SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
to
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HouseHold Direct, Inc.
(Formerly HouseHold Direct.com, Inc.)
(Name of small business issuer in its charter)
9995
Delaware
(State or other 51-0388634
jurisdiciton of (Primary Standard Industrial (I.R.S. Employer
incorporation or Classification Code Number) Identification Number)
organization)
3 Glen Road, Sandy Hook, Connecticut 06482
(203) 426-2312
(Address and telephone number of
registrant's principal executive offices)
John Folger, Chief Executive Officer
3 Glen Road, Sandy Hook, Connecticut 06482
(203) 426-2312
(Name, address and telephone number
of agent of service)
Copies to:
Craig G. Ongley Joseph B. LaRocco
McCue & Lee, P.C. 49 Locust Avenue, Suite 107
14135 Midway Road, Suite 250 New Canaan, Connecticut 06840
Addison, Texas 75001
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the registration statement becomes
effective.
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 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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. :
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this Form is a post effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Proposed Proposed Maximum
Title of Each Maximum Aggregate Amount of
Class of Securities Amount to be Offering Offering Price Registration
To Be Registered Registered Price Per (1) Fee
Security (1)
- --------------------------------------------------------------------------------
Common stock, par
value $0.001 per share 10,000,000(1) $1.00 (1)(2) $10,000,000(3) $2,500.00
- --------------------------------------------------------------------------------
Common stock, par
value $0.001 per share 6,037,500(4) $0.064 (1) $386,400(4) $97.00
- --------------------------------------------------------------------------------
Common stock, par
value $0.001 per share 8,400,000(5) $1.00(1) $8,400,000 $2,100.00
- --------------------------------------------------------------------------------
Common stock, par
value $0.001 per share 7,600,000(6) $0.00 $0.00 $0.00
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended. Represents
shares which may be issued pursuant to our equity line of credit agreement with
Dutchess Private Equities Fund, L.P. The number of shares of common stock issued
will vary based on the purchase price per share.
(2) The price per common share will vary based on the bid prices of our common
stock as reported on the Bulletin Board during the valuation periods provided in
the private equity line investment agreement described in the registration
statement. The purchase price will be equal to 91% of the average lowest three
(3) closing bid prices during the ten (10) trading days following the "put." The
agreement allows us to sell shares to Thomas Kelly and Dutchess Private Equities
Fund, L.P. over a period of 36 months from the date of the agreement.
(3) This amount represents the maximum purchase price that Dutchess Private
Equities Fund, L.P. may pay to us under the private equity line investment
agreement. The maximum net proceeds we can receive is $10,000,000, or less.
(4) This amount represents the maximum exercise price we believe that Thomas
Kelly will pay to us in the event he would choose to convert debentures issued
to him and to exercise certain warrants issued to him and purchase up to
6,037,500 shares of our common stock. The warrants may be exercised upon notice
at anytime until they expire one year from their issue date.
(5) Sprout Investments, LLC has entered into a subscription agreement with
HouseHold whereby they have agreed to buy up to 8,400,000 shares of our common
stock at a purchase price equal to 90% of the average lowest three closing bid
prices during the five trading days prior to the day we give Sprout notice of
our desire to sell shares. The number of shares we can sell to Sprout at any
time is limited to 15% of the daily average shares traded for the 20 trading
days prior to the date of HouseHold's put notice. A description of the material
terms of the subscription agreement appear in this registration statement.
(6) These shares are shares to be registered and sold by certain selling
stockholders described in the registration statement from which the company will
not receive any benefit.
(7) The Registrant will amend, from time to time, this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a) may determine.
SUBJECT TO COMPLETION, DATED FEBRUARY 25, 2002
32,037,500 SHARES
HOUSEHOLD DIRECT, INC.
COMMON STOCK
All of the shares of common stock, $.001 par value, (the "Common Stock")
offered hereby (the "Offering") are being sold by certain shareholders who are
registering up to twenty eight, million thirty two million thirty seven thousand
five hundred (32,037,500) shares of common stock as part of a private equity
line investment agreement, certain warrants issued under the terms of a
debenture, the conversion of said debenture into common shares of the company,
and a subscription agreement. This prospectus may be used only in connection
with the resale of 32,037,500 shares of common stock of HouseHold Direct, Inc.
by the selling stockholders listed on page 10 of this prospectus.
With respect to the private equity line investment agreement we describe in
this Agreement and the subscription agreement in this registration statement,
Thomas Kelly, Dutchess Private Equities Fund, LP, and Sprout Investments, LLC
are underwriters.
Our common stock is traded on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board under the symbol "BYIT." On January 14, 2002,
the low and high bid prices for the common stock on the Bulletin Board were
$0.0125 and $0.016, respectively.
INVESTING IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISKS DUE TO OUR CURRENT
FINANCIAL CONDITION. SEE "RISK FACTORS" BEGINNING ON PAGE 3.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 05, 2002.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
TABLE OF CONTENTS
Page No.
Prospectus Summary............................................................1
Risk Factors..................................................................3
Use of Proceeds...............................................................7
Determination of Offering Price...............................................7
Dilution......................................................................9
Selling Security Holders.....................................................10
Plan of Distribution.........................................................10
Legal Proceedings............................................................12
Directors, Executive Officers, Promoters and Control Persons.................12
Security Ownership of Certain Beneficial Owners and Management...............13
Description of Securities....................................................14
Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..........................14
Description of Business......................................................15
Management's Discussion and Analysis or Plan of Operation.....................20
Description of Property....................................................23
Certain Relationships and Related Transactions...............................23
Market for Common Equity and Related Stockholder Matters.....................23
Executive Compensation.......................................................25
Special Note on Forward Looking Statements...................................25
Financial Statements.........................................................F1
PROSPECTUS SUMMARY
This summary highlights information about the offering and HouseHold
Direct, Inc. which we believe will be important to you. You should read the
entire prospectus including the financial statements for a complete
understanding of our business and this offering.
The Company
HouseHold Direct, Inc. ("HouseHold") was formed in 1992 and is engaged in
the development, promotion, marketing and sales of memberships in a "wholesale
buying club" to the general public. Up to the date of this prospectus, we have
primarily been in a development stage where we have created our business plan
and acquired the necessary expertise and personnel we believe essential to
implementing our plan.
We believe that consumers will benefit by their membership in our buying
club as it will give them the ability to purchase a broad range of house hold
products including appliances, electronics and furniture at direct manufacturer
or distributor prices. Our revenue will come form initial membership fees,
periodic dues and a commission or handling charge for each product purchased
through the club.
