AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 2002
REGISTRATION STATEMENT NO. 333-62546
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RETURN ASSURED INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3896069
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
MATTHEW SEBAL, PRESIDENT
RETURN ASSURED INCORPORATED
1901 AVENUE OF THE STARS, SUITE 1710 1901 AVENUE OF THE STARS, SUITE 1710
LOS ANGELES, CA 90067 LOS ANGELES, CA 90067
(887) 807-4664 (887) 807-4664
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(address, including zip code, and (Name, address, including zip code,
telephone number, including area and telephone number, including
code, of registrant's principal area code, of agent for service)
executive offices)
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With copies to:
ADAM S. GOTTBETTER, ESQ.
CINDY M. FOX, ESQ.
KAPLAN GOTTBETTER & LEVENSON, LLP
630 THIRD AVENUE, 5TH FLOOR
NEW YORK, NY 10017-6705
(212) 983-6900
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS
SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended ("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 delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
AMOUNT TO BE PRICE PER OFFERING PRICE REGISTRATION
TITLE OF EACH CLASS OF SECURITIES BEING REGISTERED REGISTERED SECURITY (2) (2) FEE
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Common Stock, $.001 par value (1).......... 25,000,000 $.015 $300,000
Total.................................... 25,000,000 $300,000 $27.60
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(1) Includes 25,000,000 shares which may become issuable upon conversion of
the issuer's Series A Preferred Stock.
(2) Estimated solely for purposes of calculating the registration fee for the
common stock, based upon the average of the high and low sales prices of
the common stock on the NASD Over-the-Counter Bulletin Board on February 7,
2002, pursuant to Rule 457(c) under the Securities Act.
THIS 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 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, MAY DETERMINE.
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INFORMATION CONTAINED IN THIS PROSPECTUS IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY _, 2002
PROSPECTUS
25,000,000 SHARES
RETURN ASSURED INCORPORATED
COMMON STOCK
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GEM Global Yield Fund Limited is offering an aggregate of 25,000,000
shares of our common stock that may be issued if it converts outstanding shares
of our Series A Convertible Preferred Stock held by it.
The preferred stock, which the common stock underlies, was sold to GEM
in transactions which we believe to have been exempt from registration under the
Securities Act. Return Assured Incorporated will not receive any of the proceeds
from the sale of the common stock being offered by this prospectus.
The shares of common stock being offered by GEM may be sold from time
to time in the over-the-counter market or in negotiated transactions. GEM
directly, or through agents or dealers designated from time to time, may sell
the common stock offered by it at fixed prices, at prevailing market prices at
the time of sale, at varying prices determined at the time of sale or at
negotiated prices.
Our common stock is listed on the NASD OTC Bulletin Board ("OTCBB")
under the symbol "RTRN." On February 5, 2002, the last reported sale price of
the common stock on the OTCBB was $.015 per share.
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS. INVESTORS SHOULD NOT BUY
THESE SHARES UNLESS THEY CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
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THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is February _, 2002
TABLE OF CONTENTS
PAGE
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SUMMARY.....................................................................1
RISK FACTORS................................................................5
Risks Related to Our Business......................................5
Risks Related to Operating in Our Industry........................12
Risks Related to This Offering....................................16
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS.......................18
USE OF PROCEEDS............................................................19
DIVIDEND POLICY............................................................19
CAPITALIZATION.............................................................19
BUSINESS...................................................................30
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS...............43
EXECUTIVE COMPENSATION.....................................................47
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................53
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................53
DESCRIPTION OF SECURITIES..................................................54
SELLING STOCKHOLDERS.......................................................55
PLAN OF DISTRIBUTION.......................................................57
EXPERTS....................................................................59
LEGAL MATTERS..............................................................59
WHERE YOU CAN FIND ADDITIONAL INFORMATION..................................61
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................F-1
You should rely only on the information contained in this Prospectus.
We have not authorized anyone to provide you with information difference from
that contained in this Prospectus. The selling stockholders are offering to
sell, and seeking offers to buy, shares of our common stock only in
jurisdictions where offers and sales are permitted. The information contained in
this Prospectus is accurate only as of the date of this Prospectus.
PROSPECTUS SUMMARY
OUR COMPANY
OUR BUSINESS
Return Assured has brought to market the world's first proprietary
business-to-business and business-to-consumer value added "Return Seal of
Approval". The "Return Assured Seal of Approval" is provided to those merchants
that meet our criteria. If a customer orders from a merchant displaying our
seal, Return Assured will provide assurance that the merchant displaying the
Seal will honor its stated return policies. Return Assured charges the merchant
for our services based on the number of orders placed through that merchant.
Market adoption of the Seal has not met forecasted expectations. As a
result, the Company is currently developing a number of revised products with
complementary target markets. Return Assured has just completed a pilot credit
card program and is in the process of presenting the program to a number of
major credit card marketers.
The Company has scaled back operations in the "e-retail" sector in
response to the slow sales of the Seal program. No sales of the Seal were made
in the first quarter of 2001 as operations had not commenced. During the fiscal
year 2001, although we had encouraging responses to our marketing efforts, these
did not translate into a volume of paying customers that was sufficient to
warrant our projected marketing effort. Seal revenue amounted to approximately
$10,000 for fiscal 2001 and nil in the first quarter 2002.
Our Marketing Strategy
o Attract new merchants through co-marketing with web portals to promote and
endorse our web seal service to their participating merchants;
o Promote our service to merchants through direct response channels; and
o Attract new merchants through joint marketing programs with various
marketing and technology partners.
Our Growth Strategy
o Increase brand awareness of our "Return Assured Seal of Approval";
o Expand through diversifying product lines; and
o Expand through purchasing complementary businesses.
THE MERGER WITH HERTZ TECHNOLOGY GROUP
On October 13, 2000 Asure Acquisition Corp., a wholly-owned subsidiary
of Hertz Technology Group, Inc., a Delaware Corporation, was merged into Return
Assured Incorporated, a Nevada Corporation. At the same time Hertz Technology
Group changed its name to Return Assured Incorporated. Following the merger, we
discovered that the synergies we expected between Return Assured and certain of
the subsidiaries of the Hertz Technology Group including Hergo Ergonomic Support
Systems, Inc. ("Hergo"), its subsidiary RemoteIT.com Inc. and Hertz Computer
Corporation, did not come to fruition and, therefore, Return Assured disposed of
Hergo, RemoteIT.com Inc., and Hertz
Computer Corporation (collectively the "Hertz Businesses") because the Hertz
businesses are not core businesses of Return Assured. For example, Hergo's
primary business is the manufacture and distribution of office furniture which
is not an Internet business and has little in common with Return Assured,
precluding the possibility of any efficiencies of scale, joint sales or
marketing efforts or other joint initiatives.
At the time of the merger of Return Assured and the Hertz Technology
Group, Return Assured entered into a note agreement with Eli Hertz, founder of
the Hertz Technology Group, in the principal amount of $290,000 plus interest at
10% per annum payable to Eli Hertz.
In order to fully divest of the Hertz Businesses, Return Assured
entered into an agreement with Eli Hertz regarding the balance remaining on the
note wherein Return Assured would pay the remaining balance of the note in full
by October 8, 2001; provided, however, that the failure of Return Assured to pay
the note in full would result in 100% of the issued and outstanding stock of
Hergo and Hertz Computer Corporation being returned to Eli Hertz. Return Assured
did not pay the note in full by the due date, and all issued and outstanding
shares of Hergo's and Hertz Computer Corporation's common stock were transferred
to Eli Hertz. These transfers resulted in Return Assured's disposition of Hergo,
Hergo's subsidiary, RemoteIT.com and Hertz Computer Corporation while Edutec
continues to be a subsidiary of the Company.
RECENT EVENTS
Termination of Proposed Merger with Internet Business's International, Inc.
On June 4, 2001 we signed an Agreement and Plan of Merger and Share
Exchange (the "Merger Agreement") with Internet Business International, Inc.
("IBUI"), a publicly traded Nevada corporation (IBUI:OTCBB). The Merger
Agreement provided, among other things, for IBUI Acquisition Corporation to be
merged with and into IBUI and for a share exchange between the shareholders of
IBUI and the Company. On January 14, 2002, the two companies mutually decided to
terminate the Merger Agreement.
Nasdaq De-listing of our Common Stock
In August 2001, the NASDAQ Stock Market issued a delisting notice to
Return Assured for failure to comply with NASDAQ's minimum bid price
requirements and stated that effective August 3, 2001, the Company's common
stock would be delisted from the Nasdaq SmallCap Stock Market. Return Assured
immediately began to be traded on the NASD Over the Counter Bulletin Board under
the same stock symbol, RTRN. Return Assured appealed this decision and was
informed by the NASD in December 2001 that the Company's common stock would not
be relisted on NASDAQ.
References in this prospectus to "we", "us", "our" and similar terms
means Return Assured Incorporated, a Delaware corporation, formerly Hertz
Technology Group, Inc.
OUR OFFICE
Our principal executive office is located at 1901 Avenue of the Stars,
Suite 1701, Los Angeles, California 90067. Our telephone number is (877)
807-4664. Our website is http://www. returnassured.com. We do not intend for the
information found on our website to be part of this Prospectus.
2
THE OFFERING
Securities Offered: 25,000,000 shares of common stock
Common Stock Outstanding: 16,850,799 shares
Common Stock Market Symbol: NASD Over-the-Counter Bulletin Board - symbol
"RTRN"
Use of Proceeds: The selling security holder will receive the net
proceeds from the sale of the shares. We will
receive none of the shares offered by this
prospectus.
Risk Factors: An investment in the shares involves a high
degree of risk. See "Risk Factors" commencing on
the next page.
In May 2000, GEM Global Yield Fund Limited ("GEM") executed an
agreement for a "PIPE" financing with A Sure eCommerce, Inc. for $5,000,000 of
preferred stock. Pursuant to the Merger Agreement by and among Hertz Technology
Group, Inc. ("HERZ"); A Sure Acquisition Corporation, (the "Merger Subsidiary"),
and A Sure eCommerce, Inc. ("Asure"), dated July 13, 2000, the merger
subsidiary, a wholly-owned subsidiary of Hertz Technology Group, Inc ("HTG") was
merged with and into Return Assured Incorporated, a Nevada Corporation, ("RAI").
As a result of the merger, the separate corporate existence of A Sure
Acquisition ceased and RAI survived the merger as a wholly-owned subsidiary of
HTG. At the effective time of the merger, the corporate name of HTG was changed
to "Return Assured Incorporated"("Registrant"). As part of the Merger Agreement,
Registrant assumed the PIPE financing of A Sure eCommerce, Inc. because the
closing of the PIPE was a condition to the closing of the merger.
GEM Global Yield Fund Limited, a private investment fund, purchased
Series A Preferred Stock in the amount of $5,000,000, a five-year warrant to
purchase 404,041 shares of common stock exercisable at $3.00 per share. The
Series A Preferred Stock accrues dividends at a rate of 1% per annum. It is
convertible into common stock. The number of shares of common stock to be issued
upon conversion of each share of preferred stock is determined by dividing
$1,000, the stated value of the preferred share, plus accrued dividends, by the
conversion price at the time of conversion. The maximum conversion price is
$3.00 per share. However, if the market price of Registrant's stock at the time
of conversion is below the maximum conversion price, the conversion price is
reduced to the average of the three lowest closing bid prices for the common
stock during the 45 days before the date of conversion. Because the actual
number of shares of the common stock that could be issued on conversion of the
preferred shares may fluctuate, the number of shares to be issued upon the
conversion of all the Preferred Stock can only be estimated based on the then
current price of the Registrant's common stock.
MATERIAL CHANGES
On June 4, 2001, we signed an Agreement and Plan of Merger and Share
Exchange ("Merger Agreement") with Internet Business's International, Inc.
("IBUI"), a publicly-traded Nevada corporation (OTCBB:IBUI). The Merger
Agreement was amended on October 1, 2001. Under the Merger Agreement, IBUI was
to become a wholly-owned subsidiary of Return Assured by means of a share
exchange between the shareholders of IBUI and Return Assured. On January 14,
2002, Return Assured and IBUI announced that they had mutually decided to
terminate the Merger Agreement, and that all efforts underway to effect the
merger would cease.
3
In the 2001 fiscal year, we closed the business combination of our
Return Assured business and Hertz Technology Group business. On October 13, 2000
Asure Acquisition Corp., a wholly-owned subsidiary of Hertz Technology Group,
Inc., a Delaware Corporation, was merged into Return Assured Incorporated, a
Nevada Corporation. At the same time Hertz Technology Group changed its name to
Return Assured Incorporated. We discovered, however, that the synergies we
expected between Return Assured and certain of the subsidiaries of the Hertz
Technology Group including Hergo Ergonomic Support Systems, Inc. ("Hergo") and
its subsidiary RemoteIT.com Inc. and Hertz Computer Corporation, did not come to
fruition and, therefore, Return Assured disposed of Hergo, RemoteIT.com Inc.,
and Hertz Computer Corporation (collectively the "Hertz Businesses").
4
RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. The risks described below are not the only ones facing
our company. Additional risks not presently, known to us or that we currently
deem immaterial may also impair our business operations. These are all the risks
known to us at this time.
Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. The trading price of our
common stock could decline due to any of these risks and you may lose all or
part of your investment.
RISKS ASSOCIATED WITH OUR BUSINESS
We have a history of losses and may not be able to operate profitably in the
future. During the fiscal year ended August 31, 2001, Return Assured reported a
loss from continuing operations of $4,806,472 and a net loss of $9,681,732 which
included a loss from the discontinued operations of Hergo, Remote I-T and Hertz
Computer Corporation of $4,875,259. During the fiscal years ended August 31,
2000 and 1999, the Hertz Technology operations reported net losses of $2,338,069
and $694,871. We may not be able to operate profitably in the future. We expect
to experience substantial quarterly net losses for the foreseeable future, due
primarily to the following factors:
o Disposition of Hergo, Remove I-T and Hertz Computer Corporation and the
costs attendant thereto;
o Competitive pricing pressures; and
o Probable significant spending on operating expenses, in particular
marketing expenses to bring the attention of businesses and consumers to
Return Assured's services, which are likely to increase losses.
Our Return Assured business plan is unproven and we may not be able to
achieve profitability. We have not generated any revenues from our Return
Assured operations. We intend to focus substantially all of our efforts, and use
substantially all of our current working capital, in developing our Return
Assured operations. We expect that our sales and marketing, operations and
administrative expenses will increase in the future. As a result, we will need
to generate significant revenues to achieve and maintain profitability. We do
not know if our revenues will be sufficient to pay our expenses or that we will
achieve profitability. We cannot be certain that we will achieve or sustain
positive cash flow or profitability from our operations
A lack of demand for our web seal of approval service may result in our
inability to achieve profitability. We believe there is a considerable demand
from merchants to provide their customers with the assurance that the goods they
order will be delivered and that the merchants will honor their return policies.
But our management has not conducted any marketing studies to confirm that this
demand exists or the extent of the demand. We may find that as customers become
more comfortable with e-commerce they will not feel the need for outside
assurance of delivery and returns. If that happens, the number of merchants
willing to pay for our web seal service may be too small for us to be
profitable.
We may be unable to achieve our operating and financial objectives if
we cannot manage our anticipated growth effectively. We anticipate that our
business will grow rapidly. Our future success depends in large part on our
ability to manage this anticipated growth. For us to manage this growth, we will
need to:
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o expand and enhance our operating and financial procedures and
controls;
o replace or upgrade our operational and financial management
information systems; and
o attract, train, manage and retain key employees.
These activities are expected to place a significant strain on our
financial and management resources. If we are unable to manage growth
effectively, our business could suffer.
If our business plan is successful, other companies with more resources
and greater name recognition may make competition so intense that our web seal
business will not be profitable. Our business plan is based on us being the
first to market with our web seal service. Our service is not protected by
patents or other intellectual property rights, and if it is successful a number
of other companies with far more money and greater name recognition may decide
to compete with us. This competition could both reduce the number of merchants
who select us to provide the service and create downward pressure on the amount
we could charge for the service so that we would not have enough revenue to
generate a profit.
If we are unable to retain and attract key personnel, our revenues may
not reach projected levels and expenses may not be managed properly. We believe
our short and long-term success depends largely on our ability to attract and
retain highly skilled technical, managerial and marketing personnel,
particularly additional management personnel in the areas of application
integration and technical support. Competition for such personnel is intense. We
may not be able to hire or retain the necessary personnel to implement our
business strategy, or we may need to pay higher compensation for employees than
we currently expect. Our inability to attract and retain such personnel would
limit our growth and harm our business.
State regulations governing insurance could apply to our business,
making that business impractical which would cause a tremendous downturn in our
business. Virtually every state tightly regulates companies who are in the
business of insurance. We do not believe that our proposed business is insurance
under the laws of any state. This business, however, will be entirely new and
one or more states might try to regulate our operations as insurance. If our
business were to be regulated as insurance our business plan would most probably
not be practicable because the costs of complying with the insurance regulations
would be so high that we would have to raise our fees to a level most merchants
would not be willing to pay. In addition, the cost of defending against state
regulators' claims, if brought, could be prohibitive.
We cannot predict our future capital needs and we may not be able to
secure additional financing. To fully implement our business plan, we will
likely need to raise additional funds within the next 12 months in order to
develop our web seal service, to fund continuing operating losses or to acquire
complementary businesses, technologies or services. Additional financing may not
be available on terms favorable to us, or may not be available to us at all. If
we raise additional funds by issuing equity securities, our stockholders may
experience significant dilution of their ownership interest, and these
securities may have rights senior to the rights of common stockholders. If
additional financing is not available when required or is not available on
acceptable terms, we may be unable to fund continuing operations, promote our
brand name, enhance or develop our services, take advantage of business
opportunities or respond to competitive pressures, any of which could harm our
business.
We have no direct control over shipping and quality of products
(returns) shipped by merchants which may result in customers' returning
merchandise for which we are not reimbursed. We will rely on vendors to ship
merchandise directly to customers. Consequently, we will have limited control
over the goods shipped by these vendors, and shipments of goods may be subject
to delays. In addition, we may
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accept returns from customers for which we will not receive reimbursements from
manufacturers or vendors. If the quality of service provided by these vendors
falls below a satisfactory standard or if our level of returns exceeds
expectations, this could have a harmful effect on our business.
Our online commerce services will be vulnerable to interruption and
could result in a loss of business and lower earnings. Merchant access to our
web site will directly affect the volume of orders and thus affect our revenues.
System interruptions may make our web site unavailable or prevent us from
processing shipments and returns efficiently, reducing the attractiveness of our
services. We may need to add hardware and software and further develop and
upgrade our existing technology, transaction-processing systems and network
infrastructure to accommodate increased traffic on our web site and increased
sales volume. We will maintain substantially all of our computer and
communications hardware at one facility, in a co-location facility. Our systems
and operations could be damaged or interrupted by fire, flood, power loss,
telecommunications failure, network break-ins, earthquake and similar events.
Our backup systems and disaster recovery plan may not be adequate, and we may
not have sufficient business interruption insurance to compensate us for losses
from a major interruption.
Computer viruses, physical or electronic break-ins, deliberate attempts
by third parties to exceed the capacity of our systems and similar disruptions
could cause system interruptions, delays and loss of critical data, and could
prevent us from providing services and processing order tracking and return.
We have incurred charges to our operations relating to the impairment
of goodwill and to the disposition of the Hertz businesses and may be subject to
additional losses. The merger was accounted for as a purchase of Hertz by Return
Assured. Under purchase accounting, Hertz's tangible assets were entered on our
books at their fair market value. The excess of the value of the common shares
and warrants issued and the cost of the transaction over the net assets of Hertz
were recorded as goodwill. The transaction resulted in approximately $3,011,000
of goodwill. In the year ended August 31, 2001, we took a charge of $2,840,938,
the remaining goodwill balance for the impairment of this goodwill. Upon the
disposition of the Hertz businesses, we incurred a loss of $1,725,932.
RISKS ASSOCIATED WITH OUR INDUSTRY
We will operate in an extremely competitive market and we could lose
revenue and customers to competitors. It is perceived to be easy to enter the
online commerce services market. Current and new competitors can launch new
online commerce web sites at relatively low cost. Competition in services to
online commerce will likely increase as well-recognized web participants decide
to enter this market segment. Increased competition may result in price
reductions, reduced gross margins, increased marketing costs or loss of market
share, or any combination of these problems.
Major credit card companies already offer some protection against both
failure to deliver and the delivery of defective products, and they may decide
to compete with us by, for example, themselves undertaking to resolve delivery
disputes or guaranty delivery and returns for customers who use their cards to
purchase online.
We may not be successful in competing against these competitors. Many
of these competitors have greater financial, marketing, customer support,
technical and other resources than us. As a result, they may be able to provide
the same services we provide on more favorable terms than us, and they may be
able to respond more quickly to changes in customer preference or to devote
greater resources to the development, promotion and sale of their services than
we can. If competition increases and our branding efforts are not successful, we
may not be able to command higher margins on our services, or we may lose
revenue and customers to our competitors.
7
Our business may be affected by government regulation and result in
unacceptable costs to us. The need for our services may be reduced by future
state or federal regulation providing for governmental enforcement of the
obligations of online merchants to deliver their products and honor returns
policies. Even if this does not happen, it is possible that one or more states
may decide that our proposed business is close enough to the business of
insurance that it should be regulated like insurance. This could result in an
interference with our business that would create unacceptable costs to us.
The tax treatment of the Internet and electronic commerce is currently
unsettled, and taxes may be assessed which would reduce earnings. A number of
proposals have been made at the federal, state and local level and by some
foreign governments that could impose taxes on the sale of goods and services
and some other Internet activities. Our business may be harmed by the passage of
laws in the future imposing taxes or other burdensome regulations on online
commerce.
Due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet generally, covering issues such as user privacy, pricing and
characteristics and quality of products and services. Similarly, the growth and
development of the market for Internet commerce may prompt calls for more
stringent consumer protection laws that ~may impose additional burdens on those
companies conducting business over the Internet. The adoption of any additional
laws or regulations may decrease the growth of commerce over the Internet,
increase our cost of doing business or otherwise have a harmful effect on our
business.
RISKS ASSOCIATED WITH INVESTING IN US
We expect our stock price to be volatile. The market price of the
shares of our common stock has been, and will likely continue to be, subject to
wide fluctuations in response to several factors, such as:
o actual or anticipated variations in our results of operations;
o announcements of technological innovations;
o new services or product introductions by us or our competitors;
o changes in financial estimates by securities analysts; and
o conditions and trends in the Internet and electronic commerce industries.
The stock markets generally, and the NASD over-the-Counter Bulletin
Board in particular, have experienced extreme price and volume fluctuations that
have particularly affected the market prices of equity securities of many
companies and that often have been unrelated or disproportionate to the
operating performance of those companies. These market fluctuations, as well as
general economic, political and market conditions such as recessions, interest
rates or international currency fluctuations may adversely affect the market
price of our common stock.
Shares of our outstanding common stock may increase more than expected
because the conversion price of our Series A preferred stock is not fixed, but
is determined based on the market value of the common stock at the time of
conversion. Our operations are initially being financed by the sale of $5
million in Series A convertible preferred stock to GEM. This convertible
preferred stock has a maximum conversion price of $3.00 per share. However, if
the market price of our stock at the time of conversion is below $3.00 per share
the conversion price is reduced to the market price at that time. As a result,
if our common stock declines significantly in price, we will have to issue more
shares of common stock than we would if the conversion price were fixed. Nothing
in the agreement for sale of the
8
preferred stock would prevent the holder of the preferred stock from repeatedly
selling the stock short and covering its short sale at a lower price. It would
not be subject to the usual risks of a short seller, who might have to buy back
the stock it has sold at an undetermined and much higher price in order to cover
his short position, because the conversion can never go above $3.00 per share.
In addition, a holder of the preferred stock could continue converting and
selling at ever lower prices without incurring an economic loss. These sales
could result in a major decline in the price of our common stock. They could
also make us more vulnerable to a takeover by an outside party. The holder of
the Series A preferred stock has agreed with us to never own more than 4.99% of
our common stock. As a result the holder must sell enough shares upon each
conversion to not violate our agreement - possibly depressing our stock price.
The following table illustrates the number of shares that we would be
required to issue at various assumed prices upon conversion of $3,828,873, the
remaining amount of the $5,000,000 of the Series A preferred stock that has not
yet been converted, subject to the limitations described in the text following
the table. This table is for illustrative purposes only, and should not be
assumed to represent our projections of the range of future stock prices.
Conversion Shares of Common Stock Common Stock Underlying Series A
Share Issuable Under the Preferred Stockholders as a Percentage
Price Series A Preferred Stock of Total Common Stock Outstanding (1)
- ------------ ------------------------ --------------------------------------
$.015 (2) 255,258,200 93.8%
$0.025 (3) 153,154,920 (3) 90.1%
0.05 (4) 76,577.460 (3) 82%
- ----------
(1) Based on 16,850,799 shares outstanding on February 5, 2002 and assuming
authorized shares are increased.
(2) Assuming $.015 is the lowest trading price in accordance with the
parameters of the Stock Purchase Agreement.
(3) Calculated without effect given to dividends accrued.
(4) Assuming $0.025 is the lowest trading price in accordance with the
parameters of the Stock Purchase Agreement.
(5) Assuming $.05 is the lowest price in accordance with the parameters of the
Stock Purchase Agreement.
