as of the first fiscal year or interim period
beginning after June 15, 2005, or (3) for all nonpublic entities, as of
the first fiscal year beginning after December 15, 2005. Effective
October 1, 2006, the Company adopted the
ff-14
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT PRONOUNCEMENTS (CONTINUED)
fair value recognition provisions of SFAS 123(R), using the
modified-prospective transition method. Results from prior periods,
including these financial statements, will not be restated.
NOTE 2 - ACCOUNTS AND NOTES RECEIVABLE
Accounts receivable consists of amounts due from franchisees for sale
of merchandise at September 30, 2006 and September 30, 2005, as
follows:
2006 2005
------------- --------------
Accounts receivable - trade $ 803,868 $ 641,434
Less allowance for doubtful accounts (43,150) (34,400)
------------- --------------
$ 760,718 $ 607,034
============= ==============
The Company performs ongoing credit evaluations of its franchisees and
has not required collateral or other forms of security for product
sales or franchisee fees. The Company maintains an allowance for
potential losses based on its estimate of uncollectible accounts. The
Company's allowance for doubtful accounts increased by $8,750 from
September 30, 2005 to September 30, 2006, and the Company charged
directly to operations $69,413 and $67,647 of uncollectible accounts in
the year ended September 30, 2006 and the nine month period ended
September 30, 2005, respectively.
Notes receivable consists of balances due from franchisees. The notes
are interest and non-interest bearing and are payable in monthly
installments of $92 to $1,000, maturing at various dates through May
2009. The Company has recorded interest on the non-interest bearing
notes, discounted at an imputed interest rate of 5.75%. At September
30, 2006 and September 30, 2005, notes receivable are comprised of:
2006 2005
--------------- --------------
Notes receivable, fair value $ 97,157 $ 140,330
Less current portion (75,787) (69,628)
--------------- --------------
Long term portion $ 21,370 $ 70,702
=============== ==============
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2006 and September 30, 2005
consists of the following:
2006 2005
--------------- --------------
Furniture and equipment $ 85,262 $ 58,018
Computer equipment 82,478 61,012
Software 85,229 54,600
Leasehold improvements 51,457 51,457
Assets under capital lease - 42,584
--------------- --------------
304,426 267,671
Less accumulated depreciation and amortization (213,882) (140,229)
--------------- --------------
$ 90,544 $ 127,442
=============== ==============
ff-15
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3 - PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation and amortization expense for the year ended September 30,
2006 and the nine months ended September 30, 2005 was $73,653 and
$58,816, respectively.
In 2006, all assets previously classified under capital lease were
reclassified to software and furniture and equipment without any
disposition as the debt associated with the capital leases was paid off
during 2006 (see Note 5).
NOTE 4 - NOTE PAYABLE - OTHER
Note payable - other at September 30, 2006 and September 30, 2005
consists of the currently deferred portion of the Company's monthly
rent obligation under an office lease entered into effective September
15, 2002. Under the terms of the lease, the landlord has deferred a
portion of the monthly rent aggregating $140,000 over the period
September 15, 2002 to August 15, 2007. The deferred portion is
evidenced by a non-interest bearing promissory note. The note is
payable in cash or shares of the Company's common stock at the option
of the holder. The Company accretes the deferred portion of the monthly
rent utilizing an imputed interest rate of 5.75%. The note increased
$27,000 and $21,000 during the year ended September 30, 2006 and the
nine months ended September 30, 2005, respectively. The balance at
September 30, 2006 and September 30, 2005 of $124,167 and $97,167,
respectively, represents the accretion of the note.
NOTE 5 - CAPITAL LEASE OBLIGATIONS
All of the previously recorded capital lease obligations were satisfied
during the year ended September 30, 2006.
Capitalized lease obligations at September 30, 2005 consist of the
leases for office equipment and software, repayable in monthly
installments of $571 and $757, and bearing interest rates of 3.8% and
10.8%, respectively.