Although we have many of the building blocks we feel are needed to start
our business we do not have sufficient working capital to allow us to begin the
operations portion of our business plan. The primary purpose of the offering
described in this prospectus is to register a number of shares of our common
stock which we will, over a period of time, to third parties who have contracted
with us to purchase the shares contingent upon the shares be registered for
resale. The proceeds from the sales to the third parties will provide us with
the working capital necessary to fund our initial operations and business plan
implementation.
Our corporate offices are located at 3 Glen Road, Sandy Hook, Connecticut
06482 and our telephone number is (203) 426-2312. We have two Internet web sites
which can be located at www.householddirect.com and www.byit.net.
The Offering
On July 12, 2001, we signed a private equity line investment agreement with
Dutchess Private Equities Fund, L.P. and Thomas Kelly ("Dutchess") for the
future issuance and purchase of certain shares of our common stock. The
investment agreement establishes what is sometimes termed an equity line of
credit or an equity draw down facility. Dutchess has committed up to $10,000,000
to purchase shares of our common stock. Beginning on the date that a
registration statement covering the resale of the shares issuable pursuant to
the equity line of credit is declared effective by the Securities and Exchange
Commission (the "Commission"), and continuing for thirty six (36) months
thereafter, we may, from time to time, in our sole discretion, sell or "put"
shares of our common stock to Dutchess at a price equal to 91% of the average
lowest three (3) closing bid prices for the ten (10) trading days following our
"put" notice requesting access to our equity line. The average trading volume, a
decline in the daily trading volume or price of our common stock may reduce the
amount we can draw down under the terms of the private equity line of credit
agreement. Dutchess' obligation to purchase the shares of our common stock is
subject to the satisfaction of the conditions included on page 11 of this
prospectus. The number of shares that we will issue to Dutchess in return for
the advance will be determined by dividing the amount of the advance by the
purchase price of our common stock for that notice date, as set forth in
investment agreement. No advance date may be less than thirteen (13) trading
days after an advance notice date.
As additional consideration to Dutchess, payment of certain legal fees and
to induce certain parties to purchase a convertible debenture, described below,
we issued 7,600,000 shares of common stock which are to be registered by the
stockholders described on page 10 of this prospectus.
We will receive the amount of the advance less any escrow agent fees.
In addition, we are registering up to 6,037,500 common shares to be issued
in the event debentures issued to Mr. Thomas Kelly are converted into common
shares of the company and warrants to purchase 37,500 common shares is exercised
by Mr. Kelly. On July 12, 2001, the company executed a subscription agreement
whereby Mr. Thomas .
1
Kelly, an accredited investor, purchased a 6% cumulative interest debenture that
is convertible into common stock of the company at the request of Mr. Kelly at
the lesser of (i) $.10; (ii) 100% of the average of the five (5) lowest closing
bid prices during the fifteen (15) trading days prior to the closing date; or
(iii) 80% of the average of the three (3) lowest closing bid prices during the
ten (10) trading days prior to conversion.
On January 14, 2002 we entered into a subscription agreement with Max
Capital Holdings, Inc. which allows us to sell up to 8,400,000 shares of our
common stock to Sprout for 90% of the closing bid price on the day we make our
purchase request. Sprout `s obligation to purchase the number of shares we put
to them is limited to 15% of the daily average trading volume for our common
stock for the twenty trading days prior to our purchase request. A more detailed
description of our subscription agreement with Sprout is included on page 10 of
this prospectus.
Securities offered (1)............................Up to 32,037,500
shares of common stock.
Percentage of outstanding securities of
HouseHold represented by the shares being registered ......... 22.7%
The common stock to be outstanding after the offering(2)....117,723,044
shares of common stock, assuming issuance of 10,000,000
shares pursuant to our equity line of credit, 8,400,000
shares pursuant to the subscription agreement exercise of a
warrant to purchase 37,500 common shares, the conversion of
the debenture into 6,000,000 common shares for which shares
are being registered in this prospectus.
Use of Proceeds................................... We will not receive any
proceeds from the sale of common stock by the selling
stockholders. We will receive the cash proceeds, if any,
from the exercise of the warrants held by one of the selling
stockholders which will be used for working capital. See
"Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Risk factors............................................ An investment in
the shares involves a high degree of risk. See "Risk
Factors."
OTC Bulletin Board trading symbol............................. "BYIT"
(1) Prospectus (i) up to 10,000,000 shares of common stock issuable upon
the exercise from time to time of a private equity line of credit
established by Dutchess (ii) up to 37,500 shares of our common stock
issuable upon the exercise of certain warrants to a certain investor
under the terms of a debenture issued by us; (iii) up to 6,000,000 of
our common stock issuable upon conversion of debentures issued by us;
(iv) up to 8,400,000 shares of common stock issuable by HouseHold and
sold to Max Capital, from time to time, pursuant to the terms of a
subscription agreement executed between us; and (v) 7,600,000 common
shares being sold by certain selling stockholders.
(2) As of January 14, 2001. Does not include 2,445,000 shares issuable
upon exercise of certain outstanding options and warrants that are not
held by the selling shareholder
2
RISK FACTORS
OUR SECURITIES ARE HIGHLY SPECULATIVE. YOU SHOULD NOT PURCHASE THEM UNLESS
YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS BEFORE YOU DECIDE TO PURCHASE OUR SECURITIES.
The Exercise of Our Equity Line of Credit and Our Subscription Agreement May
Make it Difficult to Evaluate a Shareholder's Equity Position in HouseHold.
The number of shares of our common stock which is issuable upon exercise
from time to time under our equity line of credit will fluctuate based on the
amount of credit line we wish to access and the per share purchase price paid
based on the average of the lowest price reported for the three (3) day trading
period ending on the advance notice date. In addition, although we can sell up
to 8,400,000 common shares over a period of time under the terms of the
subscription agreement we have no requirement to do so. Therefore, the
percentage of our common stock held by a shareholder on any given day may be
substantially different from another day depending on (i) whether we choose to
sell shares under the terms of the subscription agreement or (ii) our closing
bid prices, as the number of shares of our common stock issuable pursuant to our
equity line of credit may vary significantly from day to day.
We expect to use the net proceeds from the draw downs under the equity line
investment agreement with Mr. Kelly and Dutchess and the stock sales to Max
Capital under the subscription agreement for working capital. We will have
significant flexibility in applying the net proceeds. You will not have the
opportunity to evaluate the economic, financial or other information on which we
base our decisions on how to use the net proceeds. If we fail to apply the net
proceeds effectively, our business could be negatively affected.