To date, GEM has converted the following number of shares:
GEM CONVERSIONS
CONVERSION
DATE TRANSACTION RATE # COMMON
- ------------------------ ------------ -------------------- -------------
16-Oct-00 $5,000,000 $5,000,000
Various Dividend accrual $13,252 $5,013,252
14-Nov-00 $(50,000) $4,963,252 $1.00 50,000
17-Jan-01 $(125,000) $4,838,252 $0.24 529,661
16-May-01 $(30,000) $4,808,252 $0.15 200,000
22-May-01 $(50,000) $4,758,252 $0.13 384,615
23-May-01 $(55,000) $4,703,252 $0.13 423,077
24-May-01 $(60,000) $4,643,252 $0.13 461,538
25-May-01 $(60,000) $4,583,252 $0.13 461,538
29-May-01 $(70,000) $4,513,252 $0.13 538,462
29-May-01 $(62,000) $4,451,252 $0.13 476,923
30-May-01 $(61,000) $4,390,252 $0.13 469,231
30-May-01 $(66,000) $4,324,252 $0.13 507,692
31-May-01 $(58,500) $4,265,752 $0.13 450,000
9
31-May-01 $(63,500) $4,202,252 $0.13 488,462
01-Jun-01 $(58,000) $4,144,252 $0.13 446,154
01-Jun-01 $(60,000) $4,084,252 $0.13 461,538
01-Jun-01 $(62,499) $4,021,753 $0.13 480,000
04-Jun-01 $(60,030) $3,961,723 $0.13 461,769
04-Jun-01 $(61,000) $3,900,723 $0.13 469,231
05-Jun-01 $(66,300) $3,834,423 $0.13 510,000
06-Jun-01 (5,550) $3,828,873 $0.13 42,689
8,312,580
With the remaining shares that GEM may and ultimately is expected to
convert, you may experience dilution of your ownership percentage upon GEM's
conversion of the preferred stock. The exercise of such a large amount of stock,
especially if close in time, may have a substantial negative effect on the
market price of our common stock.
We may be required to redeem the preferred stock for an amount that
would force us to go out of business. The agreement for sale of the Series A
preferred stock requires us to maintain an effective registration statement
covering resale of the shares of common stock that may be issued upon
conversion. If we are unable to maintain the effectiveness of that registration
statement or otherwise do not comply with agreements we make with holders of
that preferred stock, we will have to redeem all the outstanding preferred stock
at the stated value of $1,000 per share plus accrued dividends. There is no
provision in the agreement for payment of this obligation over time, and we will
not have any commitment for credit to finance the payment of the redemption
price. As a result, a redemption may leave us with not enough liquid assets to
continue paying our other debts and we may be forced to go out of business.
Shares of our outstanding common stock may increase more than expected
because of our Program Promotion Agreement with PlasmaNet, Inc. On December 15,
2000, we entered into a Program Promotion Agreement with Plasma Net Inc., the
provider of FreeLotto.com, a free online sweepstakes. Under the Agreement,
PlasmaNet and Return Assured have created promotional programs enhanced by
FreeLotto's relationship with its approximate 12,000,000 registered users. Under
the programs, FreeLotto members that opt in , will have their contact
information forwarded to us in real time for the purpose of new
membership/database relationship management.
In exchange for the above-mentioned membership generation, we will at
the end of each calendar week, issue $6.00 worth of our common stock to
PlasmaNet for each new member referred by us for that week. The recent decline
in our stock price will result in increased dilution of our common stock, for
each name we acquire from PlasmaNet, Inc.
DE-LISTING FROM NASDAQ
Our common stock was delisted from trading on the NASDAQ SmallCap
Market. We appealed this decision, but were unsuccessful in being relisted on
the NASDAQ SmallCap Market.
Having been de-listed from Nasdaq, our common stock is subject to the
penny stock rules. Broker-dealer practices in connection with transactions in
"penny stocks" are regulated by certain rules adopted by the Securities and
Exchange Commission. Penny stocks generally are equity securities with a price
of less than $5.00 other than securities registered on certain national
securities exchanges or quoted on Nasdaq provided that current price and volume
information with respect to transactions in such securities is provided by the
exchange or system. The rules require that, prior to a transaction in a penny
stock not otherwise exempt from the rules, the broker-dealer must:
10
o deliver a standardized risk disclosure document that provides information
about penny stocks and the risks in the penny stock market;
o provide the customer with current bid and offer quotations for the penny
stock;
o disclose the compensation of the broker-dealer and its salesperson in
connection with the transaction;
o provide the customer monthly account statements showing the market value of
each penny stock held in the customer's account; and
o make a special written determination that the penny stock is a suitable
investment for the customer and receive the customer's written agreement to
the transaction.
These disclosure requirements may have the effect of reducing the
liquidity of penny stocks. If our securities are subject to the penny stock
rules, you may find it more difficult to sell your shares of our common stock.
We may not qualify for continued Bulletin Board inclusion. Immediately
upon being delisted from the NASDAQ SmallCap Market, our common stock was
eligible for quotation on the NASD Over-the-Counter Bulletin Board ("Bulletin
Board"). If, for any reason, however, our common stock does not remain eligible
for quotation on the Bulletin Board or an active public trading market does not
develop, you may have difficulty selling your shares. If we were no longer able
to satisfy the requirements for quotation on the Bulletin Board, any trading in
our common stock would be conducted in the over-the-counter market in what are
commonly referred to as the "pink sheets." As a result, you may find it more
difficult to dispose of, or to obtain accurate quotations as to the price of,
the shares. In addition, the price of the shares, after the offering, can vary
due to general economic conditions and forecasts, our general business
condition, the release of our financial reports, and because our principals may
sell shares they owned before the offering into any market that develops.
Our ability to pay dividends is limited. We currently intend to retain
any future earnings and, therefore, do not plan to pay dividends in the
foreseeable future. Our future dividend policy will depend on our earnings,
capital requirements, financial condition and other factors that our board of
directors deems relevant. We cannot assure you that dividends will ever be paid.
Shares eligible for future sales by our current stockholders may
adversely affect the price of our stock. The market price of our common stock
could decline as a result of sales of shares of common stock by our existing
stockholders. These sales might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate.
Anti-takeover provisions and our right to issue preferred stock could
make a third party acquisition of us difficult and could deprive our
stockholders of a takeover premium for their shares. We are a Delaware
corporation. Anti-takeover provisions of Delaware law could make it more
difficult for a third party to acquire control of us, even if a change in
control would be beneficial to shareholders. Our amended certificate of
incorporation provides that our board of directors may issue preferred stock
without shareholder approval. The issuance of preferred stock could make it more
difficult for a third party to acquire us. Our board of directors may issue
preferred stock with voting or conversion rights that may have the effect of
delaying, deferring or preventing a change of control of us and would adversely
affect the market price of our common stock or voting and other rights of
holders of our common stock.
The exercise of outstanding options and warrants will dilute the
interests of our stockholders. As of February 7, 2002, we had 16,850,799 shares
of our common stock outstanding. If all our outstanding options and warrants are
exercised, we will have approximately 17,689,132 (fully diluted, not including
11
the dilutive effect of the 25,000,000 shares offered by this Prospectus or
shares that could be issued upon the conversion of the preferred stock) shares
outstanding. Thus, the percentage of shares owned by all existing stockholders
will be reduced proportionately as warrants are exercised.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain financial information and statements
regarding our operations and financial projections of a forward-looking nature.
Although these statements accurately reflect management's current understanding
and beliefs, we caution you that certain important factors may affect our actual
results and could cause such results to differ materially from any
forward-looking statements which may be deemed to be made in this Prospectus.
For this purpose, any statements contained in this Prospectus which are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as "may", "will",
"intend", "expect", "believe", "anticipate", "could", "estimate", "plan" or
"continue" or the negative variations of those words or comparable terminology
are intended to identify forward-looking statements. There can be no assurance
of any kind that such forward-looking information and statements will be
reflective in any way of our actual future operations and/or financial results,
and none of such information and statements should be relied upon, either in
whole or in part, in connection with any decision to invest in the shares.
USE OF PROCEEDS
We will not receive any of the proceeds from the resale of the shares
by the selling stockholders; all of such proceeds will be paid to the selling
stockholders. We have agreed to bear all expenses of the registration of the
resale of shares by the selling stockholders under federal and state securities
laws.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock.
We anticipate that any earnings will be retained for development and expansion
of our business and we do not anticipate paying any cash dividends in the
foreseeable future. Our Board of Directors has sole discretion to pay cash
dividends based on our financial condition, results of operations, capital
requirements, contractual obligations and other relevant factors.
CAPITALIZATION
The following table sets forth our capitalization as of November 30,
2001, and should be reviewed with our November 30, 2001 unaudited financial
statements and August 31, 2001 audited financial statements, and the notes to
those financial statements included elsewhere in this Prospectus.
November 30,
2001
[unaudited]
-------------
Stockholders' equity:
Common stock, $.0001 par value, 50,000,000 shares 16,847
authorized; 16,846,184 shares issued and outstanding
Additional Paid-In Capital 10,933,382
12
Accumulated deficit (13,082,529)
TOTAL CAPITALIZATION (2,132,300)
============
SELLING STOCKHOLDERS
We sold the preferred stock, which the common stock underlies, to GEM in
transactions we believe to be exempt from registration under the Securities Act.
As part of the above transactions, we agreed to register the shares being
offered by this prospectus. As of the date of the filing of this Registration
Statement on Form SB-2, Return Assured is authorized to issue up to 50,000,000
shares of Common Stock. While the Company plans to obtain shareholder approval
to increase the authorized shares, no assurance can be given that shareholders
will approve the increase in the authorized shares. Therefore, in this
registration of shares of common stock underlying the preferred stock sold to
GEM, we have assumed that GEM can only convert shares in excess of what GEM
currently owns so that the issued and outstanding shares of the Company will not
exceed its current authorized shares. In accordance with the conversion
provisions of the Series A Preferred Stock Purchase Agreement by and between GEM
and the Company, GEM may convert the preferred stock into shares of Common Stock
at a rate equal to the lesser of $3.00 per share or the average of the three (3)
lowest per share market value prices during the 45-day period immediately
preceding the date of conversion of the shares. Our good faith estimate of the
shares being registered is based on this provision of the Series A Preferred
Stock Purchase Agreement. Since GEM still has $3,828,873 of convertible
preferred shares remaining to convert, under the conversion provisions of the
Series A Preferred Stock Purchase Agreement and the market price of Return
Assured's common stock during the immediately preceding 45 days, GEM's preferred
shares would be convertible into 255,258,200 shares of common stock. Rather than
convert the entire balance, however, GEM has decided to convert approximately
$375,000 which is equivalent to 25,000,000 shares.
The following table sets forth information as of February 7, 2002 about
GEM and the number of shares of common stock beneficially owned by it, all of
which are offered by this prospectus. For purposes of computing the number and
percentage of shares beneficially owned by the selling stockholder on February
5, 2002, any shares which such person has the right to acquire within 60 days
after such date are deemed to be outstanding, but those shares are not deemed to
be outstanding for the purpose of computing the percentage ownership of any
other selling stockholder. As a result, GEM is deemed to own all of the shares
that may be issued either on conversion of the preferred stock it owns or upon
exercise of its warrant.
Percent Shares
Shares Owned Owned Upon Percent
Being Before Completion Owned After
Name and address Offered Offering (1) of Offering Offering (1)
---------------- ---------- ------------ ----------- ------------
GEM Global Yield Fund Limited 25,000,000 85.27% 10,687,740 25.54%
Hunkins Waterfront Plaza
P.O. Box 556, Main Street
Nevis, West Indies
- ----------
(1) Based on 41,850,799, the total issued common stock, not fully diluted in
order to stay within the authorized share amount, but including the
dilutive effect of the 25,000,000 shares offered by this prospectus and
shares that could be issued upon the conversion of the preferred stock up
to 50,000,000 total, including 16,850,799 shares presently outstanding.
13
The following people hold the offices of GEM Global Yield Fund Ltd., a
Nevis, West Indies company, shown next to their names and are those who share
beneficial ownership of the GEM shares:
Margareta Hedstrom, President and Treasurer
Pierce Loughran, Director
Thomas Lacy, Director
James A. Loughran, Authorized signatory
James E. Martin, Authorized signatory
PLAN OF DISTRIBUTION
GEM may sell the common stock being offered by this prospectus from
time to time directly to other purchasers, or to or through dealers or agents.
To the extent required, a prospectus supplement with respect to the common stock
will set forth the terms of the offering of the common stock, including the
name(s) of any dealer or agents, the number of shares of common stock to be
sold, the price of the common stock, any underwriting discount or other items
constituting underwriters' compensation.
GEM, an NASD broker-dealer itself, registered in New York and Texas,
may sell its stock from time to time directly or, alternatively, through
broker-dealers or agents. GEM will act independently of us in making decisions
regarding the timing, manner and size of each sale. It may sell its common stock
in one or more transactions at fixed prices, at prevailing market prices at the
time of sale, at varying prices determined at the time of sale or at negotiated
prices. The sales may be made in transactions (which may involve crosses or
block transactions)
o on any national securities exchange for quotation services on
which the common stock may be listed or quoted at the time of sale
o in the over-the-counter market,
o in transactions other than on such exchanges or services or in the
over-the-counter market, or
o through the writing of options.
In connection with sales of the common stock, GEM may enter into
hedging transactions with broker-dealers, and those broker-dealers may in turn
engage in short sales of the common stock in the course of hedging the positions
they assume. GEM may also sell short the common stock offered by this prospectus
and deliver that common stock to close out such short positions, or lend or
pledge such common stock to broker-dealers that in turn may sell such
securities. GEM may also sell some of the common stock offered by this
prospectus under Rule 144 under the Securities Act.
GEM and any brokers, dealers or agents described above may be deemed
"underwriters" as that term is defined by the Securities Act.
Each selling stockholder and any other persons participating in a
distribution of securities will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M may limit the timing of purchases and sales of
securities by selling stockholder and others participating in a distribution of
securities. In addition, under Regulation M, those engaged in a distribution of
securities may not at the same time make a market in the securities or take
other actions that may affect the market price of the securities for a specified
period of time before the beginning of the distribution, subject to some
exceptions or exemptions. All of the restrictions described above may affect the
marketability of the securities offered by this prospectus.
14
If a dealer is used in the sale of any common stock where this
prospectus is delivered, GEM may sell the common stock to the public at varying
prices to be determined by the dealer at the time of resale. To the extent
required, the name of the dealer and the terms of the transaction will be set
forth in the related prospectus supplement.
In connection with the sale of common stock, dealers or agents may
receive discounts, concessions, or commissions from GEM or from purchasers of
the common stock for whom they may act as agents. Agents and dealers
participating in the distribution of the common stock may be deemed to be
underwriters, and any compensation received by them and any profit on the resale
of common stock by them may be deemed to be underwriting discounts or
commissions under the Securities Act.
Under the Registration Rights Agreement with GEM, we have agreed to pay
costs and expenses associated with the registration of the shares of common
stock to be sold by this prospectus. In addition, GEM may be entitled to
indemnification against certain liabilities under the Registration Rights
Agreement.
~We will make copies of this prospectus available to GEM and have
informed GEM of the need to deliver a copy of this prospectus to each purchaser
before or at the time of such sale.
LEGAL PROCEEDINGS
Greg Chapman, the former president of Return Assured's Nevada
subsidiary, filed a lawsuit against the Company and John A. Carter, the former
chairman of Return Assured and Michael Mulberry, the former Vice President of
Investor Relations of the Company, claiming that he is entitled to receive
shares from the Company for contributions he claims to have made in the founding
of the subsidiary. We are defending against this lawsuit and believe that our
defenses have merit and that Mr. Chapman will not be successful. Messieurs
Carter and Mulberry have escrowed an aggregate of 780,000 shares of Return
Assured's common stock which they own to secure any successful claim by Mr.
Chapman.
The Company was named in a lawsuit against Internet Business
International, Inc. by Michael Rose, et al, in Orange County Superior Court. The
allegations involve breach of contract by the Company to pay finder's fees on
the merger transaction. It is the Company's position that no liability exists,
and the Company intends to vigorously defend the lawsuit. If the Company was
unsuccessful in defending this lawsuit, the Company could incur a loss of
approximately $750,000 USD.
Michael Mulberry, a former Vice President of the Company, has filed a
lawsuit against the Company claiming wrongful dismissal when his employment was
terminated in February 2001. If the Company was unsuccessful in defending this
lawsuit, the Company could incur a loss of approximately $81,000 USD.
In October 2001, a settlement was reached between Eli Hertz ("Hertz")
and Return Assured regarding a lawsuit brought by Hertz against the Company
under which Hertz claimed payment due under a note in the amount of $290,000. In
accordance with the terms of the settlement agreement, upon the default by the
Company on the note, all issued and outstanding shares of the common stock of
Hergo Technology, Inc. ("Hergo Shares") would be transferred to Hertz. The
Company defaulted on the note on or about October 8, 2001 and the Hergo Shares
were thereupon transferred to Hertz.
A creditor has filed a small claim in British Columbia Canada against
the Company's Nevada subsidiary. The Company has filed a defense in this action.
If the Company was unsuccessful in defending this lawsuit, the Company could
incur a loss of approximately $12,000 USD.
15
P. Sun's Enterprises (Vancouver) Ltd. has filed a lawsuit against the
Company for the Company's failure to pay rent in accordance with a lease which
the Company entered into for office space at 885 West Georgia Street in
Vancouver, British Columbia. The Company expects to settle this lawsuit.
Since estimated losses under the legal proceedings were not probable,
no accrual in required in accordance with SFAS 5.
LEGAL MATTERS
The validity of the issuance of shares of common stock offered by this
prospectus will be passed upon for us by Kaplan Gottbetter & Levenson, LLP. The
principals of Kaplan Gottbetter & Levenson, LLP are also the principals of KGL
Investments, Ltd., a selling stockholder in this prospectus.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth certain information regarding the executive
officers and directors of Return Assured as of October 31, 2001:
Name Age Position
- ---- --- --------
Matthew Sebal 31 President, Chairman and Director
Todd Cusolle 30 Director
A brief description of the backgrounds of the current Executive
Officers and Directors is set forth below:
Matt Sebal, President, Chief Executive Officer, Director and Chairman
Mr. Sebal, age 31, served as President and Chief Executive officer of
Return Assured from June 2000 until December 2000, when he became
President and Chairman. From 1999 to May 2000 he was Principal in
IBM's e-business Services Group for British Columbia, Canada. From
1997 to 1998, Mr. Sebal was Director of Business Development for
Communicate.com. From 1995 to 1997, he was Senior Strategist for
Emerge Online, Inc. From 1990 to 1995, he was President of Sebal
Enterprises, an import-export business. Mr. Sebal holds a
baccalaureate degree in Commerce from the University of Western
Ontario.
Todd Cusolle
Director
Mr. Cusolle, age 30, is a director and Chief Technology Officer of
Mindfuleye Systems, Inc. since March 13, 2000, is a professional
senior software developer. In addition, Mr. Cusolle has been a
director of Mindfuleye.com Systems Inc., a wholly owned subsidiary of
Mindfuleye Systems, Inc., since July 21, 1999. Prior to co-founding
Mindfuleye.com Systems Inc. in 1999, Mr. Cusolle served as a senior
developer and architect at RLG NetPeformance and Communicate.com. From
1996 until 1998, Mr. Cusolle was the founding employee of Emerge
Online and led the expansion of a technical team from 1 to 20
employees. While working with these organizations, Mr. Cusolle led the
back end development of well known investment and financial websites,
including HSBC Bank
16
USA (formerly Marine Midland Bank), TD Bank, Comerica Bank, Fleet Bank
USA, Canada Trust, Canadian Corporate News and Bayshore Trust.
Notably, Mr. Cusolle designed and implemented the world's first online
instant approval line-of credit application that automatically
accessed and analyzed an individual's credit report.
During the early days of the Internet (1995-1996) Mr. Cusolle held
development positions at both Quadravision Communications (now Bowne
Internet) and Carleton University in Ottawa, Canada.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the common stock as of February 7, 2002, by all persons
known by Return Assured to own beneficially more than five percent (5%) of the
common stock of Return Assured, each director, each Return Assured Named
Executive Officer, and all directors, Return Assured Named Executive Officers
and executive officers of Return Assured as a group.
SHARES BENEFICIALLY OWNED (1)
-----------------------------
NUMBER PERCENT
--------------- ------------
5% STOCKHOLDERS:
Plasmanet, Inc. 840,000 4.98%
420 Lexington Avenue
New York, New York 10170
NAMED EXECUTIVE OFFICERS AND DIRECTORS:
Matthew Sebal 300,000 1.8%
Todd Cusolle 0 0
All Named Executive Officers, executive officers and
directors as a group (2 persons) 300,000 1.8%
- ----------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Unless otherwise indicated
below, the persons and entities named in the table have sole voting and
sole investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. Shares of common stock
subject to options that are currently exercisable or exercisable within 60
days of March 31, 2001 are deemed to be outstanding and to be beneficially
owned by the person holding such options for the purpose of computing the
percentage ownership of such person but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person.
17
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company consists of 50,000,000
shares of Common Stock, $.001 par value per share. There are 16,850,799 issued
and outstanding Shares. Holders of the Shares do not have preemptive rights to
purchase additional Shares or other subscription rights. The Shares carries no
conversion rights and are not subject to redemption or to any sinking fund
provisions. All Shares are entitled to share equally in dividends from sources
legally available therefor when, as and if declared by the Board of Directors
and, upon liquidation or dissolution of the Company, whether voluntary or
involuntary, to share equally in the assets of the Company available for
distribution to shareholders. All outstanding Shares are validly authorized and
issued, fully paid and nonassessable, and all Shares to be sold and issued as
contemplated hereby, will be validly authorized and issued, fully paid and
nonassessable. The Board of Directors is authorized to issue additional Shares
not to exceed the amount authorized by the Company's Certificate of
Incorporation, and to issue options and warrants for the purchase of such
shares, on such terms and conditions and for such consideration as the Board
warrants for the purchase of shares, on such terms and conditions and for such
consideration as the Board may deem appropriate without further shareholders
action. The above description concerning the Shares does not purport to be
complete. Reference is made to the Company's Certificate of Incorporation and
bylaws which are available for inspection upon proper notice at the Company's
offices, as well as to the applicable statutes of the State of Delaware for a
more complete description concerning the rights and liabilities of shareholders.
Each holder of Shares is entitled to one vote per share on all matters on which
such shareholders are entitled to vote. Since the Shares do not have cumulative
voting rights, the holders of more than fifty percent (50%) of the Shares voting
for the election of directors can elect all the directors if they choose to do
so and, in such event, the holders of the remaining shares will not be able to
elect any person on the Board of Directors.
PREFERRED STOCK
The Board of Directors is empowered to authorize the issuance of one or
more classes up to a total of 1,000,000 shares of the Corporation's Preferred
Stock, or one or more series of any such class, and to fix the preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof for each such class or series, specifying
for each such class or series: (i) the designation thereof in such manner as
shall distinguish shares thereof from all other series of Preferred Stock then
or theretofore authorized; (ii) the number of shares which shall initially
constitute such class or series; (iii) whether or not the shares of such class
or series shall have voting rights in addition to the voting rights
affirmatively required by law; (iv) the rate or rates and the time or times at
which dividends and other distributions on the shares of such class or series
shall be paid, and whether or not any such dividends shall be cumulative; (v)
the amount payable on the shares of such class or series in the event of the
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation; (vi) whether or not shares of such class or series are to be
redeemable, and the terms and conditions upon which the Corporation or a holder
may exercise its or his right to redeem, or require redemption of, shares of
such class or series; (vii) whether or not a sinking fund shall be created for
the redemption of the shares of such class or series, and the terms and
conditions of any such fund; and (viii) any other preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof which shall be applicable to such class or series."
EXPERTS
18
Our financial statements as of November 30, 2001, and for the quarter
then ended and the financial statements as of August 31, 2001 and the financial
statement of Hertz Technology Group, Inc. and Subsidiaries as of August 31, 2000
and for the years then ended have been included in this prospectus and in the
registration statement in reliance on the reports of Goldstein Golub Kessler
LLP, independent auditors, given upon the authority of that firm as experts in
accounting and auditing. Financial statements of our subsidiary, Return Assured
Incorporated, a Nevada corporation, as of August 31, 2000 and August 31, 1999
and for the years then ended have been included in this prospectus and in the
registration statement in reliance on the report of Pannell Kerr Forster,
chartered accountants, given upon the authority of that firm as experts in
accounting and auditing.
COMMISSION POSITION ON INDEMNIFICATION
Section 145 of the Delaware General Corporation Law grants corporations
the power to indemnify their directors, officers, employees and agents. Our
Amended and Restated Certificate of Incorporation and our By-laws provide for
indemnification of our directors, officers, agents and employees to the full
extent permissible under the General Corporation Law. The General Corporation
Law also allows a corporation to eliminate the liability of directors for breach
of fiduciary duty in some cases. Our certificate of incorporation eliminates
that liability to the full extent permitted by the that law.
We have signed indemnification agreements with each of our directors
and executive officers. Each of these agreements provides that we will indemnify
that person against expenses, including reasonable attorneys' fees, judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with any civil or criminal action or administrative
proceeding arising out of the performance of his duties as an officer, director,
employee or agent of our company. This indemnification will be available if the
acts of the person we are indemnifying were in good faith, if the he acted in a
manner he reasonably believes to be in or not opposed to our best interest and,
as to any criminal proceeding, he had no reasonable cause to believe his conduct
was unlawful.
The registration rights we have granted the selling stockholders,
contain indemnification provisions.
We maintain directors' and officers' liability insurance coverage with
an aggregate policy limit of $5 million for each policy year.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
under the above provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission that indemnification is
against public policy and is, therefore, unenforceable.