NOTE 6 - NOTE PAYABLE - BANK
In May 2004, the Company entered into a loan agreement with a
commercial bank for equipment in the amount of $54,103. The loan is due
May 2007 with interest at 6.5% per annum, repayable in monthly
installments of $1,658 and is secured by the equipment. At September
30, 2006, the loan to the bank is as follows:
Note payable $ 12,948
Less current maturity (12,948)
-------------
Long term portion $ -
=============
NOTE 7 - BRIDGE LOAN
In January 2006, the Company issued $200,000 of convertible promissory
notes for cash, including $75,000 to officers of the Company (see Note
12). The notes require quarterly interest payments in arrears at the
rate of four percent plus the prime rate as published in the Money Rate
Table of the Western Edition of the Wall Street Journal. Repayment of
the notes was to commence upon the earlier of (a) the completion of a
private placement or (b) July 5, 2006. If repayment were to commence
pursuant to the completion of the private placement, the entire amount
of the notes, except for any amounts that had been converted (see
below) would be repaid from the proceeds of the private placement. At
the option of the lenders, at any time prior to the consummation of the
private placement, the lenders could convert all or any of the
principal amounts into the securities in the private placement. Upon
the minimum portion of
ff-16
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7 - BRIDGE LOAN (CONTINUED)
the private placement having been sold, the lenders were required to
convert at least fifty percent of the note into the private placement.
In August 2006, all of the lenders entered into an amendment to the
loan agreement and promissory note, whereby they agreed to convert the
entire amount of the note into the private placement (see Note 1 -
Private Offering Memorandum) immediately prior to closing the private
placement, with the stipulation that the minimum offering had been
sold. They further agreed that if International failed to close the
private placement by January 5, 2007, the Company would repay half the
principal amount of the note by January 31, 2007 and the remainder by
applying $3,000 from the sale of each franchise until the notes were
paid in full. The officers of the Company agreed to defer repayment of
the principal amount of their loans until the non-affiliated third
party lenders had been paid.
Interest accrued and paid on the bridge loan at September 30, 2006 was
$17,932.
The lenders were issued warrants to purchase a total of 1,000,000
shares of common stock in International at $0.30 per share. The
warrants expire January 5, 2009. The Company granted piggyback
registration rights (on a "best efforts" basis) with respect to the
shares issuable upon exercise of these warrants. The fair value of the
warrants was estimated as of the issue date under the Black-Scholes
pricing model, with the following assumptions: common stock based on a
market price of $0.20 per share, zero dividends, expected volatility of
28%, risk free interest rate of 5.125% and expected life of 1.5 years.
The fair value of the warrants of $7,655 was included as other expense
during the fiscal year ended September 30, 2006.
The Company evaluated the warrants and concluded that the warrants meet
the scope limitation found in SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," and are appropriately classified
as equity. The Company also evaluated the registration rights and
concluded that the rights do not meet the definition of derivative
instruments under SFAS 133.
NOTE 8 - CONVERTIBLE DEBENTURES
During the nine month period ended September 30, 2005, the Company
issued $100,000 of convertible debentures for cash, including $50,000
to an officer of the Company (see Note 12). The debentures have a three
year term maturing in February 2008, require quarterly interest only
payments at the Wall Street Journal prime rate plus 1%, and are
redeemable at the option of the Company in whole or in part prior to
the due date. The holder(s) of the convertible debentures have the
option, at any time, to convert all or any portion of the debentures
into common stock of the Company at $0.20 per share. Interest accrued
and paid on the debentures at September 30, 2006 and September 30, 2005
was $8,875 and $4,721, respectively.
NOTE 9 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
In May 2001, the Company authorized the issuance of 1,000,000 shares of
$1.00 par value preferred stock, which consisted of 500,000 shares of
Series A preferred stock, and 500,000 undesignated shares. The Series A
preferred stock was non-voting and could be converted into 35 shares of
common stock for each preferred share any time after issuance until
July 1, 2006. The Company reserved 17,500,000 shares of common stock
for the conversion of the Series A preferred stock.