It is Unlikely that our Company Will be Able to Continue as a Going Concern
Without a Significant Improvement in Our Financial Condition, Which has
Constrained our Ability to Finance Acquisitions, and Other Operating Expenses as
Needed.
Our independent certified public accountants' report on our consolidated
financial statements for the fiscal year ended December 31, 2000 includes an
explanatory paragraph regarding our ability to continue as a going concern.
During the next twelve (12) months, we expect to spend a minimum of $3,000,000
to conduct operations and to make acquisitions. Our ability to continue
operations is dependent upon our continued sale of our securities for funds to
meet our cash requirements, and as a result, our ability to continue as a going
concern is doubtful.
Unless we are able to generate sufficient revenue or raise additional funds
when needed, it is likely that we will be unable to continue our planned
activities, including our acquisition and expansion strategy even if we are
making progress towards implementing our business plan and attracting new
members. The longer the duration of the business plan implementation, the more
unlikely it is that we will be able to raise such funds on favorable terms to us
or at all, or that any funds raised will be sufficient to complete
implementation of the business plan to the point where revenues will be
sufficient to sustain our operations and meet our expenses. There is no
assurance that the business plan, if implemented, and additional financing from
the sale of our common stock will improve our financial condition.
Subject to certain volume restrictions and the requirement that there be an
effective registration statement covering the resale of the shares of common
stock to be sold, we have the ability to sell up to $10,000,000 worth of common
stock under the private equity line investment agreement and 8,400,000 common
shares under the subscription agreement, but the timing and amount of capital
raised can vary significantly depending upon various factors, including the
market price of our common stock. We cannot be certain that Mr. Kelly, Dutchess
and Sprout will have the ability to purchase any of the shares of common stock
put to them pursuant to the investment agreement or the subscription agreement.
Accordingly, we may not be able to raise necessary capital in the manner we
expect pursuant to the equity line investment agreement or subscription
agreement.
Because the maximum amount of (i) any draw down request under the
investment agreement is subject to a formula based on 91% of the average of the
three (3) lowest closing bid prices reported for our common stock for the ten
(10) day trading period following the date of our put notice request and the
average trading volume and (ii) any
3
notice of sale under the subscription agreement is subject to a formula
based on 90% of the closing bid price reported for the day of our notice and the
average daily trading volume for the 20 trading days prior to the date of our
notice. A decline in the daily trading volume or price of our common stock may
reduce the amount we can draw down under the private equity line of credit
agreement or shares we can sell under the subscription agreement. In addition,
business and economic conditions may not make it feasible to draw down under the
private equity line of credit agreement or sell shares under the subscription
agreement at every opportunity. We may need to raise additional capital to fund
acquisitions and other expansion activities which we deem critical to our
potential success. Dutchess or Sprout may also decline to purchase shares under
a draw or sale request under the investment agreement or subscription agreement
if the conditions set forth in the agreements are not met.
We may not be able to obtain additional financing on favorable terms to us,
if at all. If adequate funds are not available, or are not available on terms
favorable to us, we may not be able to effectively continue or complete the
implementation of our business plan.
Because Our Shares Are 'Penny Stocks,' You May Be Unable to Resell Them in The
Secondary Market.
A "penny stock" is an equity security with a market price of less than $5
per share which is not listed on the NASDAQ or another national securities
exchange. Due to the extra risks involved in an investment in penny stocks,
federal securities laws and regulations require broker/dealers who recommend
penny stocks to persons other than their established customers and accredited
investors to make a special written suitability determination for the purchaser,
provide them with a disclosure schedule explaining the penny stock market and
its risks, and receive the purchaser's written agreement to the transaction
prior to the sale. These requirements limit the ability of broker/dealers to
sell penny stocks. Also, because of the extra requirements, many broker/dealers
are unwilling to sell penny stocks at all. As a result, you maybe unable to
resell the stock you buy as a result of this offering and could lose your entire
investment.
No Assurance of Continued NASD Listing Which If Discontinued Would Limit Your
Ability to Resell Our Shares.
Subsequent to this offering, there are no assurances that a public trading
market shall continue to exist for the common stock of HouseHold. There can be
no assurances that a public trading market for the common stock will be
sustained, although we anticipate that it will continue on the OTC Bulletin
Board. Consequently, there can be no assurance that a regular trading market,
other than Bulletin Board trading, for our securities will develop in the
future. If a trading market does in fact develop for the securities offered
hereby, there can be no assurance that it will be maintained. If for any reason
such securities fail to maintain their listing on the Bulletin Board, the
listing is not maintained, or a public trading market ceases to exist, holders
of our securities may have difficulty in selling their securities should they
desire to do so. Your inability to resell your shares could result in the loss
of your entire investment.
We May Not be Able to Complete Future Strategic Acquisitions, Delaying Our
Growth Plans and Decreasing Our Chances for Profitability.
Our growth plans are substantially dependent on acquisitions. We will be
continually evaluating possible acquisitions of businesses or product lines that
complement or expand our existing business or product lines, and management
intends to pursue favorable opportunities as they arise. We have not yet
identified specific acquisition targets. The evaluation of prospective
acquisitions and the negotiation of acquisition agreements may require
substantial expense and management time; and, not all potential acquisitions
ultimately are consummated. Further, we cannot guarantee that suitable
acquisition candidates will be found or that acquisitions can be completed on
favorable terms. In addition, even if we are able to complete such acquisitions,
we cannot guarantee that the acquired companies or assets will be successfully
integrated into the company. Acquisitions may be announced or completed at any
time and may be dilutive to earnings per share on a pro forma basis. Our
business plan is dependent upon making acquisitions and should we not be
successful then it is likely that would not be able to continue in business
resulting in the loss of your investment in us.
4
Acquisitions May Disrupt or Otherwise Have a Negative Impact on Business and May
Result in Dilution to Existing Stockholders.
In the future, we intend to continue to seek investments in complementary
businesses, product lines and technology. If we buy a company, or an operating
division, we could have difficulty in assimilating the personnel and operations.
In addition, the key personnel of an acquired company may decide not to work for
us and customers and vendors of the acquired company may decide not to do
business with us. We could also have difficulty in assimilating the acquired
business, products or technology into our operations. These difficulties could
disrupt our ongoing business, distract our management and employees and increase
our expenses. In addition, future acquisitions could have a negative impact on
our business, financial condition and results of operations. Furthermore, we may
have to incur debt or issue equity securities to pay for any future acquisition,
the issuance of which may be dilutive to our existing stockholders. We
anticipate that we will use common stock of the company to help purchase
acquisitions. Should all the shares registered in this offering be purchased, we
will not have sufficient authorized shares to use for our acquisitions. We
therefore anticipate that almost immediately after the effective date of this
offering we will have to either increase the number of shares authorized by
amending our charter or reverse split our current shares issued and outstanding
to create available common stock to use for acquisitions or future equity
funding.