DESCRIPTION OF BUSINESS
In June 2001, we entered into a Merger and Share Exchange Agreement (Merger
Agreement) with Internet Business's International, Inc. (IBUI) at which time, we
planned to complete the Merger during fiscal year 2002. On January 14, 2002,
however, the two companies announced their mutual decision to terminate the
Merger Agreement and to cease all efforts underway to effectuate the merger. In
the prior fiscal year, we closed the business combination of our Return Assured
business and Hertz Technology Group business. On October 13, 2000 Asure
Acquisition Corp., a wholly-owned subsidiary of Hertz Technology Group, Inc., a
Delaware Corporation, was merged into Return Assured Incorporated, a Nevada
Corporation. At the same time Hertz Technology Group changed its name to Return
Assured Incorporated. We discovered, however, that the synergies we expected
between Return Assured and certain of the subsidiaries of the Hertz Technology
Group including Hergo Ergonomic Support Systems,
19
Inc. (Hergo) and its subsidiary RemoteIT.com Inc. and Hertz Computer
Corporation, did not come to fruition and, therefore, Return Assured disposed of
Hergo, RemoteIT.com Inc., and Hertz Computer Corporation (collectively the Hertz
Businesses) because the Hertz businesses are not core businesses of Return
Assured. For example, Hergo's primary business is the manufacture and
distribution of office furniture which is not an Internet business and has
little in common with Return Assured, precluding the possibility of any
efficiencies of scale, joint sales or marketing efforts or other joint
initiatives.
At the time of the merger of Return Assured and the Hertz Technology Group,
Return Assured entered into a note agreement with Eli Hertz, founder of the
Hertz Technology Group, in the principal amount of $290,000 plus interest at 10%
per annum payable to Eli Hertz.
In order to fully divest of the Hertz Businesses, Return Assured entered into an
agreement with Eli Hertz regarding the balance remaining on the note wherein
Return Assured would pay the remaining balance of the note in full by October 8,
2001; provided, however, that the failure of Return Assured to pay the note in
full would result in 100% of the issued and outstanding stock of Hergo and Hertz
Computer Corporation being returned to Eli Hertz. Return Assured did not pay the
note in full by the due date, and all issued and outstanding shares of Hergo's
and Hertz Computer Corporation's common stock have been transferred to Eli
Hertz. These transfers have resulted in Return Assured's disposition of Hergo
and Hergo's subsidiary, RemoteIT.com and Hertz Computer Corporation while Edutec
continues to be a subsidiary of the Company.
References in this report to we, us, our and similar terms means Return Assured
Incorporated, a Delaware corporation, formerly Hertz Technology Group, Inc.
INDUSTRY OVERVIEW
As the world familiarizes itself with the convenience of online shopping, the
wonders of the Internet have virtually placed almost anything one would want to
buy at our fingertips. The Internet has become a resource for information and
research as well as a retail mecca offering myriads of products and services
that were previously inaccessible.
A strong web presence is mandatory for any retailer that wants to compete in the
21st century. In order to become market leaders retailers must measure and act
upon their customers' needs, provide seamless service between channels and
develop new ways for customers to shop.
However, with the rapid growth of the Internet a few negatives are threatening
the retail landscape. There are mounting consumer concerns about credit card
fraud, lack of trust in the vendor or product, security risks with personal
information disclosure and a lack of systems to provide the consumer with a
safety net or comfort zone when dealing with unknown merchants. Small and medium
sized retailers may be at a disadvantage because without recognized brands or
reputations consumers are wary of shopping on these sites. In fact, 80% of
online shoppers agree that their purchasing decisions are strongly influenced by
the ability to buy from known, trusted retailers and to buy known, trusted
product brand names. In addition, it is estimated that 75% of shopping carts are
abandoned before the transaction process is complete. Even in the case where the
carts are not voluntarily abandoned, 28% of online purchases fail. Of those
purchases that failed, 28% of the customers stopped shopping online.
Furthermore, a survey shows that the inability to return goods and general lack
of trust in the vendor were two of the top ten reasons Internet users did not
buy online. For those consumers that did buy apparel online in 2000, low prices,
free delivery, large merchandise selection and ease of return topped the list of
most important features when selecting an online merchant. However, not all
return policies were rated equally. One survey showed that the most important
factor for an optimal online return policy would be a 100% money back guarantee.
20
OUR BUSINESS
We have brought to market the world's first proprietary business-to-business and
business-to-consumer value added web seal of approval which provides a service
that guarantees customers who order products through the web sites of merchant
members that the merchants' stated return policy will be honored.
Our web seal of approval is designed to meet the needs of small and medium sized
businesses by removing the risk and uncertainty that are responsible for
incomplete online transactions. We offer a risk-free shopping experience because
we guarantee to fulfill the terms of a participating merchant's return policy in
cases where the merchant will not.
According to a recent study, 75% of shopping carts are abandoned before the
transaction process is complete for two reasons:
- - Online shoppers are wary of the security risk of sending their credit card
number over the public Internet; and
- - Online shoppers are unsure, as in the mail order catalogue business, that
Internet retailers will accept return of a product if the product is
unacceptable to the consumer.
We deal with the second of these issues by providing our Return Assured Seal of
Approval web seal to those e-commerce sites that meet our criteria. If a
customer orders from a site displaying this web seal, we provide assurance that
the merchant displaying the web seal will honor its stated return policies.
When a merchant applies for the Return Assured web seal, we perform a credit
check through Dun & Bradstreet or other sources such as the Better Business
Bureau, to verify the financial and credit standing of the merchant. Depending
on the results of our initial credit investigation, the merchant may be approved
immediately, approved after a review by senior management or questioned about
the reasons for any adverse financial or credit standing. A merchant that is
ultimately approved is authorized to display the Return Assured web seal on its
e-commerce web site. The web seal itself remains on our computers. The merchant
displays our web seal by linking to the file from its web site.
As a condition for approval, all merchants must provide us with a copy of their
current merchandise return policies and to ship their products on carriers which
we have approved. These carriers must provide for online tracking of shipments
made on them. We are notified each time a customer places an order through the
site on which our web seal is displayed and receive shipping information from
the merchant which allows us to track the merchandise through the delivery
process. We have software that allows the tracking to be done automatically. A
customer who has not received merchandise ordered can contact us and quickly
determine the status of the shipment. Any delivery problems are followed up with
the carrier. If the shipment has not yet been made, we contact the merchant to
determine why and to resolve any outstanding issues.
If the customer wants to return merchandise ordered, we initially direct the
customer to contact the merchant directly for a return merchandise authorization
number and to return the merchandise directly to the merchant. If the customer
has already contacted the merchant without success, our service representative
reviews the merchant's return policies to see whether the return would be
consistent with those policies.
If the return is not consistent with the merchant policy, we tell the customer
that the return is not covered. If the return is covered, we contact the
merchant to determine whether there was a valid reason for refusal
21
to accept the return. We tell the merchant that if the reason is not
satisfactory, the merchant risks losing the Return Assured web seal for its
site. If we are unable to persuade the merchant to honor a valid claim, we
direct the customer to return the merchandise to us with a claim form. On
verifying that the return is in order, we mail our own refund check to the
customer. We then dispose of the merchandise either by trying to sell it for its
salvage value or by donating it to a charity. We may then seek to recover from
the merchant the amount we have reimbursed the customer.
Since our web seal displayed on a merchant's site is controlled by our computers
rather than by the merchant, we are able to immediately remove our web seal from
the site of any merchant which we determine is not making prompt delivery of
goods that are ordered or is not complying with its stated return policy.
We charge the merchant for our services based on the number of orders placed
through the merchant's site. The amount of the charge will depend upon a variety
of factors including - the value of the item,
- - the merchant's retail sector,
- - the typical return rate for that item,
- - the number of years the merchant has been in business, and
- - whether the merchant has a physical location.
Generally we charge from $.25 to $1.00 per transaction.
We created this service because we saw that, with the rapid growth of the
Internet retail landscape, there were mounting consumer concerns and a lack of
systems or services to provide the consumer with a safety net or comfort zone
when dealing with e-retailers.
We set a higher standard of confidence and trust between consumers and merchants
for an improved online shopping experience. Our Return Assured Seal of Approval
appears on the websites of certified, participating merchants, which represents
a guarantee to the consumer that the merchant's return policy will be honored.
This innovation injects a comfort level for consumers that want to buy online
safely and provide a level playing field for large and small merchants alike -
many of which have no arrangements for merchandise returns or refunds. The
result provides consumers with a virtual risk-free environment to shop online
safely.
RESEARCH AND DEVELOPMENT
We believe that some of our future success will depend in part on our ability to
continue to maintain and enhance our current technologies and Internet-based
trust services. Although we will continue to work closely with developers and
major customers in our development efforts, we expect that most of our future
enhancements to existing services and new Internet-based services will be
developed internally.
OUR OTHER OPERATIONS
We operated additional lines of business but have recently disposed of certain
of the Hertz businesses including Hergo Ergonomic Support Systems, Inc., which
was the subsidiary that manufactured and sold a line of functional, ergonomic,
modular products instrumental in achieving efficient workplace environments. We
also disposed of RemoteIT.Com Inc., which offered Internet and communication
22
services. We are disposed of Hertz Computer Corporation, the subsidiary that
configured and sold customized personal computers and peripherals.
SUBSIDIARY
Edutec is a Return Assured subsidiary which had training facilities equipped
with personal computer workstations and related audio-visual technology and
whose business it was to provide customers with access to such training
facilities. Because Edutec continued to sustain losses during fiscal 2001, the
Company discontinued Edutec's operations. Nevertheless, Edutec still exists as a
New York corporation and the Company has not disposed of Edutec's issued and
outstanding shares of common stock as of the date of this report.
OUR COMPETITION
We operate in a business that is subject to competitive pressures. We have a few
competitors, ranging from better business consumer dispute resolution services
to a number of relatively small, reverse logistics providers. In addition, a few
major e-commerce sites have their own systems for returns but they are very
limited in scope or flexibility for the consumer. There are also a small number
of escrow service companies offering limited merchandise satisfaction programs,
but their charges are widely varied, ranging from 1% to 6% of the goods
involved, and where the transaction value is high, the costs of such escrow
programs are quite expensive.
We believe that the combination of product, price, branding, alliances,
performance, quality, and reliability, are important competitive factors that
set us apart. However, intense competitive pressures could affect demand for our
web seal products and services, resulting in reduced profit margins and/or loss
of market opportunity.
There are a number of other companies addressing different segments of the
reverse logistics and trust business. We believe that none of these companies
have successfully married the seamless return of goods with the money back
guarantee that we provide. Some of the competing companies are:
- - Return.com which offers a reverse logistics program, limited to the physical
process of returning goods to retailers. Return.com does not, however, provide
any guarantees that the merchant's return and refund policies will be honored.
In addition, Return.com does not provide refunds to consumers.
- - ePubliceye.com which is a monitoring system that provides consumers with
limited information on e-businesses, reliability, privacy, and customer
satisfaction. ePubliceye.com is an information site relying on subjective
customer feedback which provides no return program.
- - WebAssured.com which evaluates the reliability of online sellers by alerting
shoppers of sites with poor reputations and thereby acts as an arbitrator.
Customers must, however, use their browser plug in and rely only on customer
feedback to generate reliability of merchants. They only offer a maximum refund
of $200.00.
- - ReturnExchange.com which only handles the physical process of returning goods
to merchants and exchanges and provides no refunds to consumers.
- - ClickSure.com, a UK-based online retailer verification program, which
certifies merchants for standards of privacy, security, reliability and content.
Their verification process is lengthy and rigorous, and costly for the merchant
- - about $1,500. They do not offer refunds or guarantees to consumers.
23
- - Yahoo has a Buyer Protection Program for items purchased on its auction site
which close at prices above $25 and below $10,000. However, this protection is
limited and the claims process is time consuming. In addition, refunds are not
automatically issued. First, the claim goes through customer support and
arbitration and only if the matter is not resolved does it go through their
claims department. A claim may only be submitted to Yahoo after the purchaser
has contacted the seller and a period of 25 days has passed and the matter has
not been resolved. At that point, the purchaser may file a complaint with
Yahoo!'s complaint system. After submitting a complaint, customers then access
information on it through Yahoo's website. The claims department takes 45 days
from when they receive the claim to when they profess judgment on the case. It
could take up to a few months to get judgment on a case that only covers a
limited amount of the total money spent by the consumer.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BACKGROUND
Return Assured Incorporated was originally founded in the name Hertz Technology
Group in the state of Delaware on June 18, 1996. During fiscal year 2000, Return
Assured completed the business combination of the Return Assured business and
the Hertz Technology Group business. On October 13, 2000 Asure Acquisition
Corp., a wholly-owned subsidiary of Hertz Technology Group, Inc., a Delaware
Corporation, was merged with and into Return Assured Incorporated, a Nevada
Corporation. At the same time Hertz Technology Group changed its name to Return
Assured Incorporated.
Following the merger, Return Assured discovered that the synergies it
anticipated between Hertz and Return Assured did not materialize and therefore
Return Assured decided to dispose of Hergo Ergonomic Support Systems, Inc.,
RemoteIT.com, Inc. and Hertz Computer Corporation (collectively the Hertz
Businesses).
The Company now operates in the financial services area consisting primarily of
Return Assured's Web Seal of Approval and related services. While Edutec is
still a subsidiary of Return Assured, Edutec ceased active operations in the
prior fiscal year with the termination of the Varick Street lease.
RESULTS OF OPERATIONS
THREE MONTHS ENDING NOVEMBER 30, 2001 AND 2000
Due to the Company's divestiture of Hergo Technology Inc., RemoteIT.com and
Hertz Computer Corporation (collectively the Hertz Businesses), the Company's
financial results for the quarter ended November 30, 2001 do not include the
financial results of the Hertz businesses for the entire quarter. As Return
Assured owned the Hertz Businesses for the first month of the quarter, financial
results for that period are included in the line entitled Loss from Discontinued
Operations.
The timing of the commencement of our Return Assured operations has coincided
with a significant downturn in the entire Internet sector and although initial
signups with a number of merchants were encouraging, follow-through revenue has
been very disappointing. In addition, the initial rush of inquiries and signups,
announced in early January 2001, have not resulted in significant revenues. As a
result, the Company has reduced operations in the financial services area, and
is looking towards a redefinition of the Return Assured Seal of Approval and its
areas of operations.
In addition, the Company has commenced the search for acquisition and merger
candidates which will allow the Company to sustain operations beyond the
resources which it currently has. Management recognizes that raising additional
funds for a retail-based Internet business will be particularly difficult
24
given the depressed state of the technology capital markets.
The Company entered into a letter of intent to merge with Internet Business
International Inc (IBUI) in May 2001 and executed a definitive merger agreement
in June 2001. On January 14, 2002, however, IBUI and Return Assured mutually
decided to terminate the merger agreement and ceased all activity in process
related to the merger.
Our Return Assured operations have not generated any significant revenues since
inception in June 1999 through November 30, 2001. Our Return Assured operations
have consisted of:
- - determining the feasibility and potential market acceptance of our web seal
service;
- - developing the infrastructure to deliver and monitor our web seal service;
- - pursuing our marketing strategy by forming strategic relationships with web
portals;
- - raising capital to finance our business plan; and
- - assembling our management team.
As noted above, we have scaled back the Return Assured operations and are in the
process of redefining our markets and products in response in order to generate
higher revenues. This redefinition continues and currently we continue to test
market the Seal of Approval.
The Company will also be meeting with our insurance underwriter to discuss our
ongoing relationship and to ensure that our product development efforts can be
reconciled with the needs of our insurer.
The Company has received a database of names pursuant to the FreeLotto Agreement
and is reviewing options for the use of that database.
Return Assured is experiencing significant negative effects from the overall Dot
Com meltdown. Sales have been affected as the Edutec classroom was closed when
the company gave up its lease on the Varick Street space.
The launch of the Seal of Approval has been disappointing and staff in the
Financial services division has been reduced in an effort to control costs.
Management is rethinking the seal program with a view to re-launching a modified
product in an attempt to increase market acceptance of the product. This has
been precipitated by the general decline and rethinking of internet retailing as
well as a misjudging of the potential for the seal. Initial probes of the
potential of a seal of approval product for credit card industry have been
encouraging but remain largely in the discussion phase at this time.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended November 30, 2001, we had net cash used in operating
activities of $27,898 as compared to $789,798 for the three months ended
November 30, 2000. The change in the operating activities is due to the fact
that the Company has cut back on its businesses. We were unable to generate cash
flows from operating activities. In the previous fiscal year, we issued
preferred stock in the amount of $5,000,000 to fund the shortfall in working
capital.
Cash provided by investment activities for the three months ended November 30,
2001 was nil as compared to $232,840 in net cash provided by investing
activities for the three months ended November
25
30, 2000. In the prior year the primary source of this was the cash received
upon the acquisition of the Hertz Technology Group.
Cash provided by financing activities for the quarter ended November 30, 2001
totaled nil as compared to $4,512,344 in cash provided by financing activities
for the quarter ended November 30, 2000. The Company completed a financing of
its preferred stock at the same time as the merger (the Preferred Shares),
issuing 5,000 of the Preferred Shares for $5,000,000 and granting a warrant to
purchase up to $1,000,000 of additional shares of the Company's common stock.
The Company issued a note payable to Eli Hertz who was the Chief Executive
Officer of Hertz Technology Group at the time of the merger in the amount of
$290,000.
At the end of the quarter ended November 30, 2001, the Company had cash in the
amount of $2,974,052 as compared to $3,001,950 at the beginning of the quarter,
a decrease of $27,898.
The Company believes that its current cash will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at least
the next twelve months. If cash generated from operations is insufficient to
satisfy liquidity requirements, the Company may seek to sell additional equity
or debt securities or to obtain a credit facility. The sale of additional equity
or convertible debt securities could result in additional dilution to Return
Assured's stockholders. If the Company issues debt securities, fixed obligations
will increase and the Company may have to comply with covenants that might
inhibit its operations. Moreover, such financing may not be available in amounts
or on terms acceptable to the Company, if at all.
As of November 30, 2001, the Company had $2,974,052 in cash and $1,697,076 in
working capital.
A significant portion of our working capital was to have been used to launch our
web seal operations. The cash flow from operations has not been sufficient to
meet our operating expenses. However, the Company has cut staff and operating
expenses and scaled back operations in order to preserve cash. The cash position
will be used in our ongoing effort to redefine the Company's business model and
to launch new products when feasible.
YEARS ENDING AUGUST 31, 2001 AND 2000
For the twelve months ended August 31, 2001, we had net cash used in
operating activities of ($1,847,660). Large non-cash items including shares,
options and warrants issued in exchange for services rendered, impairment of
goodwill and the loss on the disposal of the discontinued Hertz businesses
amounted to more than $5,700,000. We were therefore unable to generate cash
flows from operating activities. During the year ended August 31, 2001, we
issued preferred stock in the amount of $5,000,000 to fund the shortfall in
working capital.
Cash used in investing activities for the twelve months ended August
31, 2001 was $242,503. The primary source of this was the cash received upon the
acquisition of the Hertz Technology Group. Hertz had cash in the amount of
$249,492 upon the consummation of the merger which was transferred to Return
Assured.
Cash provided by financing activities for the year ended August 31,
2001 totaled $4,475,000. The Company completed a financing of its preferred
stock at the same time as the merger (the "Preferred Shares"), issuing 5,000 of
the Preferred Shares for $5,000,000 and granting a warrant to purchase up to
$1,000,000 of additional shares of the Company's common stock. The Company
issued a note payable to Eli Hertz who was the Chief Executive Officer of Hertz
Technology Group at the time of the merger in the amount of $290,000. As the
Company defaulted on this note and a settlement regarding the payment of the
note was reached in the fourth quarter of fiscal 2001, $90,000 of the note which
was paid during
26
fiscal 2001 was accounted for as a use of the Company's cash during fiscal 2001.
An additional $200,000 represents a note for bridge financing that the Company
paid off during fiscal 2001. In addition, the Company purchased stock from Eli
Hertz at the time of the merger with Hertz Technology Group in the amount of
$435,000, which was a use of the Company's cash in its investing activities.
At the end of fiscal 2001, the Company had cash in the amount of
$3,001,950 as compared to $132,107 at the beginning of the fiscal year.
The Company anticipates that its capital expenditures will increase
significantly in the future as it intends to make technological improvements to
its system and technical infrastructure. The Company anticipates spending in
excess of $250,000 to develop automated business processes and tools to carry
out its business plan and streamline systems that have already been developed.
Additionally, we will continue to evaluate possible investments in complementary
businesses, products and technologies, and plan to conduct aggressive brand
promotions.
RESULTS OF OPERATIONS - 2000 versus 1999
REVENUES
Hertz's sales for the year ended August 31, 2000, were $6.32 million, compared
to $6.88 million for the year ended August 31, 1999, an 8% decrease. Sales from
RemoteIT, Hertz Computer and Edutec operations were $1,236,000 for the year
ended August 31, 2000, compared to $1,576,000 for the year ended August 31,
1999, a decrease of $340,000 or 22%. RemoteIT provides networking and
communications products and services, Internet connectivity, and other
value-added services. The personal computer hardware market has become
increasingly competitive and over-saturated. Although we shifted our emphasis
from hardware manufacturing to networking and communication services during the
year ended August 31, 2000, the continued drop in hardware sales was not offset
by a significant increase in sales of networking and communications products.
The slow generation of sales in the communications area is primarily due to the
highly competitive nature of DSL communication services and the high cost of
capturing the market. The marketing needed to generate DSL sales is in radio and
other media advertising. The cost to launch such programs is high, with no real
assurance of continued customer support, since new industry programs are
continuously appearing with highly competitive rates.
For the year ended August 31, 2000, Hergo sales were $5,083,000 compared to
sales of $5,305,000 for the year ended August 31, 1999, a decrease of $222,000,
or 4%. Although Hergo sales for the first nine months had been at similar levels
as the same period last year, Hergo experienced a substantially slower fourth
quarter. In large part, the decrease arises from the merging of Hergo's Woodside
shipping division into the Long Island City manufacturing division. As a result
of this move, which occurred at the end of August 2000, resources were directed
to a large scale effort to expedite the move.
GROSS PROFIT
Our gross profit was $2,471,000, 39% of net sales, for the year ended August 31,
2000 as compared with $3,339,000, 49% of net sales, for the year ended August
31, 1999, a decrease of $868,000, or 26% decrease in gross profit.
Gross profit generated from Hergo for the year ended August 31, 2000 was
$2,325,000, 46% of net sales, compared to $2,991,000, 56% of net sales, for the
year ended August 31, 1999.
Several factors contributed to the lower gross profit margin for the current
year. Among them, major contributors were higher labor and utilities costs, as
well as increased costs of depreciation and amortization. During the year
substantial maintenance contracts were established to cover the highly
27
computerized technical equipment purchased in the past year. The costs of the
contracts and the depreciation on the same machines were substantial. The
additional machinery, however, is expected to increase efficiency and in the
long run should help in reducing labor costs associated with the production.
During the year ended August 31, 2000, we reduced the carrying value of some of
our inventory due to obsolescence and design changes. The amount of the write
down of the inventory was in excess of $100,000.
Gross profit generated from our RemoteIT, Hertz Computer and Edutec operations
for the year ended August 31, 2000 was $146,000, 12% of sales, compared to
$348,000, 22% of sales, for the same period last year.
In the current year, these operations included a full year of costs and sales
for RemoteIT. We purchased RemoteIT in February 1999. Many of the costs of
RemoteIT are fixed and those costs, combined with the low volume of sales of
products and services, resulted in the lower gross profit margin. This effect
was further aggravated by expenses incurred in connection with the DSL product
and co-location program.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased for the year ended August
31, 2000 from the comparable year ended August 31, 1999 by $147,000, or 4%. We
decided to terminate our lease at 75 Varick Street.
We believed that with the decreased need for space, due to the reduction in PC
manufacturing and the consolidation of the Hergo warehouse and offices into the
Long Island City building, we could occupy less space and save over $200,000
each year in rent. Additionally, we were able to negotiate the surrender of the
lease so that some relocation expenses were covered. In the fourth quarter of
the year ended August 31, 2000, we changed its estimate of the useful life of
some of its leasehold improvements and incurred additional amortization of
leasehold improvements of approximately $82,000. During the year ended August
31, 2000, we installed new computer software in order to comply with Y2K
considerations and to supply additional functionality. The cost for the
software, training and modifications totaled approximately $78,000 and is
included in selling, general and administrative expenses. During that year, we
also utilized a marketing test program to promote DSL services. The marketing
test program included radio, print and Internet advertising and telemarketing
expenses and cost approximately $72,000.
IMPAIRMENT LOSS ON ASSETS
With the termination of the lease at Varick Street, the Edutec division was
discontinued. Goodwill outstanding for Edutec was therefore impaired and was
written off at the end of the year ended August 31, 2000. The equipment for the
classrooms was also written down to its realizable value. The total written down
for Edutec was $105,000. In addition, Hertz Computer experienced a significant
reduction in production of personal computers. All of its associated equipment
and intangible costs totaling $177,000 was written down.
Due to the merging of the Hergo warehouse facility into the Hergo production
facility, excess and obsolete production machinery was disposed, totaling
$51,000.
Web development costs totaling $ 272,000 that were formally capitalized were
written off due to impaired value. We changed our focus of web technology
products due to the merger and the business nature of our Return Assured
operations. The website and other web enabled functions were substantially
modified and we did not use the website that we had developed in the same
manner.
OTHER INCOME (EXPENSE)
28
Other income for the year ended August 31, 2000 was $44,000 compared to other
expense of $7,000 for the year ended August 31, 1999.
Net interest income for the year ended August 31, 2000 decreased by $48,000 as
compared to the comparable year ended August 31, 1999. The decrease in interest
income for the current year was primarily due to the reduction of marketable
securities balances.