In April 2006, all issued and outstanding shares of the Company's
preferred stock were converted into shares of common stock on a 1 for
35 basis.
ff-17
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
SUBSCRIPTIONS RECEIVABLE
Subscriptions receivable at September 30, 2006 consist of 150,00 Units
($30,000) purchased pursuant to the Company's private placement (see
Note 1 - Private Offering Memorandum), for which shares of common stock
had not been issued.
COMMON STOCK
Prior to the share for share exchange with Windows (see Note 1 -
Organization), the Company issued 5,391,811 shares of common stock in
conjunction with the recapitalization of V2K International, Inc.
During the year ended September 30, 2006 the Company: issued 71,500
shares of common stock for services valued at $14,300 ($0.20 per
share); issued 2,860 shares of common stock for the exercise of stock
options for cash of $143 ($0.05 per share); accepted the recision of
sale of 116,660 shares of common stock for cash of $35,000 ($0.30 per
share); sold 175,000 shares of common stock for cash of $35,000 ($0.20
per share); issued 7,000,035 shares of common stock for the conversion
of the Company's preferred stock ($0.286 per share); and sold 1,285,000
shares of common stock for cash of $257,000 ($0.20 per share).
During the nine month period ended September 30, 2005 the Company:
issued 29,970 shares of common stock for services valued at $9,000
($0.30 per share); sold 150,000 shares of common stock for cash of
$30,000 ($0.20 per share); accepted the recision of sale of 83,330
shares of common stock for cash of $25,000 ($0.30 per share); issued
300,000 shares of common stock for exercise of stock options for cash
of $15,000 ($0.05 per share); sold 33,330 shares of common stock for
cash of $10,000 ($0.30 per share); and issued 59,500 shares of common
stock for services valued at $11,900 ($0.20 per share).
STOCK OPTION PLAN
The Company has adopted the V2K International, Inc. 2006 Stock Option
Plan (the Plan). Under the Plan, the Board of Directors, in its
discretion, may issue options to officers, directors, employees, and
consultants on a case-by-case basis. In general, options may be
exercised by payment of the option price by either (i) cash, (ii)
tender of shares of its common stock which have a fair market value
equal to the option price, or (iii) by such other consideration as the
Board of Directors may approve at the time the option is granted. The
Company has reserved an aggregate 30,000,000 shares of its common stock
for options granted under the Plan.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plan. Accordingly, no compensation cost has been
recognized for stock options granted at or above fair value at the date
of the grant to key employees and directors. Compensation expense of
$11,955 and $0 has been recorded during the year ended September 30,
2006 and the nine month period ended September 30, 2005, respectively,
for options granted below the fair value, based on the difference
between the option price and the fair value at the date of grant.
ff-18
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
A summary of the status of the Company's stock option plans as of
September 30, 2006 and September 30, 2005, and changes during the year
then ended and the nine months then ended, respectively, is presented
below:
2006 2005
--------------------------------------- ------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------------- ----------------- ---------------- ----------------
Outstanding at beginning
of period 29,925,660 $ 0.051 34,945,660 $ 0.055
Granted 28,045,110 0.070 -
Exercised (2,860) 0.050 (300,000) 0.050
Cancelled (24,337,250) 0.050 (4,720,000) 0.082
Expired (4,450,000) 0.057 -
------------------- ----------------
Outstanding at end of
period 29,180,660 0.069 29,925,660 0.051
=================== ================
Options exercisable at
period end, option
price range $0.05 - $0.57 15,468,990 0.050 13,017,990 0.053
Weighted average
remaining contractual
life of options exercisable
at period end 7.47 5.58
Weighted average of
fair value of options
granted during the
period $ 0.07
NOTE 10 - INCOME TAXES
The Company accounts for income taxes under SFAS 109, which requires
use of the liability method. SFAS 109 provides that deferred tax assets
and liabilities are recorded based on the differences between the tax
bases of assets and liabilities and their carrying amounts for
financial reporting purposes, referred to as temporary differences.