We Have Incurred Losses since Our Inception, Have No Product Revenue, and Expect
to Incur Additional Losses in the Future.
Although we were formed in 1992, we are still in the development stage.
From inception through December 30, 2000, we had an accumulated deficit of
approximately $6,087,453. We expect that our deficit will continue to increase.
The only revenues we have had are insignificant amounts related to our
membership service agreement with a company called PCS, Inc. We do not currently
have any significant source of membership revenue. At this time we have no basis
to believe that we will ever generate operating revenues from the sale of, or
services to, any membership base.
We Depend on a Series of Anticipated Acquisitions to Implement a Substantial
Portion of Our Business Plan to Develop and Expand the Growth of Memberships to
the Club. If We Do Not Acquire Any Other Companies, or If We Fail to Add Members
to the Club, Our Business, Financial Condition and Results of Operations Will Be
Harmed.
We contemplate that in order to achieve any real level of commercial or
economic success, we must be able to solicit a large number of individual
consumers to become members of our Buyer's club, and that we also must be able
to acquire other companies that will use our services and pay us a fee for these
services, or in some other way, create an economic base, like a partnership or
joint venture, for our business plan to continue. We may spend a substantial
amount of money to create marketing programs, solicit new members, or to entice
other organizations and businesses to become part of our membership
organization. If our marketing programs fail, or if we do not attract sufficient
members to justify the cost of these marketing programs, then these financial
losses could have a serious harmful effect on the results of our operations and
could result in continuing adverse financial effects.
We Depend on Relationships with Many Manufacturers and Distributors That
Represent a Large Number of the HouseHold Products That We Expect to Sell to
Members. If We Do Not Get, or Cannot Keep These Relationships, or If the
Relationships That We Have, or Conclude, Are Changed for Any Reason Whatsoever,
Our Business, Financial Condition and Results of Operations Will Be Harmed.
We will need relationships with many other companies in order to have
access to the products that we offer for sale to our members. There can be no
assurance that any company with whom we are able to have a purchase relationship
might not change their business practices, adjust their prices, modify their
distribution requirements or distribution areas, or do anything else that may
make it impossible to us to continually have access to the products that we
intend to offer for sale to our members. Should anything occur to these critical
manufacturer and distributor relationships, then our access to the products we
intend to offer to our members would be reduced or eliminated. If our access to
these products or goods were reduced or eliminated altogether, then we would
have a difficult task to find an alternate method to acquire products. Should
any of these situations occur for any substantial length of time, then we would
no longer be able to provide the services for which the member contracted our
purchasing services,
5
which could have a serious harmful effect on the results of our operations and
could result in continuing financial losses.
Our Business Could Be Harmed If We Lose the Services of the Key Personnel upon
Whom We Depend. We Do Not Currently Have A Chief Financial Officer To Watch Over
Our Finances
HouseHold Direct is currently wholly dependent upon the personal efforts
and abilities of our two full-time executive officers, only one of who, John
Folger, Chief Executive Officer, has any experience in the membership club
industry. The loss or unavailability to us of the services of John Folger or Ann
Jameson, Vice President of Operations, could have a material negative impact on
our business prospects and any potential earning capacity; and, therefore, we
have obtained "key-man" insurance on the lives of Mr. Folger and Ms. Jameson in
the amounts of $1,000,000 and $1,000,000 respectively. If our level of
operations significantly increase, the business may depend upon our abilities to
attract and hire additional management and staff employees. Our financial
position does not permit us to have a chief financial officer or accounting
professional on our staff consequently all our internal bookkeeping is being
done by our current officers. We therefore have no checks and balances on our
finances and no experienced person overlooking our accounting. It is possible
that we will be unable to secure such additional management and staff when
necessary. (See "Management")
The Company Relies on Third Parties Such as Suppliers, Vendors, Distributors and
Shippers to obtain and deliver product purchases to our members should we not be
able to acquire and maintain such relationships we would not be capable of
selling products to our members resulting in insufficient revenues to allow us
to continue in business.
The Company's success depends in large part on its ability to purchase
popular consumer products in sufficient quantities at competitive prices. We do
not have long-term or exclusive arrangements with any supplier, vendor or
distributor that guarantees the availability of products for purchase. If we are
not able to offer our members sufficient quantities or a variety of products,
our business, financial condition and operating results will be materially
adversely affected. Also, we may rely upon third party carriers to ship the
products our members buy. Therefore, we are subject to risks affecting a
carrier's ability to provide delivery services to meet our shipping needs.
Failure to deliver the products our members buy in a timely manner could
materially adversely affect its business, financial condition and operating
results.
We May Be Subject to Liability for Products Whose Sale the Company Facilitates
resulting in potential lawsuits and damages which, if substantial, could result
in the loss of all the assets of HouseHold.
Members who buy goods and products may sue if they are harmed by any of the
products whose sale we facilitate. Although we do not manufacture these
products, we are exposed to potential liability. Liability claims could require
us to spend significant time and money in litigation and to pay significant
damages, which could harm our business, financial condition and results of
operations. Although we intend to disclaim all warranties and rely on the
manufacturers to fulfill their warranty obligations, we cannot be certain that
the manufacturers will be able to fulfill their warranty obligations. In
addition, we believe that some disclaimers may be unenforceable under the laws
of certain foreign jurisdictions. Should a substantial judgment for damages be
rendered against us, we may not have sufficient insurance, if any, or assets to
pay the judgment resulting in our bankruptcy or dissolution.
**move to page 40**Some of our business expansion plans assume that we will
be involved in marketing memberships and products over the Internet, where our
target markets are highly competitive and we may be unable to compete
effectively.
**The e-commerce marketplace is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future because barriers
to entry in the e-commerce marketplace are minimal, and current and new
competitors can launch new Web sites at a relatively low cost. The general
consumer product industries are also intensely competitive. In the general and
household product industries we currently compete primarily with other
wholesalers and distributors. We also compete with the growing number of
manufacturers who sell their products directly, either online or through
traditional distribution channels. Many of these manufacturers, wholesalers and
distributors are larger and have substantially greater marketing abilities and
resources than we do.
6
We Are Subject to Risk of Computer And Communication Systems Failure Which May
Hinder Our Ability to Operate Successfully. Should our systems fail for any
substantial length of time we could experience a substantial loss in revenues
and membership resulting in adverse changes to our financial position and
operating results.