PROVISION FOR INCOME TAXES
We recorded a provision for taxes of $136,000 for the year ended August 31, 2000
as compared to $110,000 provision for the year ended August 31, 1999. The
provision for both years arises from an increase in the valuation allowance
against the deferred tax asset. The valuation allowance increased in each year
due to our estimate of the likelihood that some portion or all of the deferred
tax asset would not be realized.
NET INCOME AND EARNINGS PER SHARE
Net loss for the year ended August 31, 2000 resulted in a loss of approximately
$2,338,000 or $1.07 per share compared to a loss of $695,000 or $.33 per share
for the year ended August 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
For the twelve months ended August 31, 2000, we had cash provided by operations
of $608,000. Large non-cash items of depreciation, amortization, loss on
disposal of assets and amortization of goodwill amounted to over $1,263,000.
Because of this, despite the fact that our loss was $2,338,000, we still
experienced cash flows arising from operating activities. During the year ended
August 31, 2000, we sold marketable securities in the amount of $935,000 to fund
the shortfall in working capital.
Cash used in investment activities for the twelve months ended August 31, 2000
was $409,000. The primary use was the purchase of manufacturing equipment for
the Hergo product line. Additionally, we capitalized expenses incurred in
creation of a web site of $100,000. This amount was written off at August 31,
2000.
Cash used in financing activities for the year ended August 31, 2000 totaled
$84,000. During the year, we sold 100,000 shares of common stock for a total of
$175,000 and received $20,119 from the exercise of stock options. This offset
the payment of $279,000 in notes and capital leases payable, which includes the
last of three payments made for the purchase of Lan Metal Products, a division
of our Hergo subsidiary.
To date, we have primarily financed our operations through the sale of our
equity securities:
- - In May 2000, raised $175,000 from the sale of 100,000 shares of common stock.
- - In June 2000, Return Assured prior to the merger raised $800,000 from the sale
of 560,000 shares of common stock and $200,000 from the sale of convertible
notes.
- - In October 2000, we raised $5,000,000 from the sale of our Series A
convertible preferred stock.
After giving effect to the merger, the sale of our Series A preferred stock and
the redemption of Eli Hertz' common stock, we had, as of August 31, 2000, on a
pro forma basis, approximately:
- - $4.8 million in cash and cash equivalents; and
- - $5.9 million in working capital.
DESCRIPTION OF PROPERTY
29
We previously rented approximately 2,000 square feet of office space at
885 West Georgia Street Vancouver, B.C., Canada. We vacated this space on or
about April 30, 2001 although the lease that the Company executed with the
lessor was to run through May 2003 at an annual rate of Cdn$57,707. The lessor
commenced legal proceedings against the Company on September 19, 2001 (see Legal
Proceedings) and terminated the lease on October 15, 2001.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Return Assured recently disposed of Hergo, Remote I-T, and Hertz
Computers (collectively the "Hertz Businesses") because the Hertz businesses are
not core businesses of Return Assured. For example, Hergo's primary business is
the manufacture and distribution of office furniture. Following the merger of
Return Assured with Hertz, Return Assured discovered that Hergo's business was
not synergistic with Return Assured's, and after extensive due diligence,
decided to dispose of that business as well as the other Hertz Businesses. In
addition, at the time of the merger of Return Assured and the Hertz Technology
Group, Return Assured entered into a note agreement with Eli Hertz, founder of
the Hertz Technology Group, in the principal amount of $290,000. In order to
fully divest of the Hertz Businesses, however, Return Assured entered into an
agreement with Eli Hertz regarding the balance remaining on the note wherein
Return Assured would pay the remaining balance of the note in full by October 8,
2001; provided, however, that the failure of Return Assured to pay the note in
full would result in 100% of the issued and outstanding stock of Hergo being
returned to Eli Hertz. Return Assured failed to pay the remaining balance on the
note by the due date and returned the shares of Hergo to Eli Hertz pursuant to
the agreement.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock and warrants were traded on the Nasdaq SmallCap Market
under the symbols "HERZ" and "HERZW", respectively, from November, 1996 through
August 3, 2001. Since October 19, 2000, our common stock symbol has been "RTRN"
and our warrant symbol has been "RTRNW". On August 3, 2001, the Company's common
stock was delisted from the Nasdaq SmallCap Market and began to be traded on the
NASD Over-the Counter Bulletin Board ("OTCBB"). The following table sets forth,
for the fiscal quarters indicated, the high and low bid prices per share of our
common stock and warrants as reported on the Nasdaq SmallCap Market and the high
and low bid prices per share as reported on the OTCBB. The quotations reflect
inter dealer prices, without retail mark-up, mark-down or commissions and may
not represent actual transactions.
RTRN RTRNW
------------------ -------------------
High Low High Low
-------- ------ --------- -------
First Quarter 2002 .03 .017 0.001 0.001
Year Ending August 31, 2001
First Quarter 2.8125 0.875 0.75 0.34375
Second Quarter 1.00 0.21875 0.40625 0.09375
Third Quarter 1.0 0.125 0.1875 0.03125
June 1 - August 2 (1) 0.375 0.078125 0.11 0.0625
August 3 - August 31 (2) 0.5 0.032 0.001 0.001
30
Year Ending August 31, 2000
First Quarter 4.25 1.88 1.22 0.69
Second Quarter 2.02 0.75 1.81 0.50
Third Quarter 6.68 2.13 1.63 0.41
Fourth Quarter 4.75 2.44 0.81 0.44
(1) On August 2, 2001, the Company's common stock and warrant ceased
trading on the Nasdaq Smallcap Market.
(2) On August 2, 2001, the Company's common stock and warrant started
trading on the NASD Over-the-Counter Bulletin Board ("OTCBB").
On February 7, 2002, the closing bid price of our common stock was
$.015 per share.
As of February 7, 2002, there were 97 holders of record of the common
stock of Return Assured.
EXECUTIVE COMPENSATION
The following table shows compensation paid during the fiscal years
ended August 31, 2001, 2000 and 1999 by our President and our executive officers
who made $100,000 or more last year. Mr. Hertz was our President and Chief
Executive Officer during the year ended August 31, 2000 through October 13,
2000. Since that time Mr. Hertz has been the Chief Executive Officer of Hergo
Ergonomic Support Systems Inc. As the Company disposed of Hergo on October 8,
2001, Mr. Hertz is not shown in the table of executive officers and directors.
Barry Goldsammler was the Chief Financial Officer of Return Assured until
October 13, 2000. Since that time, Mr. Goldsammler has been the Chief Financial
Officer of Hergo. As Return Assured disposed of Hergo on October 8, 2001, Mr.
Goldsammler is no longer employed by Return Assured and is therefore not
included in the table of executive officers and directors. Mr. Sebal has been
President and Chairman of Return Assured since October 13, 2000.
Long Term Compensation
--------------------------------------------------------------
Annual Compensation Awards Payouts
--------------------- ------------------------ ------------------------------------
Other Restricted Securities All
Annual Stock Underlying LTIP Other
Compensation Awards Options/SARs Payouts Compensation
Name & Principal Position Year Salary ($) Bonus ($) ($) ($) (#) ($) ($)
- ------------------------- ------ ---------- --------- ------------- --------- ------------ -------- ------------
Matthew Sebal 2001 45,000 0 0 0 400,000 0 0
President & CEO 2000 62,000 0 0 0 429,000(1) 0 0
1999 0 0 0 0 0 0 0
- ----------
(1) Represents assumed market value of 300,000 shares at date of grant.
COMPENSATION ARRANGEMENTS
EMPLOYMENT AGREEMENT WITH MATTHEW SEBAL, PRESIDENT AND CHAIRMAN OF RETURN
ASSURED
Return Assured has an employment agreement (the "Agreement") with
Matthew Sebal dated as of the 8th of February 2001. Under the Agreement, Return
Assured agreed to employ Mr. Sebal as President and Chief Executive Officer of
Return Assured at an initial base salary of $15,000 per month
31
plus an option to purchase up to 400,000 shares of the Company's common stock at
an exercise price of $.63 per share. Mr. Sebal is also entitled to participate
in employee benefit plans maintained by Return Assured for its executives, and
other fringe benefits including retirement plan participation and an automobile
allowance of $500 per month. The agreement has a term of three years. It may be
terminated with or without cause provided that the Company gives written notice
of such termination to Mr. Sebal. The Company may also terminate the agreement
because of Mr. Sebal's total and permanent disability. Mr. Sebal may terminate
the agreement for "good reason" which is defined, among other things, as a
default by the Company in the "payment of any material sum or or the provision
of any material benefit" due Mr. Sebal under the agreement. Mr. Sebal may also
terminate the agreement without "good reason" provided Mr. Sebal gives prior
written notice to the Company. Mr. Sebal has deferred a portion of the salary
due him under this agreement.
STOCK OPTION PLAN
Our stock option plan provides for the grant of options intended to
qualify as "incentive stock options" or options that are not intended to so
qualify or "nonstatutory stock options". The total number of shares of common
stock reserved for issuance under the plan is 2,250,000, subject to adjustment
in the event of a stock split, stock dividend, recapitalization or similar
capital change. As of December 11, 2001, we have granted 400,000 options under
the plan which are still exercisable, of which none have been exercised.
The plan is presently administered by our board of directors, which
selects the eligible persons to whom options shall be granted, determines the
number of common shares subject to each option, the exercise price therefor and
the periods during which options are exercisable, interprets the provisions of
the plan and, subject to certain limitations, may amend the plan. Each option
granted under the plan shall be evidenced by a written agreement between us and
the optionee.
Options may be granted to our employees (including officers) and
directors and certain or our consultants and advisors.
The exercise price for incentive stock options granted under the plan
may not be less than the fair market value of the common stock on the date the
option is granted, except for options granted to 10% stockholders which must
have an exercise price of not less than 110% of the fair market value of the
common stock on the date the option is granted. The exercise price for
nonstatutory stock options is determined by the board of directors. Incentive
stock options granted under the plan have a maximum term of ten years, except
for 10% stockholders who are subject to a maximum term of five years. The term
of nonstatutory stock options is determined by the board of directors. Options
granted under the plan are not transferable, except by will and the laws of
descent and distribution.
LIMITATION ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation eliminates the personal liability of
directors to us and our stockholders for monetary damages for breach of
fiduciary duty as a director to the fullest extent permitted by Section 102 of
the Delaware General Corporation Law. However, this provision shall not
eliminate or limit the liability of a director:
o for any breach of the director's duty of loyalty to us or our
stockholders,
o for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
o arising under Section 174 of the Delaware General Corporation Law
(with respect to unlawful dividend payments and unlawful stock
purchases or redemptions), or
32
o for any transaction from which the director derived an improper
personal benefit.
Additionally, included in our certificate of incorporation and bylaws
are provisions to indemnify our directors, officers, employees and agents and to
purchase insurance with respect to liability arising out of the performance of
their duties as directors, officers, employees and agents as permitted by
Section 145 of the Delaware General Corporation Law. The Delaware General
Corporation Law provides further that indemnification shall not be deemed
exclusive of any other rights to which the directors, officers, employees and
agents may be entitled under a company's bylaws, any agreement, vote of
stockholders or otherwise.
The effect of the foregoing is to require us, to the extent permitted
by law, to indemnify our officers, directors, employees and agents for any claim
arising against such persons in their official capacities if such person acted
in good faith and in a manner that he reasonably believed to be in or not
opposed to our best interests, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Currently the Company does not have directors' and officers' liability
insurance, but intends to obtain such coverage during fiscal 2002.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options
granted to each of the executives named in the Summary Compensation Table for
the fiscal year ending August 31, 2001:
Percentage of Total of
Number of Shares Options Granted to Exercise
Underlying Options Employees During Price Per Expiration
Name Granted Fiscal Year Share Date
- -------------------------- ------------------ ---------------------- ---------- ----------
Matthew Sebal 400,000 87% $.63 12/5/08
Michael Sweatman (1) 60,000 13% $.63 10/7/08
- ----------
(1) Former Vice President of Finance.
OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Outstanding stock options and the last sale price of our common stock
as of August 31, 2001 - $ .05 per share - as reported by the OTCBB.
Shares
Acquired Number of Shares Underlying Value of Unexercised
on Value Unexercised Options In-the-Money Options
Name Exercise Realized at Fiscal Year End at Fiscal Year End
- --------------------- --------- --------- ---------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- -------------- ----------- -------------
Matthew Sebal 0 0 0 400,000 0 0
Barry Goldsammler 0 0 81,111 75,556 0 0
Eli Hertz 0 0 1,100,000 0 0 0
33
DIRECTORS' COMPENSATION AND COMMITTEES
We have not paid and do not presently propose to pay compensation to
any director for acting in such capacity, except for the grant of shares of
common stock or options and reimbursement for reasonable out-of-pocket expenses
in attending meetings.
We have one formal committee:
o the Audit Committee, which consists of Matthew Sebal and Todd Cusolle.
The functions of the Audit Committee include:
o monitoring our financial reporting process and internal control
systems;
o reviewing and appraising the audit efforts of our independent
accountants and internal auditing functions;
o reviewing compliance with laws and regulations under which we are
required to operate, including compliance with the Nasdaq
corporate governance standards; and
o providing an open avenue of communication among our independent
accountants, financial and senior management, internal auditing
department and Board of Directors.
The Board of Directors does not have a standing nominating committee.
Nominations for election to the Board of Directors may be made by the Board of
Directors or by any shareholder entitled to vote for the election of directors
in accordance with our bylaws and Delaware Law.
Meetings may be held from time to time to consider matters for which
approval of our Board of Directors is desirable or is required by law. Our Board
of Directors met three times during fiscal year 2001 and voted unanimously in
favor of the merger between the Company and IBUI by written consent. Our Audit
Committee met eleven times during fiscal 2001.
EXECUTIVES' COMPENSATION POLICIES
Compensation of our executives is intended to attract, retain and award
persons who are essential to the corporate enterprise. The fundamental policy of
our executive compensation program is to offer competitive compensation to
executives that appropriately rewards the individual executive's contribution to
corporate performance. The Board of Directors utilizes subjective criteria for
evaluation of individual performance and relies substantially on our executives
in doing so. The Board focuses on two primary components of our executives
compensation program, each of which is intended to reflect individual and
corporate performance: base salary and long-term incentive compensation.
Executives' base salaries are determined primarily by reference to
compensation packages for similarly situated executives of companies of similar
size or in comparable lines of business with whom we expect to compete for
executive talent and with reference to revenues, gross profits and other
financial criteria. The Board also assesses subjective qualitative factors to
discern a particular executive's relative value to the corporate enterprise in
establishing base salaries.
It is the Board's philosophy that significant stock ownership by
management creates a powerful incentive for executives to build long-term
shareholder value. Accordingly, the Board believes that an integral component of
executive compensation is the award of equity-based compensation, which is
intended to align executives' long-term interests with those of our
shareholders. Awards of stock options
34
to executives have historically been at then-current market prices. The Board
believes that option grants should be considered on an annual basis.
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets F-3
Statement of Operations F-4
Statement of Shareholders' Equity (deficiency) and Comprehensive
Loss F-5
Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-17
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Return Assured Incorporated
We have audited the accompanying consolidated balance sheet of Return Assured
Incorporated and Subsidiaries as of August 31, 2001, and the related
consolidated statements of operations, shareholders' equity (deficiency) and
comprehensive loss, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Return Assured
Incorporated and Subsidiaries as of August 31, 2001 and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses from operations and has
obligations that could exceed the Company's working capital that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that may result from this uncertainty.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
November 30, 2001
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
TO THE BOARD OF DIRECTORS
OF RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
We have audited the accompanying balance sheet of Return Assured Incorporated
(formerly A Sure eCommerce, Inc.) (A Development Stage Company) as at August 31,
2000 and the related statement of operations, stockholders' equity (deficiency)
and cash flows for the year ended August 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance whether these financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in these financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at August 31, 2000 and the
results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in note 3 to the financial
statements reported upon, the Company has no established source of revenue. This
raises substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
"Pannell Kerr Forster"
Chartered Accountants
Vancouver, Canada
September 27, 2000, except for note 14(a) and (b)
which is as of October 17, 2000
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================================================================
AUGUST 31, 2001
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 972
Cash in escrow 3,000,978
Accounts receivable 2,158
Prepaid expenses and other current assets 59,359
Current assets of discontinued operations 1,511,083
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,574,550
Noncurrent assets of discontinued operations 1,341,159
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 5,915,709
================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,048,564
Note payable 200,000
Accrued loss on disposal of discontinued operations 1,678,128
Current liabilities of discontinued operations 467,658
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,394,350
Noncurrent liabilities of discontinued operations 483,289
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 3,877,639
- --------------------------------------------------------------------------------
Commitments and Contingencies
Redeemable preferred stock, series A, stated value $1,000
authorized 6,000 shares, 5,000 issued, and 3,829
outstanding shares
3,828,873
- --------------------------------------------------------------------------------
Common Shareholders' Deficiency:
Common stock - $.001 par value; authorized 100,000,000
shares, issued and outstanding 16,846,184 shares 16,847
Additional paid-in capital 10,933,382
Accumulated other comprehensive income 503
Accumulated deficit (12,741,535)
- --------------------------------------------------------------------------------
TOTAL COMMON SHAREHOLDERS' DEFICIENCY (1,790,803)
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 5,915,709
================================================================================
See Notes to Consolidated Financial Statement
F-3
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
================================================================================
YEAR ENDED AUGUST 31, 2001 2000
- ------------------------------------------------------------------------------------------------
Revenue $ 40,422
Cost of revenue 38,419
- ------------------------------------------------------------------------------------------------
Margin 2,003
General and administrative expenses
Wages and salaries 1,135,188 $ 1,102,971
Professional fees 709,823 216,533
Development costs 211,911
Financing fees 506,000 207,500
Insurance 350,241
Travel and promotion 97,922 184,498
Consulting fees 536,966 148,646
Rent 97,852 58,494
Office and miscellaneous 392,825 46,641
Internet service and web design 24,594 29,189
Telephone and utilities 41,000 15,259
Bad debts 14,255
Interest and finance charges 621,788 8,592
Depreciation and amortization 197,725 16,817
Loss on disposal of assets 96,551
- ------------------------------------------------------------------------------------------------
Loss from continuing operations (4,806,472) (2,261,306)
Discontinued Operations:
Loss from operations of discontinued segments, including
impairment of goodwill of $2,840,938 (3,197,131)
Loss on disposal of discontinued segments, including provision
of $56,000 for operating losses during the phase-out period (1,678,128)
- ------------------------------------------------------------------------------------------------
(4,875,259)
- ------------------------------------------------------------------------------------------------
Net loss (9,681,732) (2,261,306)
Value of warrants issued in connection with preferred stock (669,350)
Dividends on preferred stock (67,434)
- ------------------------------------------------------------------------------------------------
Net loss attributable to common shareholders $(10,418,516) $ (2,261,306)
================================================================================================
Net loss per share - basic and diluted, continuing operations $ (0.48) $ (1.96)
================================================================================================
Net loss per share - basic and diluted, discontinued operations $ (0.49)
================================================================================================
Net loss per share - basic and diluted $ (0.97) $ (1.96)
================================================================================================
Weighted-average number of shares outstanding 9,949,945 1,155,950
================================================================================================
See Notes to Consolidated Financial Statement
F-4
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================
YEAR ENDED AUGUST 31, 2001 2000
- ------------------------------------------------------------------------------------------------------
Operating activities:
Net loss $(9,681,732) $(2,261,306)
Items not involving cash:
Depreciation and amortization 197,725 16,817
Services rendered in exchange for shares, options and warrants 1,194,650 1,094,976
Noncash interest expense 68,800
Loss on sale of assets 96,551
Compensation charge for excess of fair value given in share repurchase 494,230
Impairment of goodwill 2,840,938
Changes in operating assets and liabilities:
Accounts receivable 35,601 (37,387)
Due to shareholders (16,302)
Prepaid expenses 211,240 (270,014)
Current assets of discontinued operations (62,940)
Noncurrent assets of discontinued operations (106,873)
Accounts payable and accrued liabilities 673,216 331,502
Accrued loss on disposal of discontinued operations 1,678,128
Current liabilities of discontinued operations 327,515
Noncurrent liabilities of discontinued operations 185,291
- ------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,847,660) (1,141,714)
- ------------------------------------------------------------------------------------------------------
Investing activities:
Acquisition of property and equipment (13,339) (112,837)
Cash received on sale of assets 6,350
Cash received in acquisition 249,492
- ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 242,503 (112,837)
- ------------------------------------------------------------------------------------------------------
Financing activities:
Deferred offering costs (123,435)
Issuance of notes payable 200,000
Payment of notes payable (290,000)
Issuance of common stock (cash) 200,000 1,306,883
Repurchase of common stock (435,000)
Issuance of preferred stock 5,000,000
- ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,475,000 1,383,448
- ------------------------------------------------------------------------------------------------------
Effect of foreign currency translation 536
- ------------------------------------------------------------------------------------------------------
Increase in cash 2,869,843 129,433
Cash at beginning of year 132,107 2,674
- ------------------------------------------------------------------------------------------------------
Cash at end of year $ 3,001,950 $ 132,107
======================================================================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issue of common stock for:
Services $ 850,850
======================================================================================================
Financing fees $ 1,265,700
======================================================================================================
See Notes to Consolidated Financial Statement
F-5
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
AND COMPREHENSIVE LOSS
================================================================================
Accumulated
Common Stock Other
--------------------- Additional Comprehensive
Number of Paid-in Accumulated Income
shares Amount capital Deficit (Loss)
----------- -------- ------------ ------------- -------------
Balance at August 31, 1999 90 $ 1 $ (61,713) $ (33)
Common stock:
Private placement 1,445,685 1,446 $ 1,054,864
Shares issued for offering costs
For going public 340,000 340 485,860
For private placement 200,000 200 285,800
For bridge financing 200,000 200 285,800
Value of warrants issued in connection with
bridge financing 68,800
Value of warrants issued in connection with
proposed offering 233,726
Shares issued to founders' and other employees and
consultants and recapitalization 2,095,000 2,095 885,381
Cancellation of original shares (90) (1)
Legal fees incurred in connection with placement
Financing fees 415,000 415 207,085
Exchange gain 536
Net loss (2,261,306)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at August 31, 2000 4,695,685 4,696 3,507,316 (2,323,019) 503
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise warrants for cash 100,000 100 199,900
Issuance of warrants for financing fee 100,000 100 199,900
Common stock issued as consequence of merger 2,353,304 2,353 4,704,255
Classification of stock, warrants and professional fees
as cost of merger
Accrual of dividends on preferred stock (42,434)
Repurchase of common stock (115,385) (115) (230,655)
Common stock issued on conversion of preferred stock 8,312,580 8,313 1,176,066
Value of warrants attached to preferred stock 669,350 (669,350)
Preferred stock issuance costs (25,000)
Common stock issued for services (Plasmanet) 1,400,000 1,400 585,250
Value of options and warrants granted to consultants 122,000
Net loss (9,681,732)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at August 31, 2001 16,846,184 $16,847 $10,933,382 $(12,741,535) $ 503
=================================================================================================================================
Deferred Total Shareholders' Comprehensive
Offering Subscriptions Equity Income
Costs Received (Deficiency) (Loss)
---------- ------------- ------------- -------------
Balance at August 31, 1999 $ 35,426 $ (26,319)
Common stock:
Private placement 1,056,310
Shares issued for offering costs 0
For going public $(486,200) 0
For private placement 286,000
For bridge financing 286,000
Value of warrants issued in connection with
bridge financing 68,800
Value of warrants issued in connection with
proposed offering (233,726) 0
Shares issued to founders' and other employees and
consultants and recapitalization 887,476
Cancellation of original shares (35,426) (35,427)
Legal fees incurred in connection with placement (123,435) (123,435)
Financing fees 207,500
Exchange gain 536 536
Net loss (2,261,306) (2,261,306)
- ----------------------------------------------------------------------------------------------------------------------
Balance at August 31, 2000 (843,361) 0 346,135 $ (2,260,770)
- ---------------------------------------------------------------------------------------------------------=============
Exercise warrants for cash 200,000
Issuance of warrants for financing fee 200,000
Common stock issued as consequence of merger 4,706,608
Classification of stock, warrants and professional fees
as cost of merger 843,361 843,361
Accrual of dividends on preferred stock (42,434)
Repurchase of common stock (230,770)
Common stock issued on conversion of preferred stock 1,184,379
Value of warrants attached to preferred stock 0
Preferred stock issuance costs (25,000)
Common stock issued for services (Plasmanet) 586,650
Value of options and warrants granted to consultants 122,000
Net loss (9,681,732) (9,681,732)
- ----------------------------------------------------------------------------------------------------------------------
Balance at August 31, 2001 $ -- $ -- $ (1,790,803) $ (9,681,732)
======================================================================================================================
See Notes to Consolidated Financial Statement
F-6
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. PRINCIPAL Return Assured Incorporated (Return Assured Nevada) was
BUSINESS incorporated under the laws of the State of Nevada on June
ACTIVITY AND 10, 1999. The Company was deemed to be in the development
SUMMARY OF stage through October 13, 2000.
SIGNIFICANT
ACCOUNTING On October 13, 2000, Return Assured Nevada, through a
POLICIES: reverse triangular merger, became the accounting parent
and the legal subsidiary of Hertz Technology Group, Inc.