Deferred tax assets and liabilities at the end of each year are
determined using the currently effective tax rates applied to taxable
income in the periods in which the deferred tax assets and liabilities
are expected to be settled or realized. The reconciliation of enacted
rates for the year ended September 30, 2006 and the nine months ended
September 30, 2005 is as follows:
ff-19
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10 - INCOME TAXES (CONTINUED)
2006 2005
------------ ------------
Federal 34% 34%
State 4% 4%
Net operating loss carryforward - -
Increase in valuation allowance (38%) (38%)
------------ ------------
- -
============ ============
At September 30, 2006, the Company had a net operating loss
carryforward of approximately $1,044,000 that may be offset against
future taxable income subject to limitations imposed by the Internal
Revenue Service. This carryforward is subject to review by the Internal
Revenue Service and, if allowed, may offset taxable income through
2026. A portion of the net operating loss carryforward begins expiring
in 2021.
Deferred tax assets are as follows:
2006 2005
-------------- --------------
Deferred tax asset due to net operating loss $ 421,000 $ 163,000
Valuation allowance (421,000) (163,000)
-------------- --------------
$ - $ -
============== ==============
The deferred tax asset relates principally to the net operating loss
carryforward. A valuation allowance was established at September 30,
2006 and 2005 to eliminate the deferred tax benefit that existed at
that time since it is uncertain if the tax benefit will be realized.
The deferred tax asset (and the related valuation allowance) increased
by $258,000 for the year ended September 30, 2006 and decreased by
($11,000) for the nine months ended September 30, 2005.
NOTE 11 - SEGMENT INFORMATION
The Company and its subsidiaries (see Note 1 - Organization) operate
in four industry segments. Parent Holding (International) provides the
corporate vehicle for raising capital for the subsidiaries and will
fulfill the Company's obligations as a public reporting company,
assuming that the Company attains that status; Windows sells and
supports franchises in the residential and commercial window fashion
industry; Technology develops and licenses proprietary software that
allows users to decorate windows for both residential and commercial
customers; and Manufacturing manufactures soft product window
treatments exclusively for Windows franchisees.
Identified assets by industry are those assets that are used in our
operations in each industry. The Company's assets are principally cash,
accounts receivable and equipment.
The Company has adopted SFAS 131 which requires the presentation of
descriptive information about reportable segments which is consistent
with that made available to the management of the Company to assess
performance.
Windows derives its revenues from sales of franchises, royalty and
sales of materials and supplies to franchisees.
Manufacturing receives its income from the sale of labor on soft
product window treatments to Window's franchisees.
ff-20
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 11 - SEGMENT INFORMATION (CONTINUED)
During the year ended September 30, 2006 and the nine months ended
September 30, 2005 inter-segment revenues were $647,704 and $392,617,
respectively. The accounting policies applied by each segment are the
same as those used by the Company in general.
There have been no material changes in the amount of assets of any
operating segment since the last annual report.