Our success, in particular our ability to successfully receive and fulfill
orders and provide high-quality customer service, largely depends on the
efficient and uninterrupted operation of our computer and communications
systems. We contract with a third party to host and maintain our Web site. While
we contract with a third party to provide back up web hosting services, our
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and other
third party events and Acts of God. We carry no business interruption insurance
to compensate us for losses that may occur. In addition, our security mechanisms
or those of our suppliers may not prevent security breaches or service
breakdowns. Despite our implementation of security measures, our servers may be
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. These events could cause interruptions or delays in our business,
loss of data or render us unable to accept and fulfill orders. Loss of our
systems for any substantial period of time result in lost regarding venues and
membership which in turn would result in adverse changes to our financial
position and operating results.
The success of our service will depend in large part upon the development
and maintenance of the Web infrastructure, such as a reliable network backbone
with the necessary speed, data capacity and security. We also depend on timely
development of complementary products, such as high-speed modems, for providing
reliable Web access and services. Because global commerce and the online
exchange of information are new and evolving, it is difficult to predict with
any assurance whether the Web will prove to be a viable commercial marketplace
in the long-term. The Web has experienced, and is expected to continue to
experience significant growth in the numbers of users and amount of traffic. To
the extent that the Web continues to experience increased numbers of users,
frequency of use of increased bandwidth requirements of users, the Web
infrastructure may not continue to be able to support the demands placed on it
by this continued growth and the performance or reliability of the Web may be
compromised. The infrastructure of complementary products or services necessary
to make the Web a viable commercial marketplace of the long-term may not be
developed and, even if it is developed, the Web may not become a viable
commercial marketplace for products and services such as those offered by the
company. If the necessary infrastructure, standard or protocols or complementary
products, services or facilities are not developed, or if the Web does not
become a viable commercial market place, our business, financial condition and
results of operations will be harmed. Even if the infrastructures, standards or
protocols or complementary products, services or facilities are developed and
the Web becomes a viable commercial marketplace in the long term, we might be
required to incur substantial expenditures in order to adapt our service to
changing Web technologies, which could harm our financial condition and results
of operations.
USE OF PROCEEDS
We will not receive any proceeds from the registration of common stock by
the selling security holders as shown in "Selling Security Holders". We will
receive certain proceeds as we draw down on our equity line, sell shares under
the terms of the subscription agreement and if a stockholder exercises up to
37,500 warrants. We intend to use all proceeds from the equity line of credit,
the sale of the warrants and subscription agreement for working capital
including but not limited to, administrative and general overhead expenses
including salaries and bonuses, repayment of obligations owed to third parties
including vendors and creditors and expansion of our business including the
identification and purchase of other companies or their assets. We have not yet
identified any specific acquisition targets.
DETERMINATION OF OFFERING PRICE
We are not selling any stock in this offering and therefore will not be
receiving any proceeds from the sale of the common stock registered by the
security holders except in the event a stockholder exercises certain warrants
and their underlying shares registered herein. We believe that the price the
selling security holders will receive should they choose to sell their shares
after the effective date of this registration statement will be the prevailing
market price for our stock on the Bulletin Board on the date of sale. We have
used the price of $1.00 as our estimated offering
7
price based upon our belief that over the three year period of time we have to
draw down on the equity line and can sell stock to Sprout that the average per
share price will be $1.00, however, this estimate is speculative. We have no
factual basis to support our belief and our actual average price could vary
substantially from our estimate.
EQUITY LINE AND SUBSCRIPTION AGREEMENTS
We are engaging in this offering primarily to utilize the benefits of two
agreements, the equity line investment agreement and the subscription agreement,
which provide us with the opportunity to obtain capital under certain term and
conditions. The following is a summary of what we believe to be the material
terms of each agreement.
EQUITY LINE INVESTMENT AGREEMENT
On July 12, 2001 we signed a private equity investment agreement with
Dutchess Private Equities Fund, L.P. and Thomas Kelly. Pursuant to the
investment agreement and subject to the satisfaction of certain conditions,
HouseHold may sell and issue to Dutchess and Kelly, from time to time, up to an
aggregate of $10,000,000 of our common stock. Beginning on the date that a
registration statement covering the resale of the shares issuable pursuant to
the equity line is declared effective by the Commission, and continuing for
thirty six (36) months thereafter, we may, from time to time, in our sole
discretion, sell or "put" shares of our common stock to Dutchess at a price
equal to 91% of the average lowest three (3) closing bid prices reported for our
common stock for the ten (10) trade days following the receipt of our notice to
access our equity line.
The maximum advance amount on any advance notice date is equal (i) one
hundred percent (100%) of the average daily volume (computed using the 30
trading days prior to the advance notice) multiplied by (ii) the market price.
At no time will an advance be made or advance notice be given so as to cause
Dutchess to hold in excess of 4.9% of our then issued and outstanding common
shares. Our ability to put shares of common stock to Dutchess is subject to
certain conditions and limitations, including but not limited to, the following:
- The requirement that this registration statement not be suspended
or our common stock not be delisted from the Bulletin Board or
any exchange;
- Our representations and warranties to Dutchess contained in the
equity investment agreement must be accurate as of the date of
each put;
- We must have performed, satisfied and complied in all respects
with all covenants, agreements and conditions required to be
performed, satisfied or complied with at or prior to the date of
each put; $ We must have obtained all permits and qualifications
required by any applicable state in accordance with the
registration rights agreement for the offer and sale of the put
shares, or shall have the availability of exemptions there from.
The sale and issuance of the put shares must be legally permitted
by all laws and regulations to which we are subject;
- At least fifteen (15) trading days must have elapsed since the
last date we put shares to Dutchess.
We cannot assure you that we will satisfy all of the conditions required
under the investment agreement or that Dutchess, will have the ability to
purchase all or any of the shares of common stock put to it thereunder.
Under the investment agreement, we agreed to register the common stock for
resale by Dutchess which will permit Dutchess to resell the common stock from
time to time in the open market or in privately-negotiated transactions. We will
prepare the registration statement and file amendments and supplements thereto
as may be necessary in order to keep it effective as long as the equity line
investment agreement remains in effect or Dutchess owns any of our common stock.
We have agreed to bear the expenses, other than broker discounts and
commissions, if any, in connection with the preparation and filing of the
registration statement and any amendments to it.