("Hertz"). Hertz subsequently changed its name to Return
Assured Incorporated ("Return Assured Delaware"), a
Delaware Corporation. As a result, the former subsidiaries
of Hertz have become wholly owned subsidiaries. The
consolidated financial statements now include the following
companies: Return Assured Delaware, Return Assured Nevada,
Hertz Computer Corporation ("Hertz Computer"), Hergo
Ergonomic Support Systems, Inc. ("Hergo"), RemoteIT.com,
Inc. ("RemoteIT"), and Edutec Computer Education Institute,
Inc. ("Edutec") (collectively "the Company"). The merger
has been accounted for as a purchase with resulting
goodwill of approximately $3,011,000. The consolidated
statements of operations and cash flows include the
activity of Hertz and its former subsidiaries only since
the date of the merger. As further discussed in Notes 10
and 11, subsequent to year end, the Company disposed of
Hergo and RemoteIT. The Company is in the process of
disposing of Hertz Computer. The measurement date for
disposal of these operations is October 8, 2001.
The accompanying consolidated financial statements have
been prepared assuming the Company will continue as a going
concern. As shown in the accompanying consolidated
financial statements, the Company has incurred net losses
of $9,681,732 and $2,261,306 for the years ended August 31,
2001 and 2000, respectively. In addition, the holders of
the Preferred Stock described in Note 9 currently have the
right to redeem their shares for cash. If that were to
happen, the Company would not be able to meet this
obligation. The Company has entered into a letter of intent
to merge with another company (see Note 12) which they
believe will be sufficient for the Company to continue as a
going concern.
The Company operated in four segments, the financial
services segment, the technology group segment, the Hergo
segment, and the Corporate segment. The financial services
segment includes the activity of Return Assured Nevada.
Return Assured Nevada provides assurance to customers
through its "Web Seal of Approval" which guarantees to
customers who order products through the web sites
displaying the seal that the Company will honor its stated
return policies. To date, the Company has not generated
significant revenue from this segment.
The technology group segment was comprised of RemoteIT,
Hertz Computer and Edutec. RemoteIT offered full service
networking solutions and internet and web-related services,
including high-speed communications services. Hertz
Computer custom designed and assembled personal
workstations and networking, communication and web servers.
Edutec offered state-of-the-art computerized training
facilities that can be used for software, sales, education
or management training. As of August 31, 2001, the Company
had ceased operations in Edutec and Hertz Computer and was
winding down the operations of RemoteIT.
F-7
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Hergo manufactured and sold space-saving modular racks and
technical furniture to help organize all types of computer
hardware and communication and electronic equipment. In
addition, Hergo provided custom, contract manufacturing and
fabrication of specialty metal products for use in a
variety of industries.
The Corporate segment is comprised of Return Assured
Delaware, which handles the Company's corporate compliance
and equity transactions.
Substantially all revenue is from the sale of products.
Revenue from the sale of products is recognized at the date
of shipment to customers. Service revenue is recognized
when the services are performed.
Revenue derived through the "Web Seal of Approval" is
recognized when the period for which the Company guarantees
a return (based upon the related web site's return policy)
has elapsed.
All advertising costs are expensed as incurred.
For purposes of the consolidated statement of cash flows,
the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less
to be cash equivalents.
The Company maintains cash in bank accounts which, at
times, may exceed federally insured limits. The Company has
not experienced any loss on these accounts.
Cash in escrow denotes cash being held by an attorney.
These amounts are not considered restricted because these
funds are subject to withdrawal by the Company at the
Company's option.
Inventories are stated at the lower of cost, determined by
the first-in, first-out method, or market.
Depreciation of property and equipment is provided for by
the straight-line method over the estimated useful lives of
the related assets. Leasehold improvements are amortized
over the lesser of their economic useful lives or the term
of the related leases.
Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable.
Goodwill was being amortized using the straight-line method
over fifteen years. As discussed in notes 11 and 12,
subsequent to August 31, 2001 the Company disposed of
substantially all of the companies acquired in the Hertz
merger. Since the Company's goodwill was derived from the
Hertz merger, and the subsequent disposal resulted in a
substantial loss to the Company, the Company has considered
its goodwill to be fully impaired at August 31, 2001 and
has recorded an impairment charge for the entire balance
during the year ended August 31, 2001. This charge is
included in loss from operations of discontinued segments
on the consolidated statement of operations for the year
ended August 31, 2001.
F-8
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The financial position and results of operations of the
Company's foreign subsidiaries are measured using local
currency as the functional currency. Assets and liabilities
of these subsidiaries have been translated at current
exchange rates, and related revenue and expenses have been
translated at average monthly exchange rates. The aggregate
effect of translation adjustments has been deferred and is
reflected as a separate component of stockholder's equity
until there is a sale or liquidation of the underlying
foreign investment.
Net Loss per share is computed in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128,
Earnings per Share. SFAS 128 requires companies to present
basic and diluted earnings per share. Basic earnings per
share excludes the dilutive effect of outstanding stock
options, warrants and convertible securities, whereas
diluted earnings per share includes the effect of such
items. The effect of potential common stock is not included
in diluted earnings per share for the years ended August
31, 2001 and 2000 because the Company has incurred net
losses; therefore, the effect of the dilutive securities is
anti-dilutive in those years.
The preparation of financial statements in conformity with
generally accepted accounting principles requires the use
of estimates by management. Actual results could differ
from those estimates.
The Company elected to measure compensation cost using
Accounting Principles Board ("APB") Opinion No. 25 as is
permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, and has elected to comply with other
provisions and the disclosure-only requirements of SFAS
No. 123.
In June 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 141 "Business Combinations".
SFAS No. 141 is effective for business combinations
initiated June 30, 2001 and purchase business combinations
for which the date of acquisition is July 1, 2001 or
later. The Company is in the process of analyzing SFAS
No. 141 but at this time does not believe that it will
have a material effect on its financial position or
results of operations. Also in June 2001, the FASB issued
SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS
No. 142 is required to be applied for fiscal years
beginning after December 15, 2001. Earlier application is
permitted for certain entities and The Company intends to
adopt SFAS No. 142 as of September 1, 2001. SFAS No. 142
eliminates the amortization of goodwill and certain other
intangible assets. It also requires a test for impairment
at least annually. The Company is in the process of
analyzing SFAS No. 142 but does not believe the adoption
will have a material impact on its financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. SFAS No.
144 is effective for fiscal years beginning after December
15, 2001, and interim periods within those fiscal years,
with early application encouraged.
F-9
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Return Assured is in the process of analyzing SFAS No. 144
but at this time does not believe that SFAS No. 144 will
have a material effect on its financial position or results
of operations upon its adoption.
2. INVENTORIES: Inventories, which is included in current assets of
discontinued operations, consist of:
Finished goods $384,119
Raw materials 31,819
Work-in-process 88,734
-----------------------------------------------------------
$476,506
===========================================================
3. PROPERTY AND Property and equipment, which is included in noncurrent
EQUIPMENT: assets of discontinued operations, at cost, consists of
Depreciation/
Amortization
Period
----------------------------------------------------------------------
Furniture, fixtures and office equipment $76,754 5-7 years
Production equipment 1,948,364 5 years
Leasehold improvements 379,876 Term of lease
Vehicles 57,167 3 years
----------------------------------------------------------------------
2,462,161
Less accumulated depreciation
and amortization 1,204,868
----------------------------------------------------------------------
$1,257,293
======================================================================
Property and equipment includes amounts acquired under
capital leases of approximately $1,040,000 at August 31,
2001. Amortization of these assets is included in
depreciation and amortization expense. Accumulated
amortization of these assets amounted to approximately
$250,000 at August 31, 2001.
4. NOTE PAYABLE The note payable is due to an officer of Hergo. The
original note was for $290,000 plus interest rate of 10%
per annum and was due April 17, 2001. The Company
defaulted on the unpaid portion of this note and based on
a settlement agreement between the officer and the
Company, the interest rate increased to 21% effective
April 17, 2001. Since the Company did not pay the amount
due under the settlement agreement, effective October 8,
2001, the outstanding shares of certain of the former
subsidiaries of Hertz reverted to this officer of Hergo
(see Note 12). Interest expense on this note during the
year ended August 31, 2001 amounted to $21,070.
Due to the short-term nature of the note payable, the fair
value of the note is not materially different from its
carrying value.
F-10
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
5.INCOME TAXES: The provision for income taxes for the years
ended August 31, 2001 and 2000 differs from the amount
computed using the federal statutory rate of 34% as a
result of the following:
Year ended August 31, 2001 2000
-------------------------------------------------------------------------
Tax benefit at federal statutory rate (34)% (34)%
State and local income tax provision net of
federal tax effect (6) (6)
Increase in deferred tax asset valuation allowance 40 40
-------------------------------------------------------------------------
0% 0%
=========================================================================
The tax effects of available tax carryforwards and other
temporary differences that give rise to the deferred income
tax asset are presented below:
August 31, 2001
------------------------------------------------------------
Federal net operating loss carryforwards $ 5,000,000
State and local net operating loss carryforwards 660,000
Reserve for bad debts 17,000
Depreciation 50,000
Basis difference of intangibles 20,000
------------------------------------------------------------
Total long-term deferred income tax asset 5,747,000
Valuation allowance (5,747,000)
------------------------------------------------------------
NET LONG-TERM DEFERRED INCOME TAX ASSET$ - 0 -
============================================================
At August 31, 2001, the Company has a federal net operating
loss carryforward of approximately $16,000,000 available to
offset taxable income through 2021. The Company also has
state operating loss carryforwards aggregating
approximately $9,500,000 which expire through 2016. A
valuation allowance has been established for the deferred
tax assets that are not expected to be realized.
The Company files consolidated federal, state and local
income tax returns.
The net operating loss carryforwards will be subject to
annual limitations as a result of the mergers described in
Notes 1 and 12.
6. COMMITMENTS AND The Company has an employment agreement with a key
CONTINGENCIES: employee expiring in February 2004. The aggregate
approximate minimum commitment for salaries and benefits
are as follows:
F-11
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Year ending August 31,
2002 $186,000
2002 186,000
2004 108,500
-----------------------------------------------------------
$480,000
===========================================================
The Company was named in a lawsuit against Internet
Business International, Inc. (see Note 12) by Michael Rose,
et al, in Orange County Superior Court. The lawsuit alleges
that the Company breached a contract to pay a finder's fee
on the merger transaction. It is the Company's position
that no liability exists, and the Company intends to
vigorously defend the suit. If the Company is unsuccessful
in defending this suit, the Company could incur a loss of
$750,000.
Michael Mulberry, a former vice president of the Company,
has filed a lawsuit against the Company claiming wrongful
dismissal when his employment was terminated in February
2001. The Company intends to vigorously defend the suit,
and could incur a loss of $81,000.
A creditor has filed a small claim in British Columbia,
Canada against the Company's Nevada subsidiary. The Company
has filed a defense in this action and if unsuccessful,
could incur a loss of approximately $12,000.
A legal preceding is pending against the Company and two
former officers, by a former officer of a subsidiary of the
Company. This former officer of the Company's subsidiary is
claiming that he is entitled to receive shares from the
Company for his contributions and efforts in founding
Return Assured's subsidiary. It is the Company's position
that its defense has merit. The two former officers of the
Company have escrowed 780,000 shares of the Company's
common stock they own to secure any successful claim.
Since estimated losses under legal proceedings were not
probable, no accrual is required in accordance with SFAS
No. 5.
7. 401(K) PLAN: Hertz and its former subsidiaries have an employee savings
plan which qualifies under Section 401(k) of the Internal
Revenue Code (the "Code"). Under the plan, all employees
who are at least 21 years of age and have completed 1 year
of service are eligible to defer up to 22% of their
pre-tax compensation subject to the Code's limits. The
Company matches 3% of employee contributions. The Company
contributed approximately $27,000 for the period October
13, 2000 to August 31, 2001.
8. SEGMENT During the year ended August 31, 2001, the Company
INFORMATION: operated primarily in four industry segments: (i)
financial services, (ii) technology group (iii) Hergo and
(iv) Corporate. The accounting policies of the segments and
the products and services provided by the operating
segments are described in Note 1. The tables below present
information about reported segments.
For the year ended August 31, 2001:
F-12
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Financial Technology
Services Hergo Group Corporate Consolidated
------------------------------------------------------------------------------------------------
Revenue (unaffiliated) $ 10,422 $ 30,000 $ 40,422
Net loss from continuing
operations (2,726,397) (298,814) $(1,781,261) (4,806,472)
Net loss from discontinued
operations $ (257,379) (98,814) (3,197,131)
Assets 21,455 2,839,726 56,889 2,997,639 5,915,709
Interest and finance charges 48,152 208 573,428 621,788
Depreciation and amortization 14,782 20,448 162,495 197,725
Additions to property and
equipment of continuing
operations 13,339 13,339
------------------------------------------------------------------------------------------------
The Company did not operate in distinct segments during the
year ended August 31, 2000.
9. CAPITAL The Company completed a financing of Series A Convertible
TRANSACTIONS: Redeemable Preferred Stock (the "Preferred Shares") at
the same time as the merger. The Company issued 5,000 of
the Preferred Shares for $5,000,000 and granted 404,041
warrants to purchase up to $1,000,000 of additional shares
of Return Assured common stock. The Company recorded a
$669,350 charge for the value of the warrants which has
been included in the net loss attributable to common
shareholders in the Consolidated Statement of Operations at
August 31, 2001. The Preferred Shares carry a dividend of
1% and are convertible at the lesser of the average three
lowest per share market value prices for the previous 45
day period preceding the conversion date or $3.00. Per
share market price is defined as the closing bid prices of
the Company's common shares (the "Common Shares").
The Preferred Shares are redeemable based on factors that
are outside the Company's control. As of August 31, 2001,
these factors had been met and as such, the Preferred
Shares can be redeemed at any time for cash at the holder's
option.
As of August 31, 2001, the holder of the Preferred Shares
had converted $1,171,127 of Preferred Shares and $13,252 of
accrued dividends into 8,312,579 common shares.
At August 31, 2001, the Company's outstanding warrants are
summarized as follows:
Number
of Exercise
Expiration Date Shares Price
-------------------------------------------------------------
June 7, 2003 300,000 $ 1.00
June 20, 2003 28,000 1.42
June 27, 2003 300,000 1.00
August 2, 2003 485,000 0.70
July 13, 2003 50,000 1.00
October 13, 2003 737,371 3.00
July 13, 2005 290,000 1.00
July 13, 2005 333,333 3.00
-------------------------------------------------------------
Outstanding at end of year 2,523,704
=============================================================
F-13
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The board of directors adopted a stock incentive plan. The
total number of shares of common stock reserved for
issuance under the Plan is 2,250,000. Options may be
granted to the Company's employees, officers, and directors
and certain of the Company's consultants and advisors
subject to board of director's approval.
The exercise price for incentive stock options granted
under the plan may not be less than the fair market value
of the common stock on the date the option is granted,
except for options granted to 10% stockholders which must
have an exercise price of not less than 110% of the fair
market value of the common stock at the date the option was
granted. Incentive stock options granted under the plan
have a maximum term of ten years, except for 10%
stockholder who are subject to a maximum term of five
years.
A summary of the status of the Company's options as of
August 31, 2001, and changes during the year then ended
is presented below:
Weighted-
Number Average
of Exercise
Shares Price
---------------------------------------------------------------
Outstanding at beginning of year 0 $0.00
Assumed as part of merger 1,570,231 1.48
Granted 868,000 0.63
Canceled 502,000 0.77
Exercised 0 0.00
---------------------------------------------------------------
Outstanding at end of year 1,936,231 $1.30
===============================================================
F-14
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Subsequent to year end, 1,536,231 of the above options were
canceled.
The range of exercise prices at August 31, 2001 was $0.63
to $2.69 and the weighted-average remaining contractual
life is 8.13 years.
The weighted-average fair value of options granted during
the years ended August 31, 2001 was $0.63.
The following table summarized information about the
Company's stock options outstanding and exercisable at
August 31, 2001:
Weighted-
Average Weighted-
Remaining Average
Exercise Options Contractual Options Exercise
Prices Outstanding Life Exercisable Price
--------------------------------------------------------------
$0.63 490,000 9.42 years $0.63
0.85 848,231 7.25 years 565,770 0.85
1.31 84,000 7.46 years 56,028 1.31
2.69 514,000 8.46 years 437,620 2.69
--------------------------------------------------------------
1,936,231 8.13 years 1,059,418 $1.63
==============================================================
The Company has elected to apply APB Opinion No. 25 and
related interpretations in accounting for its stock options
and has adopted the disclosure-only provisions of SFAS No.
123. Had the Company elected to recognize compensation cost
based on the fair value of the options granted at the grant
date as prescribed by SFAS No. 123, the Company's net loss
and loss per share would have been for the year ended
August 31, 2001 as follows:
-------------------------------------------------------------
Net loss as reported $ (9,681,732)
Net loss - pro forma (9,967,752)
Loss per share - as reported (basic and diluted) (0.98)
Loss per share - pro forma (basic and diluted) (1.22)
-------------------------------------------------------------
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for
the years ended August 31, 2001: expected volatility of
223%; risk-free interest rates of 4.83% to 6.52%; expected
lives of 10 years; and no dividend yield.
F-15
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
10. DISCONTINUED Subsequent to year-end, the Company disposed of its Hergo
OPERATIONS: and RemoteIT operations and is in the process of disposing
of its Hertz Computer operations (See Note 12). The results
of the operations and the loss of the disposal have been
reflected as discontinued operations in the accompanying
consolidated financial statements.
Net sales from discontinued operations amounted to
$4,776,548 for the year ended August 31, 2001.
11. PROFORMA The following pro forma information assumes the
INFORMATION acquisition of Hertz had occurred at the beginning of the
periods presented:
<Caption>
August 31, August 31,
Year ended 2001 2000
------------------------------------------------------------------------------
Revenue $ 40,422 $ 94,515
Net loss (9,967,227) (11,346,714)
Loss per share - basic and diluted (0.98) (3.34)
Weighted average number of shares 10,207,459 3,393,869
------------------------------------------------------------------------------
12. SUBSEQUENT Effective October 8, 2001, the Company divested itself of
EVENT Hergo and RemoteIT as part of a settlement agreement with
an officer of Hergo. The Company is also in the process of
disposing of Hertz Computer Corporation. In exchange for
the companies, said officer of Hergo agreed to cancel all
debt that is owed to him by the Company (approximately
$231,000) and agreed to cancel his employment and
consulting agreements with the Company.
The Company has entered into a merger agreement, as
amended, to merge with Internet Business's International,
Inc. ("IBUI") through a reverse triangular merger. The
merger will be structured as a stock-for-stock exchange.
Under this agreement Return Assured would issue 0.077
shares of the Company's common stock, par value $0.001 per
share, for each share of IBUI common stock outstanding as
of the effective date of the merger. The merger would to
be accounted for as an acquisition under the purchase
method of accounting for business combinations with an
estimated purchase price of $1,100,000.
In conjunction with the proposed merger, the Company would
conduct a 1:6 reverse split of its common stock.
F-16
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Independent Auditor's Report F-2
Consolidated Financial Statements:
Balance Sheet F-3
Statement of Operations F-4
Statement of Changes in Shareholders' Equity F-5
Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-17
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Hertz Technology Group, Inc.
We have audited the accompanying consolidated balance sheets of Hertz Technology
Group, Inc. and Subsidiaries as of August 31, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hertz Technology
Group, Inc. and Subsidiaries as of August 31, 2000 and 1999 and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
October 26, 2000
F-2
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================================================================
August 31, 2000 1999
- ---------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 147,404 $ 32,456
Marketable securities 657,359 1,592,158
Accounts receivable, net of allowance for doubtful accounts of
$63,000 and $96,133, respectively 766,079 1,033,726
Inventories 476,506 669,601
Prepaid expenses and other current assets 101,857 282,790
- ---------------------------------------------------------------------------------------------
Total current assets 2,149,205 3,610,731
Property and Equipment, net 1,304,762 1,783,728
Goodwill, net of accumulated amortization of $109,848 and
$86,349, respectively 119,762 244,284
Deferred Income Taxes -- 136,173
Other Assets 76,940 308,075
- ---------------------------------------------------------------------------------------------
Total Assets $ 3,650,669 $ 6,082,991
=============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 291,839 $ 261,688
Accrued expenses and other current liabilities 152,293 237,570
Current portion of capital lease obligation 59,102 46,974
Current portion of notes payable 3,484 126,666
- ---------------------------------------------------------------------------------------------
Total current liabilities 506,718 672,898
Capital Lease Obligation, net of current portion 182,110 194,318
Notes Payable 15,683 126,667
- ---------------------------------------------------------------------------------------------
Total liabilities 704,511 993,883
- ---------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
Shareholders' Equity:
Common stock - $.001 par value; authorized 6,000,000 shares;
issued 2,527,460 and 2,306,950 shares, respectively 2,528 2,307
Additional paid-in capital 6,032,787 5,837,889
Accumulated deficit (2,803,141) (465,072)
Less treasury stock, 177,868 shares, at cost (286,016) (286,016)
- ---------------------------------------------------------------------------------------------
Shareholders' equity 2,946,158 5,089,108
- ---------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 3,650,669 $ 6,082,991
=============================================================================================
See Notes to Consolidated Financial Statements
F-3
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
================================================================================
Year ended August 31, 2000 1999
- ---------------------------------------------------------------------------------------------
Net sales $ 6,319,304 $ 6,881,838
Cost of sales 3,848,414 3,542,941
- ---------------------------------------------------------------------------------------------
Gross profit 2,470,890 3,338,897
Selling, general and administrative expenses (4,148,536) (4,001,717)
Impairment loss on assets (604,800) --
- ---------------------------------------------------------------------------------------------
Operating loss (2,282,446) (662,820)
Other income (expense) 43,540 (7,224)
Interest income, net of interest expense of $40,025 and $27,145,
respectively 37,010 85,173
- ---------------------------------------------------------------------------------------------
Loss before benefit for income taxes (2,201,896) (584,871)
Provision for income taxes 136,173 110,000
- ---------------------------------------------------------------------------------------------
Net loss $(2,338,069) $ (694,871)
=============================================================================================
Loss per common share - basic and diluted $ (1.08) $ (.33)
=============================================================================================
Weighted-average number of common shares outstanding - basic
and diluted 2,158,861 2,132,777
=============================================================================================
See Notes to Consolidated Financial Statements
F-4
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
================================================================================
Retained
Common Stock Additional Earnings Treasury Stock Total
----------------------- Paid-in (Accumulated --------------------- Shareholders'
Shares Amount Capital Deficit) Shares Amount Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at September 1, 1998 2,256,950 $ 2,257 $ 5,772,189 $ 229,799 70,868 $ (108,028) $ 5,896,217
Issuance of shares in
connection with purchase
of RemoteIT 50,000 50 65,700 -- -- -- 65,750
Repurchase of treasury stock -- -- -- -- 107,000 (177,988) (177,988)
Net loss -- -- -- (694,871) -- -- (694,871)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at August 31, 1999 2,306,950 2,307 5,837,889 (465,072) 177,868 (286,016) 5,089,108
Sale of common stock 100,000 100 174,900 -- -- -- 175,000
Issuance of common stock 100,000 100 (100) -- -- -- --
Exercise of stock options 20,510 21 20,098 -- -- -- 20,119
Net loss -- -- -- (2,338,069) -- -- (2,338,069)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at August 31, 2000 2,527,460 $ 2,528 $ 6,032,787 $(2,803,141) 177,868 $ (286,016) $ 2,946,158
=================================================================================================================================
See Notes to Consolidated Financial Statements
F-5
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================
Year ended August 31, 2000 1999
- ----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(2,338,069) $ (694,871)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 590,015 426,241
Amortization of goodwill 68,343 59,347
Provision for doubtful accounts (33,133) (34,696)
Deferred income taxes 136,173 110,000
Impairment loss on assets 604,800 --
Changes in operating assets and liabilities:
Decrease in marketable securities 934,799 167,836
Decrease in accounts receivable 300,780 1,363,000
Decrease in inventories 193,095 39,627
Decrease (increase) in prepaid expenses and other current assets 180,933 (98,771)
Decrease in other assets 25,213 11,974
Decrease in accounts payable, accrued expenses and other
current liabilities (55,126) (533,731)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 607,823 815,956
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (308,509) (437,278)
Software development costs (100,239) (171,559)
- ---------------------------------------------------------------------------------------------------
Cash used in investing activities (408,748) (608,837)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of notes payable (234,166) (133,807)
Repayment of capital lease obligations (45,080) (3,122)
Purchase of treasury stock -- (177,988)
Proceeds from sale of common stock 175,000 --
Proceeds from exercise of stock options 20,119 --
- ---------------------------------------------------------------------------------------------------
Net cash used in financing activities (84,127) (314,917)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 114,948 (107,798)
Cash and cash equivalents at beginning of year 32,456 140,254
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 147,404 $ 32,456
===================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 42,239 $ 24,931
===================================================================================================
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock relating to purchase of subsidiaries -- $ 65,750
===================================================================================================
Capital lease obligations incurred $ 45,000 $ 244,414
===================================================================================================
See Notes to Consolidated Financial Statements
F-6
1. PRINCIPAL The consolidated financial statements include the
BUSINESS accounts of Hertz Technology Group, Inc.
ACTIVITY AND ("Hertz-Tech") and its wholly owned subsidiaries
SUMMARY OF (hereinafter collectively referred to as the
SIGNIFICANT "Company"). The Company's subsidiaries include Hertz
ACCOUNTING Computer Corporation ("Hertz Computer"), Hergo
POLICIES: Ergonomic Support Systems, Inc. ("Hergo") and Edutec
Computer Education Institute, Inc. ("Edutec"). As
further described in Note 6, on March 1, 1999 the
Company acquired all of the outstanding stock of
RemoteIT.com, Inc. ("RemoteIT"). The results of
operations of RemoteIT are included in the Company's
consolidated financial statements from the date of
acquisition. On August 27, 1999, another wholly owned
subsidiary, LAN Metal Products Corp. ("LAN"), was
merged into Hergo. All significant intercompany
transactions and balances have been eliminated in
consolidation.