Segment information for the year ended September 30, 2006 and the nine
months ended September 30, 2005 consists of the following:
PARENT
HOLDING WINDOWS TECHNOLOGY MANUFACTURING TOTAL
------------- --------------- -------------- ----------------- ---------------
Revenues
2006 - 8,158,542 - - 8,158,542
2005 - 6,128,589 - 4,853 6,133,442
Inter-segment revenues
2006 - - - 647,704 647,704
2005 - - - 392,617 392,617
(Loss) from operations
2006 (1,399) (541,855) (110,084) (78,867) (732,205)
2005 - (4,766) - (73,348) (78,114)
Identifiable assets (net)
2006 1,089,096 1,401,032 - 91,011 2,581,139
2005 - 1,485,850 - 90,934 1,576,784
Depreciation and amortization
charged to identifiable assets
2006 - 53,977 - 19,676 73,653
2005 - 39,213 - 19,603 58,816
Interest revenue
2006 - 6,506 - - 6,506
2005 - 3,914 - - 3,914
Interest expense
2006 - 28,700 - 1,150 29,850
2005 - 8,740 - 1,440 10,180
Reconciliation of segment totals to consolidated amounts:
2006 2005
------------- -------------
Total revenues for reportable segments $ 8,806,246 $ 6,526,059
Elimination of inter-segment revenues (647,704) (392,617)
------------- -------------
Total Consolidated Revenues $ 8,158,542 $ 6,133,442
============= =============
ff-21
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 11 - SEGMENT INFORMATION (CONTINUED)
Reconciliation of segment totals to consolidated amounts (continued):
2006 2005
------------- -------------
Identifiable assets (net) $ 2,581,139 $ 1,576,784
Elimination of intercompany assets (1,074,161) (228,698)
------------- -------------
Total Consolidated Assets $ 1,506,978 $ 1,348,086
============= =============
NOTE 12 - RELATED PARTY TRANSACTIONS
During the year ended September 30, 2006, $15,000 in subscriptions (see
Note 1 - Private Offering Memorandum) were received from officers of
the Company, and $75,000 in bridge loans (see Note 7) were issued to
officers of the Company.
During the nine month period ended September 30, 2005, $50,000 in
convertible debentures (see Note 8) were issued to an officer of the
Company.
In July 2004, the board of directors of Windows granted Bob Leo, the
founder, and at the time, an officer of Windows, an option to purchase
a franchise for $10, as part of a proposed employee package. Mr. Leo
exercised the option in August 2005. The amount of this benefit is
estimated to be approximately $44,500.
NOTE 13 - COMMITMENTS
The Company has entered into non-cancelable leases for office and
manufacturing facilities in Denver, Colorado. Minimum payments due
under these leases, including the deferred portion due in 2007 (see
Note 4), are as follows:
Fiscal year ending September 30, 2007 $ 213,025
===========
Rent expense was $122,788 and $79,123, for the year ended September 30,
2006 and the nine months ended September 30, 2005, respectively.
NOTE 14 - SUBSEQUENT EVENTS
On January 5, 2007, all of the bridge loan lenders (see Note 7) entered
into a second amendment to the loan agreement and promissory note,
whereby they agreed to convert the entire amount of the note into the
private placement (see Note 1 - Private Offering Memorandum)
immediately prior to closing the private placement, with the
stipulation that the minimum offering had been sold. They further
agreed that if the Company failed to close the private placement by
January 31, 2007, the Company would repay half the principal amount of
the note by February 28, 2007 and the remainder by applying $3,000 from
the sale of each franchise until the notes were paid in full,
commencing February 28, 2007.
ff-22
V2K INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 14 - SUBSEQUENT EVENTS (CONTINUED)
On January 31, 2007, the Company closed its Private Placement (see Note
1 - Private Offering Memorandum), having sold 3,553,750 units,
consisting of 3,553,750 shares of common stock and 3,553,750 warrants
to purchase shares of common stock at $0.50 per share, for $710,750
($0.20 per unit); converted $200,000 in bridge loans (see Note 7) into
1,000,000 units ($0.20 per unit), consisting of 1,000,000 shares of
common stock and 1,000,000 warrants to purchase shares of common stock
at $0.50 per share; and converted $100,000 in debentures (see Note 8)
into 500,000 shares of common stock ($0.20 per share).
NOTE 15 - RESTATEMENT
In July 2004 the Company granted an officer/employee an option to
purchase a franchise for $10 as part of an employee package. This
option was exercised by the officer/employee in August 2005 and valued
at $44,500. The issuance of the franchise was initially recorded as an
increase to franchise revenue and a decrease to additional paid in
capital for $44,500. These restated financial statements reflect the
exercise of the option as an increase to compensation expense and an
increase to additional paid in capital.