SUBSCRIPTION AGREEMENT
Effective January 14, 2002 we entered into a subscription agreement with
Sprout Investments, LLC which allows us to sell them 8,400,000 shares of our
common stock subject to the terms and conditions of the agreement. The agreement
8
allows us to notify Max Capital that we wish to sell or "put" a number of our
shares and Sprout must purchase the shares we tender to them as long as:
- The amount of shares we put to Sprout at any given time does not
exceed the number of shares equal to 15% of the daily average
share trading volume for the 20 trading day period prior to the
date of our put notice to Sprout;
- Sprout will pay us a per share purchase price equal to 90% of the
lowest three day average closing bid price reported for our
common stock for the 5 day trading period ending the day prior to
the date of our put notice to Sprout;
- We have complied with all the covenants and not breached any of
the warranties we have given to Max Capital as stated in the
terms of the agreement;
- The shares we sell to Sprout are registered by us for resale so
that Max Capital can resell them from time to time on the open
market or in private sales transactions that might be negotiated
by them. We have agreed to pay the costs of the registration and
including the expenses of amending the registration documents
from time to time until such time as we have sold all 8,400,000
shares to Max Capital or no longer sell shares to Max Capital
under the terms of the agreement.
There can be no assurance that we will be able to meet the requirements
necessary to sell shares to Sprout or that something adverse may cause Max
Capital to breach the agreement with us.
DILUTION
As of August 31, 2001, we had a net tangible book value of $359,721 or our
negative net tangible book value as of September 30, 2002 was $2,305,838 or
approximately $(.06) per share is determined by dividing the amount of our total
tangible assets less total liabilities by the number of our total tangible
assets less total liabilities by the number of shares of common stock
outstanding at that date. Dilution in net tangible book value per share
represents the difference between the amount per share paid by purchasers of
shares of common stock immediately after the completion of this offering.
After giving effect to the issuance and sale of the maximum number of
shares of common stock, 18,400,000 at a estimated price of $1, 6,037,500 for
conversion of the debentures issued to Thomas Kelly at $0.064 per share, and
7,600,000 to certain shareholders, our net tangible book value as of September
30, 2001 would have been $16,480,562, or approximately $ 0.49 per share. This
represents an immediate increase in net tangible book value of $.55 per share,
to existing stockholders; and an immediate dilution of approximately $0.51 per
share to the following table illustrates this per shares at $1.
Following table illustrates this per share dilution:
Public offering price per share $ 1.00
Net tangible book value per share at
September 30, 2001 0.06
Increase in net tangible book value
per share due to offering 0.55
Dilution per share to new investors 0.51
The following table summarizes, as of September 30, 2001, the difference
between the number of shares of common stock purchased form us, the total cash
consideration paid and the average price per share paid by existing stockholders
of common stock and by the new investors purchasing shares in this offering. The
table assumes the sale of both the minimum and maximum number of shares offered
in this prospectus at an initial public offering price of $1.00 per share, and
before any deduction of estimated offering expense.
Shares Purchased Total Consideration Average Price
--------------- ------------------- -------------
Number Percent Amount Per Cent Share
Existing stockholders 62,226,692 77 $5,999,549 24 $0.10
Investors 32,037,500 33 18,786,400 76 0.59
9
SELLING SECURITY HOLDERS
The table below sets forth certain information as of the date of this
prospectus, with respect to the amount and percentage ownership of each selling
security holder before this offering, the number of shares covered by this
prospectus and the amount and percentage ownership of each security holder after
this offering (assuming the issuance of the 32,037,500 shares being registered
in this registration statement). None of the selling security holders has had
any position, office, or other material relationship with us in the last two (2)
years, other than that disclosed in this prospectus.
Selling Shares Owned Shares Owned
Security Before After
Holder Offering(1) Percentage(2) Offering(3) Percentage(4)
Dutchess Private
Equities Fund, L.P. 5,600,000 4.8% 0 0%
- -------------- --------------------- ---------------------- --------------------
Dutchess Advisors,
Ltd.
3,100,000 2.6% 0 0%
- --------------------------------------------------------------------------------
Thomas Kelly 14,737,500 12.5% 0 0%
- --------------------------------------------------------------------------------
Joseph B. LaRocco 200,000 0.02% 0 0%
- --------------------------------------------------------------------------------
Sprout
Investments, LLC 8,400,000 7.1% 0 0%
- --------------------------------------------------------------------------------
(1) Assumed actual common shares owned and assumes we exercise our full equity
line, sell all shares under the security agreement and that all warrants and
convertible debentures of the selling security holders have been exercised.
(2) Based on 85,685,544 shares being issued and outstanding as of January 14,
2002 plus the 32,037,500 shares to be registered in this offering for a total of
117,723,044 common shares outstanding.
(3) Assumes that all equity line shares, all shares sold through the
subscription agreement and all warrants and convertible debentures of the
selling security holders have been exercised and converted and the resultant
shares have been resold through this offering.
(4) Based on 117,723,044 shares being issued after the offering.
The number or shares we are registering is our good faith estimate of the
maximum number of shares we will issue to i) Dutchess under the terms of our
private equity line investment agreement, the above described warrant and
debenture and ii) Sprout under the terms of the subscription agreement
PLAN OF DISTRIBUTION
We are registering the proposed resale of up to an estimated 10,000,000
shares of our common stock by Dutchess, which will receive shares of common
stock pursuant to our equity line investment agreement. In addition, we are
registering the resale of up to 37,500 shares of common stock issuable upon the
exercise of warrants and up to 6,000,000 shares of common stock upon the
conversion of debentures issued to Thomas Kelly. We are also registering
8,400,000 shares of common stock by Sprout Investments, LLC. pursuant to a stock
purchase agreement. The remaining 7,600,000 shares being registered by this
offering will be sold by the selling security holders for their sole benefit and
no proceeds will accrue to us. The security holders may offer the shares at
various times in one or more of the following transactions:
- in the over-the-counter market;
- in transactions other than market transactions;
- in connection with short sales of our shares;
- by pledge to secure debts or other obligations;
- in connection with the writing of non-traded and exchange-traded call
options, in hedge transactions and in settlement of other transactions
in standardized or over-the-counter options;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account; or in a combination of any of the
above.
10
The selling security holders may sell shares at market prices then
prevailing, at prices related to prevailing market prices, at negotiated prices
or at fixed prices.
The selling security holders may use broker-dealers to sell shares. If this
happens, broker-dealers will either receive discounts or commissions from the
selling security holders, or they will receive commissions from purchasers of
shares for whom they have acted as agents. Dutchess, Sprout and the other
selling security holders may be deemed to be underwriters with respect to any
shares sold by them. Broker-dealers who act in connection with the sale of the
common stock may also be deemed to be underwriters. Profits on any resale of the
common stock as a principal by these broker-dealers, and any commissions
received by the broker-dealers, may be deemed underwriting discounts and
commissions under the Securities Act of 1933.