In July 2000, Asure Acquisition Corporation
("Acquisition Corp."), a wholly-owned subsidiary of
the Company, was formed to facilitate a merger with A
Sure eCommerce, Inc. ("A Sure") (see Note 14). In
conjunction with this merger, subsequent to year-end
the Company changed the name of Hertz-Tech to Return
Assured Incorporated ("Return Assured").
The "Technology Group" is comprised of RemoteIT,
Hertz Computer and Edutec. RemoteIT offers full
service networking solutions and internet and
web-related services, including high-speed
communications services. Hertz Computer custom
designs and assembles personal workstations and
networking, communication and web servers. Edutec
offers state-of-the-art computerized training
facilities that can be used for software, sales,
education or management training.
During the year ended August 31, 2000 the Company
reduced many of the functions of Hertz Computer and
transferred the remaining operations to RemoteIT. In
addition, the Company has terminated the lease for
the Edutec training facilities and plans to
discontinue Edutec services in December 2000.
Hergo manufactures and sells space-saving modular
racks and technical furniture to help organize all
types of computer hardware and communication and
electronic equipment. In addition, Hergo provides
custom, contract manufacturing and fabrication of
specialty metal products for use in a variety of
industries.
Substantially all revenue is from the sale of
products. Revenue from the sale of products is
recognized at the date of shipment to customers.
Service revenue is recognized when the services are
performed.
Substantially all computers and components sold by
the Company are covered under warranty by the
manufacturers.
All advertising costs are expensed as incurred.
The Company considers all highly liquid investments
with a maturity of three months or less to be cash
equivalents. Cash equivalents, which consist
primarily of money market accounts, are carried at
cost, which approximates market value.
F-7
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Company maintains cash in bank accounts which, at
times, may exceed federally insured limits. The
Company has not experienced any loss on these
accounts.
Inventories are stated at the lower of cost,
determined by the first-in, first-out method, or
market.
Depreciation of property and equipment is provided
for by the straight-line method over the estimated
useful lives of the related assets. Leasehold
improvements are amortized over the lesser of their
economic useful lives or the term of the related
leases.
Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be
recoverable.
The Company determined that property and equipment
with a net book value of approximately $242,000,
including approximately $51,000 from Hergo and
approximately $191,000 from the Technology Group, was
impaired. The Company plans to dispose of these
assets in December 2000. An impairment charge for the
net book value was recorded during the year ended
August 31, 2000 and is included in impairment loss on
assets on the consolidated statement of operations
for the year ended August 31, 2000.
During the year ended August 31, 2000, the Company
decided to change the focus of the products and
services sold by the Technology Group. The new plans
call for a significant reduction of Hertz-brand
computer sales. The Company therefore determined that
the trademark value of the Hertz name, approximately
$34,000, may not be recoverable. The asset was
written off and the charge is included in impairment
loss on assets on the consolidated statement of
operations for the year ended August 31, 2000.
The costs of software developed for internal use
incurred during the preliminary project stage are
expensed as incurred. Direct costs incurred during
the application development stage are capitalized.
Costs incurred during the post implementation/
operation stage are expensed as incurred.
During the years ended August 31, 2000 and 1999 the
Company capitalized the costs of developing an
internet store to be used primarily for the sales of
Hertz-brand computers. Approximately $172,000 of
internal-use software costs were capitalized and
included in other assets at August 31, 1999. An
additional $100,000 was capitalized during the year
ended August 31, 2000. Due to the business changes in
the Technology Group, the Company abandoned the
majority of the software developed and wrote off
approximately $272,000 of software development costs.
The charge is included in impairment loss on assets
on the consolidated statement of operations for the
year ended August 31, 2000.
Goodwill is amortized using the straight-line method
over five years. At each balance sheet date, the
Company evaluates the period of amortization of
goodwill. The factors used in evaluating the period
of amortization include: (i) current operating
results, (ii) projected future operating results, and
(iii) any other material factors that affect the
continuity of the business.
F-8
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
During the year ended August 31, 2000, the Company
decided not to renew a service contract with Edutec's
primary customer. In addition, the Company no longer
plans to offer training facility services. As a
result, the Company wrote off the net carrying value
of goodwill arising from the purchase of Edutec of
approximately $56,000. This charge is included in
impairment loss on assets on the consolidated
statement of operations for the year ended August 31,
2000.
Basic earnings per common share is computed using the
weighted-average number of common shares outstanding.
Diluted earnings per common share is computed using
the weighted-average number of common shares
outstanding adjusted for the incremental shares
attributed to outstanding options and warrants to
purchase common stock. No incremental shares were
used in the 2000 and 1999 calculation of diluted
earnings per common share since they would have had
an antidilutive effect.
The preparation of financial statements in conformity
with generally accepted accounting principles
requires the use of estimates by management. Actual
results could differ from those estimates.
The Company elected to measure compensation cost
using Accounting Principles Board ("APB") Opinion No.
25 as is permitted by Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, and has elected to comply
with other provisions and the disclosure-only
requirements of SFAS No. 123.
The Company does not believe that any recently issued
but not yet effective accounting standards will have
a material effect on the Company's consolidated
financial position, results of operations or cash
flows.
2. MARKETABLE The Company's marketable securities are comprised of
SECURITIES: debt securities at August 31, 2000 and of equity and
debt securities at August 31, 1999 and are classified
as trading securities. Trading securities are
recorded at fair value, with the change in fair value
during the period included in operations.
Net unrealized holding losses on trading securities
amounted to $9,139 and $23,281 for the years ended
August 31, 2000 and 1999, respectively.
3. INVENTORIES: Inventories consist of the following:
August 31, 2000 1999
---------------------------------------------------
Components $ 6,219 $ 52,143
Raw materials 57,684 104,271
Work-in-process 11,488 22,053
Finished goods 401,115 491,134
---------------------------------------------------
$476,506 $669,601
===================================================
F-9
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. PROPERTY AND Property and equipment, at cost, consists of:
EQUIPMENT:
Depreciation/
Amortization
August 31, 2000 1999 Period
----------------------------------------------------------------------------------------
Furniture, fixtures and office
equipment $ 144,264 $ 464,716 5-7 years
Warehouse equipment 1,387,619 1,438,280 5 years
Leasehold improvements 878,989 705,434 Term of lease
Vehicles 88,852 94,391 3 years
----------------------------------------------------------------------------------------
2,499,724 2,702,821
Less accumulated depreciation
and amortization 1,194,962 919,093
----------------------------------------------------------------------------------------
$1,304,762 $1,783,728
========================================================================================
Property and equipment includes amounts acquired
under capital leases of approximately $290,000 and
$245,000 at August 31, 2000 and 1999, respectively.
Amortization of these assets is included in
depreciation and amortization expense. Accumulated
amortization of these assets amounted to
approximately $79,000 and $23,000 at August 31, 2000
and 1999, respectively.
5. NOTES PAYABLE: Notes payable consist of the following:
August 31, 2000 1999
--------------------------------------------------------------------------------
Note payable to an officer of LAN, due in three
annual installments through December 2000. The
note bears interest at a rate of 7% per annum -- $253,333
Other $ 19,167 --
--------------------------------------------------------------------------------
19,167 253,333
Less current portion 3,484 126,666
--------------------------------------------------------------------------------
Long-term portion $ 15,683 $126,667
================================================================================
Based on the borrowing rates currently available to
the Company for loans with similar terms and average
maturities, the fair value of the long-term debt
approximates the carrying amount.
The note payable to an officer of LAN was paid in
full during the year ended August 31, 2000. Interest
expense on the notes amounted to $10,662 and $18,429
for the years ended August 31, 2000 and 1999,
respectively.
F-10
6. ACQUISITION: In February 1999, the Company acquired all of the
outstanding stock of RemoteIT.com in exchange for the
issuance of 50,000 shares of common stock of the
Company (adjusted to reflect the 100% stock dividend
of May 18, 1999, described in Note 13). This business
combination was accounted for as a purchase. The
stock issued was valued at $65,750 and has all been
recorded as goodwill. Had the acquisition occurred at
September 1, 1998; revenue, net loss and loss per
share would not have been significantly impacted.
7. CAPITAL LEASE The Company leases property and equipment under
OBLIGATIONS: capital leases which expire at various dates through
April 2005. The leases require monthly payments of
principal and interest, imputed at interest rates
ranging from 8% to 11% per annum.
Approximate minimum future lease payments under
capital leases are as follows:
Year ending August 31,
2001 $ 77,000
2002 75,000
2003 71,000
2004 51,000
2005 7,000
--------------------------------------------------------------------------------
281,000
Less amount representing interest 40,000
--------------------------------------------------------------------------------
241,000
Less current maturities 59,000
--------------------------------------------------------------------------------
Capital lease obligations, less current maturities $182,000
================================================================================
8. INCOME TAXES: The provision for income taxes for the years ended
August 31, 2000 and 1999 consists of the following
components:
Year ended August 31, 2000 1999
--------------------------------------------------------------------------------
Current:
Federal -- --
State and local -- --
Deferred:
Federal $ 95,321 $ 77,000
State and local 40,852 33,000
--------------------------------------------------------------------------------
$136,173 $110,000
================================================================================
F-11
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The provision for income taxes for the years ended
August 31, 2000 and 1999 differs from the amount
computed using the federal statutory rate of 34% as a
result of the following:
Year ended August 31, 2000 1999
--------------------------------------------------------------------------------
Tax benefit at federal statutory rate (34)% (34)%
State and local income tax provision net of
federal tax effect (6) (6)
Increase in deferred tax asset valuation allowance 46 59
--------------------------------------------------------------------------------
6% 19%
================================================================================
The approximate tax effects of temporary differences
that give rise to the net short-term deferred income
tax asset are presented below:
Year ended August 31, 2000 1999
--------------------------------------------------------------------------------
Reserve for bad debts $ 25,000 $ 38,000
Sales tax accrual 20,000
Unrealized losses on marketable securities 15,000 12,000
Capitalized inventory -- 8,000
Contributions carryforward 15,000 13,000
--------------------------------------------------------------------------------
Total short-term deferred income tax asset 55,000 91,000
Valuation allowance (55,000) (91,000)
--------------------------------------------------------------------------------
Net short-term deferred income tax asset $ - 0 - $ - 0 -
================================================================================
The tax effects of available tax carryforwards and
other temporary differences that give rise to the net
long-term deferred income tax asset are presented
below:
Year ended August 31, 2000 1999
--------------------------------------------------------------------------------
Federal net operating loss carryforwards $ 911,000 $ 473,995
State and local net operating loss carryforwards 412,000 205,404
Deferred rent 11,120
Depreciation 59,000 (4,570)
Basis difference in amortization of intangibles 30,000 21,224
--------------------------------------------------------------------------------
Total long-term deferred income tax asset 1,412,000 707,173
Valuation allowance (1,412,000) (571,000)
--------------------------------------------------------------------------------
Net long-term deferred income tax asset $ - 0 - $ 136,173
================================================================================
F-12
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
At August 31, 2000, the Company has a federal net
operating loss carryforward of approximately
$3,300,000 available to offset taxable income through
2020. The Company also has state operating loss
carryforwards aggregating approximately $3,300,000
which expire through 2015. A valuation allowance has
been established for the deferred tax assets that are
not expected to be realized.
The Company files consolidated federal, state and
local income tax returns.
The net operating loss carryforwards will be subject
to annual limitations as a result of the merger
described in Note 14.
9. COMMITMENTS AND The Company is obligated under noncancelable
CONTINGENCIES: operating leases for warehouse and office space
expiring at dates through July 2005. In addition, the
Company has two operating leases for automobiles
expiring at dates through June 2003. The aggregate
approximate minimum future payments under these
leases are payable as follows:
Year ending August 31,
2001 $182,000
2002 112,000
2003 3,000
---------------------------------------
$297,000
---------------------------------------
These leases are subject to escalation for the
Company's proportionate share in real estate taxes
and other operating expenses. Total rent expense
charged to operations amounted to approximately
$418,000 and $272,000 for the years ended August 31,
2000 and 1999, respectively.
The Company has employment agreements with five key
employees and a consulting agreement with one of
these employees expiring through October 2005. The
aggregate approximate minimum commitment for future
salaries and fees are as follows:
Year ending August 31,
2001 $ 600,000
2002 486,000
2003 345,000
2004 345,000
2005 345,000
Thereafter 43,000
---------------------------------------------------
$ 2,164,000
===================================================
The agreements provide for base compensation and
fringe benefits. One of the agreements provides for
additional compensation based on the gross profit on
certain sales, as defined.
F-13
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. 401(k) PLAN: In January 1999, the Company adopted an employee
savings plan which qualifies under Section 401(k) of
the Internal Revenue Code (the "Code"). Under the
plan, all employees who are at least 21 years of age
and have completed 1 year of service are eligible to
defer up to 22% of their pre-tax compensation subject
to the Code's limits. The Company matches 3% of
employee contributions. The Company contributed
approximately $27,000 and $24,000 for the years ended
August 31, 2000 and 1999, respectively.
11. SEGMENT INFORMATION: The Company operates primarily in two industry
segments: (i) Technology Group and (ii) Hergo. The
accounting policies of the segments and the products
and services provided by the operating segments are
described in Note 1. The tables below present
information about reported segments.
At August 31, 2000:
Technology
Group Hergo Other Consolidated
--------------------------------------------------------------------------------
Sales (unaffiliated) $ 1,236,132 $ 5,083,172 $ 6,319,304
Gross profit 146,014 2,324,876 2,470,890
Operating loss (777,147) (1,277,943) (227,356) (2,282,446)
Assets 440,395 2,356,765 853,509 3,650,669
Capital expenditures 4,721 348,788 353,509
Depreciation and
amortization expense 242,744 347,271 590,015
--------------------------------------------------------------------------------
At August 31, 1999:
Technology
Group Hergo Other Consolidated
--------------------------------------------------------------------------------
Sales (unaffiliated) $ 1,576,499 $ 5,305,339 $ 6,881,838
Gross profit 347,757 2,991,140 3,338,897
Operating loss (233,885) (210,133) $ (218,802) (662,820)
Assets 1,646,565 2,813,214 1,623,212 6,082,991
Capital expenditures 247,669 419,023 666,692
Depreciation and
amortization expense 153,136 273,105 426,241
--------------------------------------------------------------------------------
12. GEOGRAPHIC The Company had sales to customers in the New York
AND CUSTOMER Tri-State area of approximately 69% and 63% of net
CONCENTRATION: sales for the years ended August 31, 2000 and 1999,
respectively. Approximately 16% of net sales were to
federal, state and city agencies and
government-affiliated organizations, including
hospitals and schools, for the year ended August 31,
1999.
F-14
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. CAPITAL On February 16, 2000, the Company amended the number
TRANSACTIONS: of shares of common stock authorized from 3,000,000
to 6,000,000. In addition, the Company increased the
number of stock options available under its stock
option plan (the "Plan") from 500,000 to 750,000
shares.
Subsequent to year-end, the Company increased the
number of shares of common stock authorized to
50,000,000 and increased the number of stock options
available under the Plan to 2,250,000. In addition,
the Company authorized the issuance of 1,000,000
shares of preferred stock.
On November 2, 1998, the Company approved a 1-for-3
reverse split of the Company's common stock and Class
A warrants. In addition, on May 18, 1999, the Company
approved a 100% stock dividend on its common stock.
After the record date of the stock dividend, each
outstanding Class A warrant became exercisable to
purchase two shares of common stock. All share and
per share data included in this report have been
retroactively adjusted to give effect to the reverse
split and stock dividend as of the first date
presented.
In June 2000, the Company sold 100,000 shares of
common stock to a private investor and agreed to
register the shares in an S-3 filing within a certain
time period, as defined. The Company was required to
place an additional 100,000 shares in escrow to be
delivered to the investor if the Company defaulted on
the agreement. The Company registered the original
shares per the agreement in September 2000. The
escrow shares are eligible to be released at the
sooner of two years or upon the disposal of the
registered shares by the investor or its assignee.
In connection with the Company's initial public
offering and with the underwriter's subsequent
exercise of its over-allotment option, the Company
has outstanding 843,333 Class A warrants. In
addition, the Company has outstanding an
Underwriter's Purchase Option (the "Underwriter's
Option") to purchase up to 110,000 units, consisting
of 73,333 shares of common stock and 73,333 Class A
warrants. The Underwriter's Option is exercisable
through November 2001. To date, this option has not
been exercised. Each warrant is convertible into two
shares of common stock at an exercise price of $8.25
per share (adjusted to reflect the reverse stock
split of November 2, 1998 and the 100% stock dividend
of May 18, 1999, as described above). To date no
warrants have been exercised.
Under the Plan the Company may grant incentive and/or
nonqualified options to purchase shares of common
stock to directors, employees and consultants to the
Company. Options granted under the Plan are
exercisable for a period of up to 10 years from the
date of the grant at an exercise price which is not
less than the fair market value of such shares at the
date of the grant. In the case of options granted to
a shareholder owning more than 10% of the outstanding
shares of the Company on the date of the grant, the
options are exercisable for a period not to exceed
five years from the date of the grant at an exercise
price which is not less than 110% of the fair market
value of such shares at the date of the grant.
Options to purchase 313,941 shares of common stock
(excluding canceled shares) are outstanding under the
Plan as of August 31, 2000. In addition, options to
purchase 1,272,001 shares of common stock are
outstanding outside the Plan as of August 31, 2000.
F-15
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
A summary of the status of the Company's options as
of August 31, 2000 and 1999, and changes during the
years then ended is presented below:
2000 1999
-------------------------------------------------------------------------------------
Weighted- Weighted-
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
-------------------------------------------------------------------------------------
Outstanding at beginning of year 1,090,052 $ .93 851,853 $ 6.55
Granted 537,000 2.69 1,101,452 .93
Canceled (20,600) 1.31 (863,253) 6.43
Exercised (20,510) .98 -- --
-------------------------------------------------------------------------------------
Outstanding at end of year 1,585,942 $ 1.52 1,090,052 $ .93
=====================================================================================
The range of exercise prices at August 31, 2000 was
$.845 to $2.69 and the weighted-average contractual
life was approximately 4.3 years.
The weighted-average fair value of options granted
during the years ended August 31, 2000 and 1999 was
$2.28 and $ .86, respectively.
There were approximately 335,000 options exercisable
at August 31, 2000 with a weighted-average exercise
price of $ .92. No options were exercisable at August
31, 1999.
The Company has elected to apply APB Opinion No. 25
and related interpretations in accounting for its
stock options and has adopted the disclosure-only
provisions of SFAS No. 123. Had the Company elected
to recognize compensation cost based on the fair
value of the options granted at the grant date as
prescribed by SFAS No. 123, the Company's net loss
and loss per share would have been as follows:
Year ended August 31, 2000 1999
----------------------------------------------------------------------------------------
Net loss as reported $(2,338,069) $ (694,871)
Net loss - pro forma (2,952,694) (2,297,416)
Loss per share - as reported (basic and diluted) (1.08) (.33)
Loss per share - pro forma (basic and diluted) (1.37) (1.08)
----------------------------------------------------------------------------------------
The fair value of each option grant is estimated on
the date of grant using the Black-Scholes
option-pricing model with the following
weighted-average assumptions used for the years ended
August 31, 2000 and 1999: expected volatility of 165%
and 209%, respectively; risk-free interest rates of
6.76% and 5%, respectively; expected lives of 4
years; and no dividend yield.
F-16
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
On October 13, 2000, the Acquisition Corp. merged
with A Sure and each share of A Sure common stock was
converted into one share of Returned Assured
(formerly Hertz-Tech) common stock. Return Assured
issued 4,895,685 shares of common stock in connection
with the merger. Subsequent to the merger, an outside
investor purchased 5,000 shares of the newly created
Series A Convertible Preferred Stock for $5,000,000
and was granted a warrant to purchase up to
$1,000,000 of additional shares of Return Assured
common stock. In accounting for the transaction, the
Company was considered to be the acquiree in a
reverse merger.
F-17
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
AUGUST 31, 2000 AND 1999
(U.S. DOLLARS)
INDEX PAGE
----- ----
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS F-19
FINANCIAL STATEMENTS
Balance Sheets F-20
Statement of Operations F-21
Statement of Stockholders' Equity (Deficiency) F-22
Statement of Cash Flows F-23
Notes to Financial Statements F-24 - F-32
F-18
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
TO THE BOARD OF DIRECTORS
OF RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
We have audited the accompanying balance sheets of Return Assured Incorporated
(formerly A Sure eCommerce, Inc.) (A Development Stage Company) as at August 31,
2000 and 1999 and the related statements of operations, stockholders' equity
(deficiency) and cash flows for the year ended August 31, 2000 and initial 82
days ended August 31, 1999 and the cumulative period from June 10, 1999
(inception) through August 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance whether these financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in these financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at August 31, 2000 and 1999
and the results of its operations and its cash flows for the initial 82 day
period ended August 31, 1999, the year ended August 31, 2000 and the cumulative
period from June 10, 1999 (inception) through August 31, 2000 in conformity with
generally accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in note 3 to the financial
statements, the Company has no established source of revenue. This raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
"Pannell Kerr Forster"
Chartered Accountants
Vancouver, Canada
September 27, 2000, except for note 14(a) and (b)
which is as of October 17, 2000
F-19
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
AUGUST 31
(U.S. DOLLARS)
2000 1999
----------- -----------
ASSETS
CURRENT
Cash $ 132,107 $ 2,674
Accounts receivable 37,759 372
Prepaid expenses (note 4) 270,599 585
----------- -----------
TOTAL CURRENT ASSETS 440,465 3,631
PROPERTY AND EQUIPMENT (note 5) 97,036 1,016
DEBT DISCOUNT (note 8(a)(iv)(c)) 354,800 0
----------- -----------
$ 892,301 $ 4,647
=========== ===========
LIABILITIES
CURRENT
Accounts payable and accrued liabilities (note 6) $ 346,166 $ 14,664
Due to shareholders 0 16,302
----------- -----------
TOTAL CURRENT LIABILITIES 346,166 30,966
NOTES PAYABLE (note 7) 200,000 0
----------- -----------
TOTAL LIABILITIES 546,166 30,966
----------- -----------
COMMITMENT (note 11)
CONTINGENCIES (note 12)
STOCKHOLDERS' EQUITY (DEFICIENCY) (note 8)
COMMON STOCK AND PAID-IN CAPITAL IN EXCESS OF $0.001 PAR VALUE
Authorized
100,000,000 Shares
Issued and outstanding
4,695,685 Shares (August 31, 1999 - 90) 3,512,012 1
SUBSCRIPTIONS RECEIVED 0 35,426
DEFERRED OFFERING COSTS (note 8(a)(iv)(a)) (843,361) 0
OTHER COMPREHENSIVE INCOME (LOSS) 503 (33)
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE (2,323,019) (61,713)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 346,135 (26,319)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 892,301 $ 4,647
=========== ===========
See notes to financial statements.
F-20
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
PERIOD FROM JUNE 10, 1999 (INCEPTION) THROUGH AUGUST 31, 1999, YEAR ENDED AUGUST
31, 2000 AND PERIOD FROM JUNE 10, 1999 (INCEPTION) THROUGH AUGUST 31, 2000
(U.S. DOLLARS)
PERIOD FROM PERIOD FROM
JUNE 10, JUNE 10,
1999 1999
(INCEPTION) (INCEPTION)
YEAR ENDED THROUGH THROUGH
AUGUST 31, AUGUST 31, AUGUST 31,
2000 1999 2000
----------- ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES
Wages and salaries (note 8(a)(ii)) $ 1,102,971 $ 0 $ 1,102,971
Professional fees 216,533 10,590 227,123
Development costs 211,911 0 211,911
Financing fees 207,500 0 207,500
Travel and promotion 184,498 23,821 208,319
Consulting fees 148,646 21,317 169,963
Rent 58,494 1,655 60,149
Office and miscellaneous 46,641 4,330 50,971
Internet service and web design 29,189 0 29,189
Telephone 15,259 0 15,259
Loan receivable write-off 14,255 0 14,255
Interest and finance charges 8,592 0 8,592
Depreciation 16,817 0 16,817
----------- ----------- -----------
NET LOSS FOR PERIOD $(2,261,306) $ (61,713) $(2,323,019)
=========== =========== ===========
NET LOSS PER SHARE $ (1.96)
===========
WEIGHTED AVERAGE NUMBER OF SHARES 1,155,950
===========
See notes to financial statements.