The effect of the restatement is a decrease to 2005 operations of
$89,000 and an increase to additional paid in capital of $89,000. This
correction has been reflected in the 2006 financial statements as an
increase to accumulated (deficit) and an increase to additional paid in
capital of $89,000.
ff-23
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the corporate laws of the State of Colorado and the Article
entitled "Indemnification" in the registrant's Articles of Incorporation, the
registrant has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The registrant's
Bylaws (Exhibit 3.2 hereto) also provide for mandatory indemnification of its
directors and executive officers, and permissive indemnification of its
employees and agents, to the fullest extent permissible under Colorado law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the registrant in connection with the
securities being registered are as follows:
Securities and Exchange Commission filing fee........$ 245.00
Accounting fees and expenses......................... 50,000.00
Blue sky fees and expenses........................... 1,000.00
Legal fees and expenses.............................. 25,000.00
Transfer agent fees and expenses..................... 1,000.00
Printing expenses.................................... 1,000.00
Miscellaneous expenses............................... 1,755.00
--------------
Total................................................$ 80,000.00
==============
All amounts are estimates except the SEC filing fee. The Selling
Shareholders will be bearing the cost of their own brokerage fees and
commissions and their own legal and accounting fees.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the registrant has issued and sold the
unregistered securities set forth in the tables below.
- -------------------------------------------------------------------------------------------------------------------
PERSONS OR CLASS OF
DATE PERSONS SECURITIES CONSIDERATION
- -------------------------------------------------------------------------------------------------------------------
04/01/06 25 Shareholders of V2K 26,093,586 shares of common stock Shares of V2K Window
Window Fashions, Inc. Fashions, Inc. common and
preferred stock
- -------------------------------------------------------------------------------------------------------------------
04/01/06 Holders of stock options Options to purchase 24,300,110 shares Stock Options of V2K
of V2K Window Fashions, Window Fashions, Inc.
Inc.
- -------------------------------------------------------------------------------------------------------------------
05/02/06 4 directors Options to purchase 200,000 shares Services as directors
- -------------------------------------------------------------------------------------------------------------------
06/30/06 Employees, officers and Options to purchase 3,545,000 shares Services to the company
directors
- -------------------------------------------------------------------------------------------------------------------
08/30/06 6 holders of warrants of Warrants to purchase 1,000,000 shares of Warrants of V2K Window
V2K Window Fashions, Inc. common stock at $0.30 per share through Fashions, Inc.
January 5, 2009
- -------------------------------------------------------------------------------------------------------------------
II-1
- -------------------------------------------------------------------------------------------------------------------
PERSONS OR CLASS OF
DATE PERSONS SECURITIES CONSIDERATION
- -------------------------------------------------------------------------------------------------------------------
09/06/06 - 72 investors, of which Units consisting of 3,553,750 shares of $710,750 cash
01/31/07 no more than 35 were common stock and warrants to purchase
non-accredited investors 3,553,750 shares of common stock at $0.50
per share through September 30, 2008
- -------------------------------------------------------------------------------------------------------------------
10/17/06 One director Options to purchase 50,000 shares of Service as a director
common stock
- -------------------------------------------------------------------------------------------------------------------
01/31/07 2 holders of convertible 500,000 shares of common stock Cancellation of
debentures debentures in the
principal amount of
$100,000
- -------------------------------------------------------------------------------------------------------------------
01/31/07 6 holders of convertible Units consisting of 1,000,000 shares of Cancellation of
promissory notes common stock and warrants to purchase promissory notes in the
1,000,000 shares of common stock at $0.50 principal amount of
per share through September 30, 2008 $200,000
- -------------------------------------------------------------------------------------------------------------------
No underwriters were used in the above stock transactions. The
registrant relied upon the exemption from registration contained in Section 4(2)
and/or Rule 506 as to all of the transactions, as the investors with either
deemed to be sophisticated with respect to the investment in the securities due
to their financial condition and involvement in the registrant's business or
accredited investors. Restrictive legends were placed on the certificates
evidencing the securities issued in all of the above transactions.