As of January 14, 2002, we had approximately 85,685,544 shares of common
stock outstanding. The following table shows the number of shares we would issue
to Mr. Kelly, Dutchess and Sprout Investments, LLC and the price it would pay
for those shares given the hypothetical variable shown in the table, if
- we requested draw downs of the maximum amount under the private
equity line of credit agreement and sold all 8,400,000 shares to
Sprout under the terms of the subscription agreement;
- we set a minimum per share purchase price of $1.00;
- we do not issue more shares to Dutchess under the equity line
investment agreement than we are currently registering for resale
of the shares issued under the common stock purchase agreement.
Assumed Number of Shares Issuable
Lowest to Dutchess and Sprout under the
Price Equity Line Investment Agreement and
Subscription Agreement
$1.00 18,400,000
$2.00 13,400,000
$5.00 10,400,000
To permit Mr. Kelly, Dutchess and Sprout to resell the common shares issued
to them under the equity line investment agreement, or subscription agreement
and to permit the resale of 37,500 common shares issued upon the exercise of the
warrant issued to Mr. Kelly and the convertible debenture owned by Thomas Kelly,
we agreed to register those shares and to maintain that registration. To that
end, we have agreed to prepare and file such amendments and supplements to the
registration statement and the prospectus as may be necessary in accordance with
the Securities Act and the rules and regulations promulgated thereunder, in
order to keep it effective until the earliest of any of the following dates, as
applicable:
- in the case of shares issuable under the equity line or the
subscription agreement, the date after which all of the common
shares held by Mr. Kelly, Dutchess and Sprout in connection with
the equity line or the subscription agreement have been sold
pursuant to a registration statement.
- in the case of shares issuable upon exercise of the warrant and
conversion of the convertible debenture, (i) the earliest date
which the warrant was exercised or three (3) years from the date
of issuance of the warrant and; (ii) the earliest date upon which
the debenture is converted or five (5) years from the date of
issuance.
No underwriting commissions or finder's fees have been or will be paid by
us. The selling security holders will pay all broker-dealer commissions and
related selling expenses associated with the sale of the common stock. The
common stock offered hereby is being registered pursuant to our contractual
obligations, and we have agreed to pay the costs of registering the shares,
including the fees outlined above. Under the equity line investment agreement,
we have also agreed to indemnify Dutchess with respect to the shares offered
hereby against certain liabilities, including certain liabilities under the
Securities Act.
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In connection with the offering, persons participating in the offering may
purchase and sell shares of common stock on the open market. These transactions
may include short sales, stabilizing transactions in accordance with Rule 104 of
Regulation M under the Exchange Act and purchases to cover positions created by
short sales. The selling security holders have advised us that they do not
intend to engage in any short sale or stabilization transactions. Short sales
involve the sale by an underwriter of a greater number of shares than they are
required to purchase in the offering which creates a short position. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or limiting a decline in the market price of the common stock.
These activities, if taken by the underwriters, may stabilize, maintain or
otherwise affect the market price of the common stock. As a result, the price of
the common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected in the
over-the-counter market or otherwise.
LEGAL PROCEEDINGS
The company is not a party to any material litigation and is not aware of
any threatened material litigation except that is has been named as a defendant
in a civil lawsuit, Orienstar Finance Ltd.. vs. HouseHold Direct, Inc., et al.,
Case No. 01CV0598 filed in the District Court, Jefferson County, State of
Colorado. The lawsuit filed on May 21, 2001 alleges that Household violated
certain federal and Colorado securities laws including engaging in fraudulent
conduct and misrepresentations to induce Orienstar to purchase $460,000 worth of
Household common stock. Orienstar is seeking return of its $460,000 and
rescission of the Purchase Agreement. Household has denied any wrongdoing and
has engaged Colorado counsel to defend the company.
MANAGEMENT
Directors, Executive Officers, Promoters And Control Persons
Set forth below are the names, ages and positions of the executive
officers, key employees and directors of the Company:
John D. Folger, President and Chief Executive Officer, and Director, age
50. Since February of 1997 as President, CEO and Chairman of the Company, has
organized a unique national membership program into a publicly held enterprise.
He has developed operational plans, business structures and mandates and has led
the Company from concept, through development and currently launching
operational phase. Mr. Folger has over 25 years experience in conceptual
marketing structure as direct employee, consultant and principal. He had a
diverse executive management background with substantial credits in the creation
and implementation of market expansion strategies for corporate, public and
privately held companies. During this period he has: 1) created a master and
sub-franchise system for Business Exchange International; 2) developed marketing
plans for a wholly owned subsidiary of Bristol-Myers/Drackett and Business
Exchange International; 3) developed financing programs for Finlandia
Industries; 4) developed multiple office recruiting and operating strategies for
Amour Funding/The Investor Group; and, 5) designed, in conjunction with Online
Business Associates, The Virtual Visitor Center Internet-based applications.
From January 1, 1992 through May of 1993, Mr. Folger served as Vice President of
Finlandia Industries; from June of 1993 through December of 1994 as President of
MBA Financial Corp; from January of 1995 through January of 1997 as Vice
President of Online Business Associates, Inc.
Ann D. Jameson, Vice President, Secretary/Treasurer, and Director, age 58.
Jameson's 28 years of experience includes positions with The Hartford Insurance
Group and Carvel Corporation. She has developed managerial expertise in key
areas of strategy assessment, policy development, and project methods, data
processing systems development projects, procedures and training, human
resources and corporate relations. She developed programs and strategies that
addressed employee involvement, innovation and community service as Manager of
Community Affairs and Employee Services.
Prior to her association with the Company, Jameson's focus was directed
toward the development and support of programs and strategies to a client base
of corporate/small business levels, healthcare, professional/community
organizations, service/recreational agencies, and tourism as Executive Assistant
with Laughter Works Seminars, Fair Oaks, CA. Her professional activities include
director positions with the National and
12
Connecticut Employee Services and Recreational Associations, as well as special
events including New York Medical College, "This Close" for Cancer Research, and
the Michael Bolton Foundation.