F-21
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
PERIOD FROM JUNE 10, 1999 (INCEPTION) TO AUGUST 31, 1999 AND YEAR ENDED
AUGUST 31, 2000
(U.S. DOLLARS)
COMMON SHARES
AND PAID IN CAPITAL IN
EXCESS OF $0.001 PAR DEFICIT
-------------------------------- ACCUMULATED
NUMBER AMOUNT DEVELOPMENT
- -----------------------------------------------------------------------------------------------------------------------------------
Issuance of
Common stock
For cash
- Initial shares 90 $ 1 $ 0
Subscriptions received 0 0 0
Exchange loss 0 0 0
Net loss 0 0 (61,713)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 31, 1999 90 1 (61,713)
COMMON STOCK
Private placement 1,445,685 1,056,310 0
Shares issued for offering costs
For going public (note 8(a)(iv)(a)) 340,000 486.200 0
For private placement (note 8(a)(iv)(b)) 200,000 286,000 0
For bridge financing (note 8(a)(iv)(c)) 200,000 286,000 0
Value of warrants issued in connection
with bridge financing (note 8(a)(iv)(c)) 0 68,800 0
with going public (note 8(a)(iv)(a)) 0 233,726 0
Founders' and other employees
and consultants and recapitalization 2,095,000 887,476 0
Cancellation of original shares (90) (1) 0
Legal fees incurred in connection
with placement 0 0 0
Financing fees 415,000 207,500 0
Exchange Gain 0 0 0
Net Loss 0 0 (2,261,306)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 31, 2000 4,695,685 $ 3,512,012 $(2,323,019)
===================================================================================================================================
==================================================================================================================================
OTHER TOTAL
COMPREHENSIVE DEFERRED STOCKHOLDERS'
INCOME OFFERING SUBSCRIPTIONS EQUITY
(LOSS) COSTS RECEIVED (DEFICIENCY)
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of
Common stock
For cash
- Initial shares $ 0 $ 0 $ 0 $ 1
Subscriptions received 0 0 35,426 35,426
Exchange loss (33) 0 0 (33)
Net loss 0 0 0 (61,713)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 31, 1999 (33) 0 35,426 (26,319)
COMMON STOCK
Private placement 0 0 0 1,056,310
Shares issued for offering costs
For going public (note 8(a)(iv)(a)) 0 (486,200) 0 0
For private placement (note 8(a)(iv)(b)) 0 0 0 286,000
For bridge financing (note 8(a)(iv)(c)) 0 0 0 286,000
Value of warrants issued in connection
with bridge financing (note 8(a)(iv)(c)) 0 0 0 68,800
with going public (note 8(a)(iv)(a)) 0 (233.726) 0 0
Founders' and other employees
and consultants and recapitalization 0 0 (35,426) 852,050
Cancellation of original shares 0 0 0 (1)
Legal fees incurred in connection
with placement 0 (123,435) 0 (123,435)
Financing fees 0 0 0 207,500
Exchange Gain 536 0 0 536
Net Loss 0 0 0 (2,261,306)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 31, 2000 $ 503 $(843,361) $ 0 $ 346,135
====================================================================================================================================
See notes to financial statements.
F-22
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
PERIOD FROM JUNE 10, 1999 (INCEPTION) THROUGH AUGUST 31, 1999, YEAR ENDED
AUGUST 31, 2000 AND PERIOD FROM
JUNE 10, 1999 (INCEPTION) THROUGH AUGUST 31, 2000
(U.S. DOLLARS)
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD FROM PERIOD FROM
JUNE 10, JUNE 10,
1999 1999
(INCEPTION) (INCEPTION)
YEAR ENDED THROUGH THROUGH
AUGUST 31, AUGUST 31, AUGUST 31,
2000 1999 2000
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $(2,261,306) $(61,713) $(2,323,019)
Items not involving cash
Depreciation 16,817 0 16,817
Services rendered in exchange for
shares and subscriptions 1,094,976 35,426 1,130,402
Changes in operating assets and liabilities
Accounts receivable (37,387) (372) (37,759)
Changes in amount due to shareholders (16,302) 16,302 0
Prepaid expenses (270,014) (585) (270,599)
Accounts payable and accrued liabilities 331,502 14,664 346,166
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED BY) OPERATING ACTIVITIES (1,141,714) 3,722 (1,137,992)
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (112,837) (1,016) (113,853)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Deferred offering costs (123,435) 0 (123,435)
Issuance of notes payable 200,000 0 200,000
Issuance of common stock 1,306,883 1 1,306,884
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,383,448 1 1,383,449
- -----------------------------------------------------------------------------------------------------------------------------------
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH 536 (33) 503
- -----------------------------------------------------------------------------------------------------------------------------------
INFLOW OF CASH 129,433 2,674 132,107
CASH, BEGINNING OF YEAR 2,674 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
CASH, END OF YEAR $ 132,107 $ 2,674 $ 132,107
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
Issue of common stock
For services (note 8(a)) $ 850,850 $ 35,426 $ 886,276
For financing fees 1,265,700 0 1,265,700
SUPPLEMENTAL CASH-FLOW INFORMATION
Interest paid 0 0 0
Income taxes paid 0 0 0
===================================================================================================================================
See notes to financial statements.
F-23
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JUNE 10, 1999 (INCEPTION) TO AUGUST 31, 1999, AND YEAR ENDED
AUGUST 31, 2000
(U.S. DOLLARS)
1. ORGANIZATION AND NATURE OF OPERATIONS
The Company was incorporated under the laws of the State of Nevada on June
10, 1999. The Company is in the development stage as more fully defined in
Statement No. 7 of the Financial Accounting Standards Board. The Company
is in the early stages of implementing its business plan and it does not
have any revenue to date. The Company intends to provide a service that
will guarantee customers who order products through the web sites of
merchant members will get the product and that the merchant member will
honor its stated return policies.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Debt discount
Debt discount represent costs to finance long term debt, these costs
are deferred and amortized over the term of the related debt.
(b) Revenue recognition
As the Company is continuing to develop its technologies, no
revenues have been earned to date. Once sales have been earned by
the Company, the Company will recognize such revenues.
(c) Development expenditures
Development expenditures are charged to operations as incurred.
(d) Depreciation
Depreciation is provided using the declining-balance method on the
following annual rates:
Computer hardware and software - 20%
Office furniture and equipment - 30%
The Company reviews long-term assets to determine if the carrying
amount is recoverable based on the estimate of future cash flows
expected to result from the use of the assets and its eventual
disposition. If in this determination there is an apparent
shortfall, the loss will be recognized as a current charge to
operations.
(e) Income taxes
The Company uses the asset and liability approach in its method of
accounting for income taxes which requires the recognition of
deferred tax liabilities and assets for expected future tax
consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. A valuation allowance
against deferred tax assets is recorded if, based upon weighted
available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized.
See notes to financial statements.
F-24
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JUNE 10, 1999 (INCEPTION) TO AUGUST 31, 1999 AND YEAR ENDED
AUGUST 31, 2000
(U.S. DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Loss per share
Loss per share computations are based on the weighted average number
of common shares outstanding during the period. Common share
equivalents consisting of stock purchase warrants (note 8(b)) are
not considered in the computation because their effect would be
anti-dilutive. Loss per share for the period ended August 31, 1999
was not calculated since it gives no meaningful information.
(g) Foreign currency translation
Amounts recorded in foreign currency are translated into United
States dollars as follows:
(i) Monetary assets and liabilities are translated at the rate
of exchange in effect as at the balance sheet date; and
(ii) Revenues and expenses at the average rate of exchange for
the year.
Unrealized gains and losses arising from this translation of foreign
currency are excluded from net loss for the period and accumulated
as a separate component of stockholders' equity.
(h) 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 disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates and would impact future results of
operations and cash flows.
(i) Stock based compensation
The Company applies APB Opinion No. 25 and related interpretations
in accounting for its employee stock option plans. Compensation
expense is recorded when options are granted to management at
discounts to market.
(j) Financial instruments
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and accrued liabilities, due to
shareholders and notes payable. Unless otherwise noted it is
management's opinion that these financial instruments approximate
their fair market values and the Company is not exposed to
significant interest, currency or credit risks arising from these
financial instruments.
F-25
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JUNE 10, 1999 (INCEPTION) TO AUGUST 31, 1999 AND YEAR ENDED
AUGUST 31, 2000
(U.S. DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(k) Recent accounting pronouncements
(i) In June 1999, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133". This statement defers the
effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to fiscal years
beginning after June 15, 2000, although early adoption is
encouraged. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments. It
requires a company to recognize all derivatives as either
assets or liabilities in the statement of cash flows and to
measure those instruments at fair value. Additionally, the
fair value adjustments will affect either stockholders'
equity or net income depending on whether the derivative
instrument qualifies as a hedge for accounting purposes
and, if so, the nature of the hedging activity. The
Company will adopt this standard as of September 1, 2000.
Management does not expect the adoption to have a material
effect on the Company's results of operations; however, the
effect on the Company's financial position depends on the
fair values of the Company's derivatives and related
financial instruments at the date of adoption.
(ii) In December 1999, the SEC issued Staff Accounting Bulletin
("SAB") 101, "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provide
guidance for presentation of revenue and for disclosure
related to revenue recognition policies in financial
statements filed with the SEC. The Company believes the
adoption of SAB 101 will not have a material impact on the
Company's financial position and results of operations.
(iii) In March 2000 the Financial Accounting Standards Board
issued "Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation". Among other
issues, this interpretation clarifies:
(a) the definition of employee for purposes of applying
APB Opinion No. 25;
(b) the criteria for determining whether a plan qualifies
as a non-compensatory plan;
(c) the accounting consequence of various modifications
of the terms of a previously fixed stock option
award; and
(d) the accounting for an exchange of stock compensation
awards in a business combination.
F-26
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JUNE 10, 1999 (INCEPTION) TO AUGUST 31, 1999 AND YEAR ENDED
AUGUST 31, 2000
(U.S. DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
In relation to (c) the interpretation states, "if the exercise
price of a fixed stock option award is reduced, the award
shall be accounted for as a variable from the date of the
modification to the date the award is exercised, is forfeited,
or if expired unexercised, the exercise price of an option
award has been reduced if the fair value of the consideration
required to be remitted pursuant to the award's original
terms".
The interpretation is generally effective July 1, 2000 and the
Company may incur additional compensation expense in fiscal
2001.
3. GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal
course of business. However, the Company has no current source of revenue.
Without realization of additional capital, there is substantial doubt
about the Company's ability to continue as a going concern.
4. PREPAID EXPENSES
=============================================================================================================================
2000 1999
-----------------------------------------------------------------------------------------------------------------------------
Prepaid professional and cyber liability insurance $250,000 $ 0
effective September 11, 2000 to September 10, 2001
Deposits on leases and other 20,599 585
-----------------------------------------------------------------------------------------------------------------------------
$270,599 $585
=============================================================================================================================
5. PROPERTY AND EQUIPMENT
============================================================================================================================
2000 1999
------------------------------------------------------------ -----------
Accumulated
Cost Depreciation Net Net
----------------------------------------------------------------------------------------------------------------------------
Computer hardware and
software $105,808 $16,023 $89,785 $1,016
Office furniture
and equipment 8,045 794 7,251 0
----------------------------------------------------------------------------------------------------------------------------
$113,853 $16,817 $97,036 $1,016
============================================================================================================================
F-27
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JUNE 10, 1999 (INCEPTION) TO AUGUST 31, 1999 AND YEAR ENDED
AUGUST 31, 2000
(U.S. DOLLARS)
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
=============================================================================================================================
2000 1999
-----------------------------------------------------------------------------------------------------------------------------
Trade payables $304,775 $14,664
Accrued wages and salaries 41,391 0
-----------------------------------------------------------------------------------------------------------------------------
$346,166 $14,664
=============================================================================================================================
7. NOTES PAYABLE
============================================================================================================================
2000 1999
----------------------------------------------------------------------------------------------------------------------------
12% two year promissory notes payable, due June 20, 2002
convertible upon default into common stock at a
price of $1.429 per share (note 8(a)) $200,000 $ 0
============================================================================================================================
8. STOCKHOLDERS' EQUITY
(a) Common stock
During the year ended August 31, 2000,
(i) the Company completed several private placements whereby
the Company issued:
(a) 560,000 shares of common stock at a price of $1.429
per share and in connection with this offering a 12%,
$200,000 two year promissory note payable,
convertible upon default into common stock at a price
of $1.429 per share, with attached 28,000 stock
purchase warrants exercisable into common stock at a
price of $1.429 for a period of three years from
issuance.
(b) 285,595 shares of common stock were issued at prices
ranging between $1.00 and $1.25 for total proceeds of
$292,310.
(c) 600,000 shares of common stock of which 150,000 shares
include one share purchase warrant exercisable within
three years at a price of $1.00 per share. These shares
were issued at prices ranging from $0.33 to $0.50 per
share for total proceeds of $250,000.
(ii) the Company issued 595,000 shares to directors, officers,
employees and consultants of the Company. It was determined at
the time of issuance that the market value of those shares was
$1.43 per share. Consequently, an amount of $850,850 was
recorded as wages and salaries for these shares.
F-28
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JUNE 10, 1999 (INCEPTION) TO AUGUST 31, 1999 AND YEAR ENDED
AUGUST 31, 2000
(U.S. DOLLARS)
8. STOCKHOLDERS' EQUITY (Continued)
(iii) the Company agreed with its founders to reduce the
number of shares to be issued as founder's shares to
1,200,000 shares at par value. No additional
compensation expense was recorded in the books since
par value was considered market value at
incorporation.
(iv) the Company issued 740,000 shares, at $1.43 per
share, of these;
(a) 340,000 shares issued to KGL Investments and
Donahhue & Associates for consulting
services in relation to taking the company
public via the merger with Hertz (note
14(a)) with 340,000 warrants attached (note
8(b)). The warrants were given a fair value
of $233,726 and these amount along with the
shares were recorded as deferred offering
costs.
(b) 200,000 shares issued for completion of the
$800,000 private placement in note
8(a)(i)(a) above with warrants attached to
acquire 333,333 shares (note 8(b)).
(c) 200,000 shares issued for Bridge financing
with warrants attached to acquire 100,000
shares (note 8 (b)). These warrants were
given a fair value of $68,800. The value of
the shares and warrants have been deferred
and amortized over the life of the note
payable. (note 7)
(v) the Company issued 300,000 shares as payment for the
$35,426 subscriptions received. Of these, 150,000
shares include one share purchase warrant exercisable
within three years at a price of $1.00 per share.
(vi) the Company issued 415,000 shares of common stock
with 300,000 warrants attached. These shares were
issued as consideration for financing fees the
Company incurred but the financing was never
completed.
(b) Warrants
====================================================================================================================================
NUMBER EXERCISE
EXPIRY DATE OF SHARES PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
Closing of merger (note 14(a)) (100,000 exercised subsequent to 110,000 $ 2.00
August 31, 2000)
June 7, 2003 (note 8(a)(i)(c), 8(a)(v) and 8(a)(vi)) 600,000 $ 1.00
June 7, 2003 (note 8(a)(iv)(c)) 100,000 $ 1.00
June 7, 2003 (note 8(a)(iv)(b)) 333,333 $ 3.00
June 20, 2003 (note 8(a)(i)(a)) 28,000 $ 1.429
June 7, 2005 (note 8(a)(iv)(a)) 340,000 $ 1.00
====================================================================================================================================
F-29
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JUNE 10, 1999 (INCEPTION) TO AUGUST 31, 1999 AND YEAR ENDED
AUGUST 31, 2000
(U.S. DOLLARS)
9. RELATED PARTY TRANSACTIONS
(a) Consulting fees includes $102,471 (1999 - Nil) paid to
directors, officers and a company owned by one of the
directors of the Company.
(b) Accounts payable at August 31, 2000 includes $68,591 (1999 -
Nil) due to directors, officers and a company owned by one of
the directors of the Company.
(c) The Company paid $96,511 (1999 - Nil) for wages to directors
and officers and $557,700 (1999 - $Nil) by issuance of 390,000
(1999 - Nil) shares to directors and officers (note 8(a)).
10. INCOME TAXES
====================================================================================================================================
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred income tax assets
Net operating loss and credit carryforwards $ 830,000 $ 21,000
- ------------------------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 830,000 21,000
Valuation allowance (830,000) (21,000)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 0 $ 0
====================================================================================================================================
As at August 31, 2000 the Company's net operating loss carryforwards
for income tax purposes were approximately $2,800,000. If not utilized,
they will start to expire in 2019.
11. COMMITMENT
The Company occupies leased office premises in Vancouver, Canada under
the terms of a lease expiring April 30, 2003, requiring annual rental
payments of U.S. $36,135, totalling U.S. $96,360.
12. CONTINGENCIES
During the year a former president and director of the Company
commenced an action against the Company and other parties, claiming an
interest in certain founders' shares to be issued by the Company as
well as damages arising from his termination. It is the opinion of
management of the Company that these claims have no merit. There is no
assurance that the outcome will be favourable to the Company. As the
outcome cannot be determined at this time, any adjustment, if required,
will be recorded by the Company when settlement occurs. Two of the
directors of the Company have agreed to escrow 780,000 of the merged
company common stock to secure any success in this claim. These two
directors have also agreed to indemnify the Company if the claim is
successful.
F-30
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JUNE 10, 1999 (INCEPTION) TO AUGUST 31, 1999 AND YEAR ENDED
AUGUST 31, 2000
(U.S. DOLLARS)
13. COMPREHENSIVE LOSS
====================================================================================================================================
PERIOD FROM PERIOD FROM
JUNE 10, 1999 JUNE 10, 1999
(INCEPTION) (INCEPTION)
YEAR ENDED THROUGH THROUGH
AUGUST 31, AUGUST 31, AUGUST 31,
2000 1999 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $(2,384,741) $(61,713) $(2,446,454)
Other comprehensive income (loss) 536 (33) 503
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss $(2,384,205) $(61,746) $(2,445,951)
====================================================================================================================================
14. SUBSEQUENT EVENTS
(a) Merger
The Company has announced a reverse triangular merger ("the
merger") with a NASD listed company, Hertz Technology Group
Inc. ("Hertz") in which the Company will become a wholly-owned
subsidiary of Hertz. As a result of the merger the current
shareholders of Hertz will own approximately 33% of the common
stock of the merged company and the current shareholders of
the Company will own approximately 67% of the common stock of
the merged company.
Subsequent to the merger, the merged company, Hertz, will
change its name to Return Assured, Inc. ("Return").
The merger was completed October 13, 2000.
(b) Preferred stock
The merged Company has entered into an agreement to issue
5,000 shares of series A convertible preferred stock and stock
purchase warrants to purchase up to 404,041 common shares of
the merged company for total proceeds of $5,000,000 which
cleared on October 13, 2000.
(i) The preferred shares are entitled to cumulative
dividends at a rate of 1% per annum and are payable
in cash or by issuing Series A preferred shares.
These shares are convertible into common stock at the
lesser of:
(a) $3.00; and
(b) 100% of the average of the 3 lowest per
share market value prices during the 45 day
period immediately preceding the conversion
date.
Given the market price on the date of issuance of the
preferred shares, there was no beneficial conversion
feature.
(ii) The stock purchase warrants are exercisable for three
years at a price of $3.00 per share.
F-31
RETURN ASSURED INCORPORATED
(FORMERLY A SURE ECOMMERCE, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JUNE 10, 1999 (INCEPTION) TO AUGUST 31, 1999 AND YEAR ENDED
AUGUST 31, 2000
(U.S. DOLLARS)
14. SUBSEQUENT EVENTS (Continued)
(c) Stock options
Subsequent to August 31, 2000 the Company reserved for grant
1,200,000 stock options to various officers, directors and
employees of the Company exercisable at a price of $1.43 per
share.
F-32
PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited consolidated pro forma financial statements give effect
to the merger of Hertz Technology Group, Inc. ("Hertz") and Return Assured
Incorporated "Return Assured". This merger, a purchase transaction, has been
accounted for as a reverse acquisition with Return Assured as the accounting
acquiror. In addition, the consolidated pro forma financial statements also give
effect to the sale of $5 million of newly created Series A Preferred Stock
immediately following the merger. The unaudited pro forma consolidated balance
sheet presents the financial position of Hertz and Return Assured as of August
31, 2000 assuming the merger and sale of Preferred Stock had occurred on that
date. Such pro forma information is based upon the historical balance sheet data
of Hertz and Return Assured as of that date. The unaudited pro forma
consolidated statements of operations give effect to the merger of Hertz and
Return Assured by combining the results of operations of Hertz and Return
Assured for the year ended August 31, 2000, respectively, as if the merger and
the Preferred Stock transaction had occurred on September 1, 1999. Return
Assured is a development stage company.
The unaudited pro forma consolidated financial statements are based on the
estimates and assumptions set forth in the notes to these financial statements,
which have been made solely for purposes of developing this pro forma
information. The unaudited pro forma consolidated financial statements are not
necessarily an indication of the results that would have been achieved had such
transactions been consummated as of the dates indicated or that may be achieved
in the future.
These unaudited pro forma consolidated financial statements should be read in
conjunction with the historical financial statements and related notes of Hertz
and Return Assured.
F-33
Return Assured Incorporated
Pro Forma Consolidated Balance Sheet
August 31, 2000
(Unaudited)
(in thousands)
Return Assured, Inc.
August 31, 2000
Consolidated Balance Sheet
Return Pro Forma
Hertz Assured Adjustments Pro Forma
------------------------------------------------------------------
ASSETS
Current:
Cash 147 132 4,975 3 4,619
(435) 2
(200) 4
Marketable securities 657 657
Accounts receivable 766 39 805
Inventory 477 477
Prepaid Expenses and other current assets 102 271 373
-----------------------------------------------------------------
Total current assets 2,149 442 4,340 6,931
Property and equipment 1,305 97 1,402
Goodwill 120 2,764 1 2,764
(120) 1
Deferred Financing Costs 355 (355) 4 0
Other Assets 77 77
-----------------------------------------------------------------
Total Assets 3,651 894 6,629 11,174
=================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities 292 346 638
Accrued expenses and other current liabilities 152 42 1 194
Current portion of capital lease obligations 59 59
Current portion of notes payable 3 290 2 293
-----------------------------------------------------------------
Total current liabilities 506 346 332 1,184
=================================================================
Capital Lease Obligations, net of current portion 182 182
Notes Payable 16 200 (200) 4 16
-----------------------------------------------------------------
Total Liabilities 704 546 132 1,382
-----------------------------------------------------------------
Preferred Stock 5,000 3 5,000
-----------------------------------------------------------------
Shareholders' Equity:
Common Stock 3 3,512 (3,509) 1 6
Additional paid-in-capital 6,033 4,707 1
(6,033) 1
(3) 1
(231) 2
669 3
3,509 1 8,651
Less: treasury stock (286) 286 1 0
Accumulated other comprehensive income 1 1
Deferred offering costs (842) 842 1 0
Accumulated deficit (2,803) (2,323) 2,803 1 (3,866)
(494) 2
(694) 3
(355) 4
-----------------------------------------------------------------
Total Shareholders' Equity 2,947 348 1,497 4,792
-----------------------------------------------------------------
Total Liabilities and Shareholders' Equity 3,651 894 6,629 11,174
=================================================================
F-34
Return Assured Incorporated
Notes to Unaudited Pro Forma Consolidated Balance Sheet
August 31, 2000
The pro forma consolidated balance sheet of Return Assured gives effect to the
issuance of Hertz common stock and warrants to purchase common stock in exchange
for all the outstanding common stock and warrants to purchase common stock of
Return Assured as if it had occurred on August 31, 2000. For accounting
purposes, this transaction is being accounted for as a purchase with Return
Assured being the acquiror. Further, Hertz and Return Assured have entered into
other agreements that will take place concurrently with the closing of this
merger. Following is a summary of the pro forma adjustments to reflect the
foregoing:
1. Adjustment to reflect (a) the value of the Hertz shares outstanding
prior to the merger at fair market value of $2 per share, (b) costs of
the merger amounting to approximately $165,000 in cash, which is
comprised of deferred costs of approximately $123,000 and accrued
expenses of approximately $42,000, and (c) shares valued at 486,000
with attached warrants with a Black Scholes value of approximately
$233,000 given as finder's fee. The excess of the value of the shares
and warrants issued and the costs of the transaction over the net
assets of Hertz has been recorded as goodwill.
2. Adjustment to record the purchase of 115,385 shares of common stock
from Eli E. Hertz and I. Marilyn Hertz for $435,000 in cash and the
issuance of a $290,000 note payable, due April 17, 2001. The excess of
the amount paid over the fair value of the shares of approximately
$494,000 is recorded as a compensation charge.
3. Adjustment to record (a) sale of $5,000,000 of newly created Series A
Preferred Stock to GEM Global Yield Fund ("GEM"), (b) $25,000 of cash
paid for related professional fees associated with the Preferred Stock
transaction and (c) the fair value under the Black Scholes method of
404,041 warrants issued to GEM in connection with the Preferred Stock
transaction.
4. Adjustments to record the repayment of bridge financing and the
elimination of the related deferred financing costs upon receipt of the
funds from a Series A Preferred Stock.
F-35
Return Assured Incorporated
Pro Forma Consolidated Statement of Operations
For the Year ended August 31, 2000
(Unaudited)
(in thousands, except per share amounts)
Return Pro Forma
Hertz Assured Adjustments Pro Forma
-----------------------------------------------------------------
Sales 6,319 6,319
Cost of Sales 3,848 3,848
-------------------------------------------- ---------
Gross Profit 2,471 0 0 2,471
Selling, general and administrative expenses 4,149 2,261 125 1 7,297
578 2
184 4
Loss on Disposal 605 605
-------------------------------------------- ---------
Operating loss (2,283) (2,261) (887) (5,431)
Other Income (Expense):
Other Income 44 44
Interest, net 37 (29) 5 8
-------------------------------------------- ---------
Loss before provision for income taxes (2,202) (2,261) (916) (5,379)
Provision for income taxes 136 136
-------------------------------------------- ---------
Net Loss (2,338) (2,261) (916) (5,515)
Preferred stock dividends 50 3 50
-------------------------------------------- ---------
Net Loss attributable to common shareholders (2,338) (2,261) (966) (5,565)
============================================ =========
Net loss per share - basic and diluted (1.08) (1.96) (0.80)
========================= =========
Weighted average number of shares outstanding -
basic and diluted 2,159 1,156 6,939 6
========================= =========
F-36
Return Assured Incorporated
Notes to Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended August 31, 2000
1. Adjustment to record the consulting agreement with Eli Hertz amounting
to $125,000 for the year. No adjustment has been made for the base salaries
of the employment agreements with Eli Hertz, I. Marilyn Hertz and Barry
Goldsammler as the employment agreements are not significantly different
than the actual salaries earned by these individuals during the year.
2. Adjustment to record the bonus due to Eli Hertz under his employment
agreement amounting to 25% of the gross profit of Hergo.