ITEM 27. EXHIBITS
- --------------------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
- --------------------------------------------------------------------------------
3.1 Articles of Incorporation (1)
- --------------------------------------------------------------------------------
3.2 Bylaws (1)
- --------------------------------------------------------------------------------
5.1 Opinion of Dill Dill Carr Stonbraker & Hutchings, P.C. (1)
- --------------------------------------------------------------------------------
10.1 2006 Stock Option Plan (1)
- --------------------------------------------------------------------------------
10.2 Form of Franchise Agreement (2)
- --------------------------------------------------------------------------------
10.3 Software License Agreement from V2K Technology, Inc. to V2K Window
Fashions, Inc. (1)
- --------------------------------------------------------------------------------
10.4 Office Lease and Note (2)
- --------------------------------------------------------------------------------
21 Subsidiaries of the registrant (1)
- --------------------------------------------------------------------------------
23.1 Consent of Dill Dill Carr Stonbraker & Hutchings, P.C. Reference
is made to Exhibit 5.1 (1)
- --------------------------------------------------------------------------------
23.2 Consent of Gordon, Hughes & Banks, LLP
- --------------------------------------------------------------------------------
II-2
- ------------------
(1) Filed as an exhibit to the initial filing of the registration statement on
March 9, 2007.
(2) Filed as an exhibit to Amendment No. 1 to the registration statement on
May 1, 2007.
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 small business issuer pursuant to the foregoing
provisions, or otherwise, the small business 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 small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business 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 small business 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 small business issuer 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; and 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.
(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.
Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
II-3
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 Denver,
State of Colorado, on May 30, 2007.
V2K INTERNATIONAL, INC.
By: /s/ VICTOR J. YOSHA
----------------------------------------
Victor J. Yosha, President
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, Chief Executive Officer and
/s/ VICTOR J. YOSHA Director (Principal Executive Officer) May 30, 2007
- ------------------------------------
Victor J. Yosha
Chief Financial Officer (Principal Financial
/s/ JERRY A. KUKUCHKA Officer and Principal Accounting Officer) May 30, 2007
- ------------------------------------
Jerry A. Kukuchka
/s/ GORDON E. BECKSTEAD Director May 30, 2007
- ------------------------------------
Gordon E. Beckstead
Director
- ------------------------------------
Carlyle Griffin
/s/ R.J. WITTENBRINK Director May 30, 2007
- ------------------------------------
R.J. Wittenbrink
Director
- ------------------------------------
Tom Grimm
II-4
EXHIBIT INDEX
- --------------------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
- --------------------------------------------------------------------------------
3.1 Articles of Incorporation (1)
- --------------------------------------------------------------------------------
3.2 Bylaws (1)
- --------------------------------------------------------------------------------
5.1 Opinion of Dill Dill Carr Stonbraker & Hutchings, P.C. (1)
- --------------------------------------------------------------------------------
10.1 2006 Stock Option Plan (1)
- --------------------------------------------------------------------------------
10.2 Form of Franchise Agreement (2)
- --------------------------------------------------------------------------------
10.3 Software License Agreement from V2K Technology, Inc. to V2K Window
Fashions, Inc. (1)
- --------------------------------------------------------------------------------
10.4 Office Lease and Note (2)
- --------------------------------------------------------------------------------
21 Subsidiaries of the registrant (1)
- --------------------------------------------------------------------------------
23.1 Consent of Dill Dill Carr Stonbraker & Hutchings, P.C. Reference
is made to Exhibit 5.1 (1)
- --------------------------------------------------------------------------------
23.2 Consent of Gordon, Hughes & Banks, LLP
- --------------------------------------------------------------------------------
- ------------------
(1) Filed as an exhibit to the initial filing of the registration statement on
March 9, 2007.
(2) Filed as an exhibit to Amendment No. 1 to the registration statement on
May 1, 2007.