3. Adjustment to record 1% dividend on $5,000,000 of Series A Preferred
Stock to GEM Global Yield Fund.
4. Adjustment to record the amortization of approximately $2,764,000 of
goodwill over a period of 15 years. The Company believes that a 15-year
goodwill life is appropriate in this merger as the largest revenue
contributor is Hergo Ergonomic Support Systems, Inc. Hergo is a
manufacturer of modular racks and technical furniture, it has been in
business for a number of years, its customers are in a variety of
industries and its operations do not rely directly on the technology
sector.
5. Adjustment to record the interest expense at a rate of 10% on the
$290,000 note payable to Eli & Marilyn Hertz.
6. Pro forma net income per share is computed by dividing the pro forma net
income by Hertz's weighted average number of shares after giving effect to
the issuance of 4,895,685 shares of common stock and the purchase of
115,385 shares of common stock from Eli and Marilyn Hertz in conjunction
with the merger for $435,000 cash and a $290,000 note payable. Incremental
shares from the effect of options, warrants and convertible preferred stock
have not been included in the weighted average shares calculation on a
diluted basis as the effect would have been antidilutive.
7. Note: In connection with the Preferred Stock transaction discussed in
footnote (3) above, Return Assured (a) paid $25,000 in cash for related
professional fees and (b) issued 404,041 of warrants to GEM with a fair
value under the Black Scholes method of approximately $669,000. The
accretion of these preferred stock costs will reduce the amount available
to common shareholders of the merged companies. In connection with the
merger, Returned Assured paid Eli and Marilyn Hertz $435,000 in cash and a
$290,000 note payable for 115,385 shares of Hertz Common Stock. The
$494,230 above market value paid to Eli and Marilyn Hertz is considered to
be a charge to compensation. The accretion and compensation charges are
deemed to be nonrecurring and therefore has not been considered in the
accompanying pro forma consolidated statement of operations.
F-37
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountant's Report........................................4
Consolidated Balance Sheet as of November 30, 2001 and August
31, 2001............................................................5
Consolidated Statements of Operations for the three months
ended November 30, 2001 and November 30, 2000.......................6
Consolidated Statements of Cash Flows for the three months
ended November 30, 2001 and November 30, 2000.......................7
Notes to Consolidated Financial Statements..........................8-10
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Shareholders of
Return Assured Incorporated
We have reviewed the accompanying consolidated balance sheet of Return Assured
Incorporated and Subsidiaries as of November 30, 2001, and the related
consolidated statements of operations and cash flows for the three-month periods
ended November 30, 2001 and 2000. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements reported upon, the Company has no established source of revenue, has
sustained recurring net operating losses, and has a shareholders' deficit that
raises substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from this
uncertainty.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
January 14, 2002
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
_______________________________________________________________________________
<Table>
<Caption> November 30, August 31,
2001 2001
(unaudited) (audited)
- --------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 2 $ 972
Cash in escrow 2,974,050 3,000,978
Accounts receivable 2,158
Prepaid expenses and other current assets 1,940 59,359
Current assets of discontinued operations 1,511,083
- --------------------------------------------------------------------------------------------------
Total current assets 2,975,992 4,574,550
Noncurrent assets of discounted operations 1,341,159
- --------------------------------------------------------------------------------------------------
Total Assets $ 2,975,992 $ 5,915,709
==================================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,278,916 $ 1,048,564
Note payable 200,000
Accrued loss on disposal of discontinued operations 1,678,128
Current liabilities of discontinued operations 467,658
- --------------------------------------------------------------------------------------------------
Total current liabilities 1,278,916 3,394,350
Noncurrent liabilities of discontinued operations 483,289
- --------------------------------------------------------------------------------------------------
Total liabilities 1,278,916 3,877,639
- --------------------------------------------------------------------------------------------------
Commitments and Contingencies
Redeemable preferred stock, series A, stated value $1,000
authorized 6,000 shares, 5,000 issued, and 3,829 outstanding shares
No liquidation preference. 3,828,873 3,828,873
- --------------------------------------------------------------------------------------------------
Common Shareholders' Deficit:
Common stock - $.001 par value; authorized 100,000,000
shares, issued and outstanding 16,846,184 shares 16,847 16,847
Additional paid-in capital 10,933,382 10,933,382
Accumulated other comprehensive Income 503 503
Accumulated deficit (13,082,529) (12,741,535)
- --------------------------------------------------------------------------------------------------
Total common shareholders' deficit (2,131,797) (1,790,803)
- --------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Deficit $ 2,975,992 $ 5,915,709
==================================================================================================
See Notes to Consolidated Financial Statements
F-3
</Table>
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
_____________________________________________________________________________
<Table>
<Caption> Unaudited
------------------------
Three months ended November 30, 2001 2000
- -----------------------------------------------------------------------------------------------
Revenue $ 29,571
Cost of revenue 6,242
- -----------------------------------------------------------------------------------------------
Margin 23,329
General and administrative expenses
Wages and salaries $ 46,500 218,293
Professional fees 180,568 117,578
Financing fees 506,000
Insurance 15,805
Travel and promotion 62,136
Consulting fees 15,305 187,217
Rent 30,050
Office and miscellaneous 20,001 215,900
Internet service and web design 8,943
Telephone and utilities 172 19,561
Interest and finance charges 21,098 81,789
Depreciation and amortization 50,973
- -----------------------------------------------------------------------------------------------
Loss from continuing operations (283,644) (1,490,916)
Discontinued Operations:
Loss from operations of discontinued segments (47,804) (772,780)
- -----------------------------------------------------------------------------------------------
Net loss (331,448) (2,263,696)
Value of warrants issued in connection with preferred stock (669,350)
Dividends on preferred stock (9,546) (25,000)
- -----------------------------------------------------------------------------------------------
Net loss attributable to common shareholders $ (340,994) $(2,958,046)
===============================================================================================
Net loss per share - basic and diluted, continuing operations $ (0.02) $ (0.37)
===============================================================================================
Net loss per share - basic and diluted, discontinued operations (0.00) (0.13)
===============================================================================================
Net loss per share - basic and diluted $ (0.02) $ (0.50)
===============================================================================================
Weighted-average number of shares outstanding 16,846,184 5,927,638
===============================================================================================
See Notes to Consolidated Financial Statements
F-4
</Table>
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
________________________________________________________________________________
<Table>
<Caption>
Unaudited
-----------------------
Three-months ended November 30, 2001 2000
- ---------------------------------------------------------------------------------------------------
Operating activities:
Net loss $ (331,448) $(2,263,696)
Items not involving cash:
Depreciation and amortization 206,161
Compensation charge for excess of fair value given in share repurchase 494,230
Services rendered in exchange for shares, options and warrants 486,000
Loss on abandonment of assets 82,429
Non cash interest expense 68,800
Changes in operating assets and liabilities:
Accounts receivable 2,158 (247,309)
Inventory (38,591)
Prepaid expenses and other current assets 57,419 40,989
Current assets of discontinued operations 1,511,083
Noncurrent assets of discontinued operations 1,341,159
Accounts payable and accrued liabilities 220,806 381,189
Accrued loss on disposal of discontinued operations (1,878,128)
Current liabilities of discontinued operations (467,658)
Noncurrent liabilities of discontinued operations (483,289)
- ----------------------------------------------------------------------------------------------------
Net cash used in operating activities (27,898) (789,798)
- ----------------------------------------------------------------------------------------------------
Investing activities:
Acquisition of property and equipment (16,652)
Net cash received on merger 249,492
- ----------------------------------------------------------------------------------------------------
Net cash provided by investing activities 232,840
- ----------------------------------------------------------------------------------------------------
Financing activities:
Capital lease payments (52,656)
Payment of notes payable (200,000)
Issuance of common stock (cash) 200,000
Repurchase of common stock (435,000)
Issuance of preferred stock 5,000,000
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,512,344
- ----------------------------------------------------------------------------------------------------
(Decrease) increase in cash (27,898) 3,955,386
Cash at beginning of period 3,001,950 132,107
- ----------------------------------------------------------------------------------------------------
Cash at end of period $2,974,052 $4,087,493
====================================================================================================
Supplemental Disclosure of Noncash Financing Activity:
Accrual of dividends on preferred stock $ 9,546
====================================================================================================
See Notes to Consolidated Financial Statements
F-5
</Table>
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPAL BUSINESS Return Assured Incorporated (Return Assured
ACTIVITY AND SUMMARY Nevada) was incorporated under the laws of the
OF SIGNIFICANT State of Nevada on June 10, 1999. The Company
ACCOUNTING POLICIES: was deemed to be in the development stage
through October 13, 2000.
On October 13, 2000, Return Assured Nevada,
through a reverse triangular merger, became
the accounting parent and the legal subsidiary
of Hertz Technology Group, Inc. ("Hertz").
Hertz subsequently changed its name to Return
Assured Incorporated ("Return Assured
Delaware"), a Delaware Corporation. As a
result, the former subsidiaries of Hertz have
become wholly owned subsidiaries. The
consolidated financial statements now include
the following companies, Return Assured
Delaware, Return Assured Nevada, Hertz
Computer Corporation ("Hertz Computer"), Hergo
Ergonomic Support Systems, Inc. ("Hergo"),
RemoteIT.com, Inc. ("RemoteIT"), and Edutec
Computer Education Institute, Inc. ("Edutec")
(collectively "the Company"). The merger was
accounted for as a purchase with resulting
goodwill of approximately $3,011,000. The
consolidated statements of operations and cash
flows include the activity of Hertz and its
former subsidiaries only since the date of the
merger. As further discussed below, the
Company disposed of Hergo, RemoteIT, and Hertz
Computer. The measurement date for disposal of
these operations was October 8, 2001.
Effective October 8, 2001, the Company
divested itself of Hergo, RemoteIT, and Hertz
Computer. In exchange for the Companies, Eli
Hertz agreed to cancel all debt that is owed
to him by the Company (approximately $220,000)
and agreed to cancel his consulting agreement
with the Company.
The accompanying consolidated financial
statements have been prepared assuming the
Company will continue as a going concern. As
shown in the accompanying consolidated
financial statements, the Company has
recurring net losses. In addition, the holders
of the Preferred Stock currently have the
right to redeem their shares for cash. If that
were to happen, the Company would not be able
to meet this obligation. The Company is
currently seeking a merger candidate which
they believe will be sufficient for the
Company to continue as a going concern.
The Company operated in four segments, the
financial services segment, the technology
group segment, the Hergo segment, and the
Corporate segment. The financial services
segment includes the activity of Return
Assured Nevada. Return Assured Nevada provided
assurance to customers through its "Web Seal
of Approval" that guarantees that customers
who order products through the web sites
displaying the seal that the Company will
honor its stated return policies. To date, the
Company has not generated significant revenue
from this segment.
The technology group segment was comprised of
RemoteIT, Hertz Computer and Edutec. RemoteIT
offered full service networking solutions and
internet and web-related services, including
high-speed communications services. Hertz
Computer custom designed and assembled
personal workstations and networking,
communication and web servers. Edutec offered
state-of-the-art computerized training
facilities that can be used for software,
sales, education or management training. As of
November 30, 2001, the Company has ceased
operations in Edutec and disposed of Hertz
Computer and RemoteIT.
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hergo manufactured and sold space-saving
modular racks and technical furniture to help
organize all types of computer hardware and
communication and electronic equipment. In
addition, Hergo provided custom, contract
manufacturing and fabrication of specialty
metal products for use in a variety of
industries. As of November 30, 2001, the
Company had disposed of Hergo.
The Corporate segment is comprised of Return
Assured Delaware, which handles the Company's
corporate compliance and equity transactions.
The interim financial statements include all
adjustments which in the opinion of
management are necessary in order to make the
financial statements not misleading.
Cash in escrow denotes cash being held by an
attorney. These amounts are not considered
restricted because these funds are subject to
withdrawal by the Company at the Company's
option.
2. CONTINGENCIES: The Company was named in a lawsuit against
Internet Business International, Inc. by
Michael Rose, et al, in Orange County
Superior Court. The lawsuit alleges that the
Company breached a contract to pay a
finder's fee on the merger transaction. It is
the Company's position that no liability
exists, and the Company intends to vigorously
defend the suit. If the Company was
unsuccessful in defending this suit, the
Company could incur a loss of $750,000.
Michael Mulberry, a former Vice President of
the Company, has filed a lawsuit against the
Company claiming wrongful dismissal when his
employment was terminated in February 2001.
The Company intends to vigorously defend the
suit and could incur a loss of $81,000.
A creditor has filed a small claim in British
Columbia, Canada against the Company's Nevada
subsidiary. The Company has filed a defense in
this action and if unsuccessful, could incur a
loss of approximately $12,000.
A legal proceeding is pending against the
Company and two former officers, by a former
officer of a subsidiary of Return Assured's.
This former officer of the Company's
subsidiary is claiming that he is entitled to
receive shares from the Company for
contributions in founding Return Assured's
subsidiary. It is the Company's position that
its defense has merit. The two former officers
of the Company have escrowed 780,000 shares of
the Company's common stock they own to secure
any successful claim.
P. Sun's Enterprises (Vancouver) Ltd. has
filed a lawsuit against the Company for the
Company's failure to pay rent in accordance
with a lease which the Company entered into
for office space at 885 West Georgia Street
in Vancouver, British Columbia. The Company
expects to settle this lawsuit.
Since estimated losses under legal proceedings
were not probable, no accrual is required in
accordance with Statement of Financial
Accounting Standards No. 5.
The Company entered into a letter of intent to
merge with Internet Business International
Inc. ("IBUI") in May 2001 and executed a
definitive merger agreement in June 2001. On
January 14, 2002, however, IBUI and Return
Assured mutually decided to terminate the
merger agreement and ceased all activity in
process related to the merger.
RETURN ASSURED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SEGMENT INFORMATION: During the quarters ended November 30, 2001
and 2000, respectively, the Company had four
industry segments: (i) Financial Services,
(ii) Technology Group (iii) Hergo (iv) and
Corporate. The accounting policies of the
segments and the products and services
provided by the operating segments are
described in Note 1. The tables below present
information about reported segments.
For the quarter ended November 30, 2001:
Financial Technology
Services Hergo Group Corporate Consolidated
Net loss from continuing
operations $(136,176) $ (147,468) (283,644)
Net loss from discontinued
operations $ (47,804) (47,804)
Assets 1,942 2,974,050 2,975,992
------------------------------------------------------------------------------------------------
For the quarter ended November 30, 2000:
Financial Technology
Services Hergo Group Corporate Consolidated
Revenue (unaffiliated) $ 30,000 $ (429) $ 29,571
Net loss from continuing
operations (955,167) (116,803) (418,946) (1,490,916)
Net loss from discontinued
operations $ (532,825) (239,955) (772,780)
------------------------------------------------------------------------------------------------
25,000,000 SHARES
RETURN ASSURED INCORPORATED
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
FEBRUARY ___, 2002
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES, AND AGENTS;
INSURANCE.
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses (including attorneys'
fees), judgments, fines ,and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee, or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made with respect to any
claim, issue, or matter as to which such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine,
upon application, that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such court shall deem
proper.
(c) To the extent that a director, officer, employee, or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit, or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue, or matter therein, he shall be
indemnified against expenses (including attorney's fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee, or agent is proper in the circumstances because he has met
the applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the Board of Directors by a
majority vote of a quorum consisting of
II-1
directors who were not parties to such action, suit, or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders.
(e) Expenses incurred by an officer or director in defending any civil,
criminal, administrative, or investigative action, suit, or proceeding may be
paid by the corporation in advance of the final disposition of such action,
suit, or proceeding upon receipt of an undertaking by or on behalf of such
director to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the corporation as authorized in this II-1
section. Such expenses including attorneys' fees incurred by other employees and
agents may be so paid upon such terms and conditions, if any, as the Board of
Directors deems appropriate.
(f) The indemnification and advancement expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section.
(h) For purposes of this Section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees, or agents so that any
person who is or was a director, officer, employee, or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise, shall stand in the same position
under this section with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee, or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such person.
II-2
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT MAY
BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY PURSUANT
TO THE FOREGOING PROVISIONS, IT IS THE OPINION OF THE COMMISSION THAT SUCH
INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND
IS THEREFORE UNENFORCEABLE.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the distribution of the
securities being registered, all of which are to be paid by the Registrant, are
as follows:
Securities and Exchange Commission Registration Fee $156*
Printing and Engraving Expenses 18,500**
Blue Sky Fees and Expenses 4,000**
Legal Fees and Expenses 47,000**
Accounting Fees and Expenses 35,000**
Miscellaneous Fees and Expenses 0
- ----------
* Paid with original filing.
** Estimated.
ITEM 26 - RECENT SALES OF SECURITIES
Simultaneous with the merger of Return Assured with Hertz Technology
Group in the first quarter of fiscal 2001, we issued 5,000 shares of Series A
Preferred Stock and 404,041 common stock purchase warrants in a private
placement to Global Emerging Markets for $5,000,000. These securities were sold
under the exemption from registration provided by Section 4(2) of the Securities
Act and Rule 506 promulgated under the Securities Act. Neither we nor any person
acting on our behalf offered or sold the securities by means of any form of
general solicitation or general advertising. The purchaser represented in
writing that it was an accredited investor and that it acquired the securities
for its own account. A legend was placed on the certificates stating that the
securities have not been registered under the Securities Act and cannot be sold
or otherwise transferred without an effective registration or an exemption
therefrom.
II-3
ITEM 27. EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation (1)
3.2 Certificate of Amendment of Certificate of Incorporation (2)
3.3 By-Laws (1)
3.4 Certificate of Designations of Series A of Preferred Stock (2)
4.1 Specimen Stock Certificate (3)
4.2 Form of Redeemable Warrant (1)
4.3 Form of Warrant Agreement (1)
5.1 Opinion of Kaplan Gottbetter & Levenson, LLP
10.1 1996 Stock Option Plan (1)
10.2 Series A Preferred Stock Purchase Agreement between Return Assured
Incorporate and GEM Global Yield Fund Limited date July 13, 2000 (2)
10.3 Form of Merchant Agreement (4)
10.4 Employment Agreement between Returned Assured Incorporated and
Matthew Sebal (3)
15 Awareness Letter of Goldstein Golub Kessler LLP*
21 Subsidiaries of the Registrant (5)
23.1 Consent of Goldstein Golub Kessler LLP*
23.2 Consent of Goldstein Golub Kessler LLP*
23.3 Consent of Pannell Kerr Forster*
23.4 Consent of Kaplan Gottbetter & Levenson, LLP (included in Exhibit 5)*
24 Power of Attorney (included on Signature Page)*
</Table>
- ---------------
*Filed herewith
(1) Incorporated by reference to Hertz Technology Group, Inc.'s Form SB-2, as
amended, filed with the Securities and Exchange Commission (SEC File No.
333-09783) on November 5, 1996.
(2) Incorporated by reference to Hertz Technology Group, Inc.'s Form 8-K
filed with the Securities and Exchange Commission on October 20, 2000.
(3) Incorporated by reference to Registration Statement on Form S-4 (File No.
333-71692) filed on October 16, 2001.
(4) Incorporated by reference to Amendment No. 1 to Registration Statement on
Form S-3 ( File No. 333-62546) on June 26, 2001.
(5) Incorporated by reference to Form 10-KSB (File No. 0-2679) filed with the
Securities and Exchange Commission on December 14, 2001.
II-4
ITEM 28. UNDERTAKINGS
a. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(b) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information
set forth in the registration statement;
(c) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement; provided, however, that paragraphs (1)(a)
and (1)(b) above do not apply if the information required to be
included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d)
of the Exchange Act that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
b. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall by deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
c. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under "Item 15,
Indemnification of Directors and Officers" above, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment to the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
II-5
d. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-6
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file with the Commission at the Public Reference Room at
the Commission, at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call 1-800-SEC-0330 for further information
concerning the Public Reference Room. The Commission also makes these documents
and other information available on its web site at http://www.sec.gov.
We have filed with the Commission a registration statement on Form S-B2
under the Securities Act of 1933, relating to the common stock offered by this
prospectus. This prospectus is a part of the registration statement but does not
contain all of the information in the registration statement and its exhibits.
For further information, we refer you to the registration statement and its
exhibits.
The Commission allows us to "incorporate by reference" the information
we file with it, which means that we can disclose important information to you
by referring you to another document we have filed with the Commission. The
information incorporated by reference is an important part of this prospectus
and information that we file later with the Commission will automatically update
and supersede this information. We incorporate by reference the following:
o Annual Report on Form 10-KSB for the fiscal year ended August 31,
2000, as filed with the Commission on December 14, 2000;
o Amended Annual Report on Form 10-KSB/A for the fiscal year ended
August 31, 2000 as filed with the Commission October 3, 2001;
o Annual Report on Form 10-KSB for the fiscal year ended August 31,
2001, as filed with the Commission on December 14, 2001;
o The Current Report on Form 8-K dated December 15, 2000, as filed
with the Commission on January 12, 2001.
o The Current Report on Form 8-K dated May 11, 2001, as filed with
the Commission on May 15, 2001;
o The Current Report on Form 8-K dated June 4, 2001, as filed with
the Commission on June 28, 2001;
o The Current Report on Form 8-K dated June 4, 2001, as filed with
the Commission on July 30, 2001;
o The Current Report on Form 8-K dated October 8, 2001, as filed
with the Commission on December 4, 2001;
o The Current Report on Form 8-K dated January 14, 2002, as filed
with the Commission on January 16, 2002;
o The Quarterly Report on Form 10-QSB for the quarter ended November
30, 2000, as filed with the Commission on January 19, 2001;
II-7
o The Amended Quarterly Report on Form 10-QSB/A for the quarter
ended November 30, 2000, as filed with the Commission on October
3, 2001;
o The Quarterly Report on Form 10-QSB for the quarter ended February
28, 2001, as filed with the Commission on April 23, 2001;
o The Amended Quarterly Report on Form 10-QSB/A for the quarter
ended February 28, 2001, as filed with the Commission on October
3, 2001;
o The Quarterly Report on Form 10-QSB for the quarter ended May 31,
2001, as filed with the Commission on July 20, 2001;
o The Amended Quarterly Report on Form 10-QSB for the quarter ended
May 31, 2001, as filed with the Commission on October 3, 2001;
o The Quarterly Report on Form 10-QSB for the quarter ended November
30, 2001, as filed with the Commission on January 22, 2002; and
o Any future filings we make with the Commission until the selling
stockholder sells all of the common stock offered by it by this
prospectus.
Note that interim review reports of independent accountants are
governed by SAS 71/AU 722. These are reports which are included in financial
statements that are generally unaudited. SAS 71/AU 722 interim review reports
are not considered "reports" as such as defined in Sections 7 and 11 of the
Securities Act of 1933, as amended, (the "Act"). In addition, the liability of
independent accountants under Section 11, "Civil Liabilities on Account of False
Registration Statement," does not extend to SAS71/AU 722 review reports.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address or telephone number:
Return Assured Incorporated
Attn: Investor Relations
1901 Avenue of the Stars, Suite 1710
Los Angeles, CA 90067
Tel: (877) 807-4664
E-mail: info@returnassured.com
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on a Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on the 12th day of
February 2002.
RETURN ASSURED INCORPORATED
(Registrant)
By: /s/ MATTHEW SEBAL
----------------------------------
Name: Matthew Sebal
Title: President
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint Matthew Sebal with full power
to act as his or her true and lawful attorney-in-fact and agent for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this Registration Statement including without limitation any
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully, for all intents and purposes, as he or she could
or might do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities on February 12, 2002.
By: /s/ MATTHEW SEBAL
-----------------
Matthew Sebal
President and Chairman of the Board
By: /s/ TODD CUSOLLE
----------------
Todd Cusolle
Director
II-9
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation (1)
3.2 Certificate of Amendment of Certificate of Incorporation (2)
3.3 By-Laws (1)
3.4 Certificate of Designations of Series A of Preferred Stock (2)
4.1 Specimen Stock Certificate (3)
4.2 Form of Redeemable Warrant (1)
4.3 Form of Warrant Agreement (1)
5.1 Opinion of Kaplan Gottbetter & Levenson, LLP
10.1 1996 Stock Option Plan (1)
10.2 Series A Preferred Stock Purchase Agreement between Return Assured
Incorporate and GEM Global Yield Fund Limited date July 13, 2000 (2)
10.3 Form of Merchant Agreement (4)
10.4 Employment Agreement between Returned Assured Incorporated and
Matthew Sebal (3)
15 Awareness Letter of Goldstein Golub Kessler LLP*
21 Subsidiaries of the Registrant (5)
23.1 Consent of Goldstein Golub Kessler LLP*
23.2 Consent of Goldstein Golub Kessler LLP*
23.3 Consent of Pannell Kerr Forster*
23.4 Consent of Kaplan Gottbetter & Levenson, LLP (included in Exhibit 5)*
24 Power of Attorney (included on Signature Page)*
</Table>
- ---------------
*Filed herewith
(1) Incorporated by reference to Hertz Technologies Group, Inc.'s Form SB-2, as
amended, filed with the Securities and Exchange Commission (SEC File No.
333-09783) on November 5, 1996.
(2) Incorporated by reference to Hertz Technologies Group, Inc.'s Form 8-K
filed with the Securities and Exchange Commission on October 20, 2000.
(3) Incorporated by reference to Registration Statement on Form S-4 (File No.
333-71692) filed on October 16, 2001.
(4) Incorporated by reference to Amendment No. 1 to Registration Statement on
Form S-3 ( File No. 333-62546) on June 26, 2001.
(5) Incorporated by reference to Form 10-KSB (File No. 0-2679) filed with the
Securities and Exchange Commission on December 14, 2001.