Both Mr. Folger, as an officer, and Ms. Jameson, as an employee, are
currently involved in the completion of the winding up of Preferred Consumer
Network International, Inc. ("PCNI"). PCNI entered into an operating agreement
with United Buyers Service of Massachusetts and Connecticut (entities owned by
Mr. Folger), which was engaged in the sale of memberships in and the operation
of a consumer wholesale buyers club. As a result of the failure of these
businesses, certain withholding taxes were left unpaid. The Internal Revenue
Service ("IRS") has instituted collection of the payroll taxes and placed liens
on certain real property of Mr. Folger and Ms. Jameson. Both parties are
currently attempting to obtain and complete a settlement of the IRS claims. None
of the PCNI problems including the IRS settlement involve or effect HouseHold.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Names and Address of Title of Amount and Nature of Percent of
Beneficial Owner Class Beneficial Ownership Class(3)
John D. Folger,
President Common 10,787,062(1) 12.6%
CEO, Director, Chairman
900 Main Street S.
Southbury, CT 06488
Ann D. Jameson,
Vice-President Common 2,621,428(2) 7.7%
Secretary, Treasurer,
Director
900 Main Street S.
Southbury, CT 06488
Dutchess Private
Equities Fund L.P. Common 8,700,000 7.4%(4)
Dutchess Advisors Ltd.
100 Mill Plain Rd. 3rd Floor
Danbury, CT 06811
Thomas Kelly Common 14,737,500 12.5%
1961 Casa-de-Elegante Court
Las Vegas, NV 89117
Sprout Investments, LLC Common 8,400,000 7.1%
3500 East 17th Avenue
Denver, CO 80206
Officers, Directors and
Beneficial Owners Common 45,245,990(3) 38.4%
As a class 6 persons
(1) Included in the shares are options to purchase 870,000 common shares
granted in November 1999
(2) Included in the shares are options to purchase 750,000 common shares
granted in November 1999
(3) Gives effect to all of the shares registered in this offering as if we
utillized all of our equity line, sold all of the shares permitted
under the terms of the subscription agreement and all debentures and
warrants were exercised resulting in a total number of shares issued
and outstanding of 117,723,044.
(4) Dutchess Private Equities Fund L.P.and Dutchess Advisors, Ltd, are
seperate entities owned by two principals, Michael A. Novielli and
Douglas H. Lighton
13
DESCRIPTION OF SECURITIES
Common Stock
Our amended charter authorizes the issuance of 250,000,000 shares of common
stock at a par value of $.001 per share. Each stockholder of record of our
common stock is entitled to one vote for each share held in all matters properly
submitted to the stockholders for their vote. Cumulative voting for the election
of directors is not authorized by our charter.
Stockholders of our common stock are entitled to such dividends as may be
declared from time to time by the Board of Directors out of legally available
funds; and, in the event of liquidation, dissolution or winding up of the
affairs of the Company, holders are entitled to receive, ratably, the net assets
of the Company available to stockholders. Our stockholders have no preemptive,
conversion or redemptive rights. All of the issued and outstanding shares of
common stock are, and all unissued shares when offered and sold will be, duly
authorized, validly issued, fully paid, and nonassessable. To the extent that
additional shares of the Company's common stock are issued, the relative
interest of then existing stockholders may be diluted. We have not adopted any
anti takeover measures other than those generally available for all corporations
under the law of our state of incorporation, Delaware.
Each stockholder has sole investment power and sole voting power over the
shares owned by them and each share of common stock is entitled with respect to
election of directors or any other matter upon which shareholders are required
or permitted to vote.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our charter provides that none of our directors shall be liable to us or
our shareholders for monetary damages for breach of fiduciary duty as a
director, except for liability
1. for any breach of the director's duty of loyalty to us or our
shareholders;
2. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
3. under section 174 of the Delaware General Corporation Law; or
4. for any transaction from which the director derives improper personal
benefit.
The effect of this provision is to eliminate our rights and those of our
shareholders (through shareholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of his or her
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described
above. The limitations summarized above, however, do not affect our ability or
that of our shareholders to seek non-monetary remedies, such as an injunction or
rescission, against a director for breach of his or her fiduciary duty.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers, or persons controlling our Company pursuant to the foregoing
provisions, we have been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in our affairs since the date
hereof or that the information contained herein is correct as of any date
subsequent to the date hereof. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities offered hereby by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making the offer is not qualified to do so or to anyone
to whom it is unlawful to make such offer or solicitation.
14
BUSINESS
Overview
We are engaged in the creation, development and marketing of a "membership
club" to consumers. In exchange for a membership fee, HouseHold will act as a
purchasing agent on behalf of the member, thereby allowing the member to
purchase normal HouseHold goods like furniture, carpeting, floor and wall
coverings, small and large appliances and electronic products at the wholesale
price that a manufacturer or distributor normally sells to retail businesses
that sell these products. This membership relationship with the consumer allows
each of them to save money on their purchases because the profit margin that is
usually added to the manufacturer or distributor price by these retail
businesses is not added.
For income HouseHold will rely in part on recurring membership fees, the
amounts of which are dependent on the level of service, or services, that are
selected by the member. It is expected that this fee will be normally about
$9.95 per member/per month or a flat annual fee. We are just starting to
initiate our membership program and have not sold a material amount of
memberships. We will also charge a handling or transaction fee, of 10% or less,
on each of the products purchased through the club by our members. The
transaction fee will vary depending on the type of cost of the product or good
purchased.
History of Organization
The Company was originally incorporated on January 2, 1992 in Florida as
RDM Marketing, Inc. ("RDM"). Between 1992 and 1998, the Company was essentially
dormant with no significant business activities. On July 10, 1998, the Company
exchanged 10,000,000 shares of its common stock for all of the outstanding
shares of Preferred Consumer Network International, Inc. ("PCNI"). The PCNI
acquisition was made to acquire their membership base, operations and cash
assets. However it was later determined that the PCNI liabilities were too great
to sustain operations. On May 14, 1999, RDM entered into an acquisition
agreement whereby RDM agreed to acquire all of the issued and outstanding
capital stock of Thunderstick LLC, Inc. ("Thunderstick") in exchange for
1,000,000 shares of common stock. We acquired Thunderstick for the purpose of
obtaining its web site management software, the computer expertise of its
founder and a small amount of physical assets including computer hardware. On
July 12, 1999, RDM changed its corporate domicile from Florida to Delaware and
its name to HouseHold Direct.com, Inc. by merging into the Company's wholly
owned Delaware subsidiary. On or about September 14, 1999, the Company entered
into an acquisition agreement with Megappliance, Inc. ("Mega") pursuant to which
the Company agreed to acquire a Web site (including software, technology and
related commercial relationships) in exchange for shares of the Company's common
stock. On March 9, 2000, the Company executed an Agreement and Plan of Merger
with CrossCheck Corp, a Colorado corporation ("Cross") and a Letter Agreement
with the shareholders of Cross. Pursuant to such agreements, the Company merged
Cross (which had no business operations but was registered, and fully reporting,
under the Exchange Act) into the Company so that the Company could achieve
"successor issuer" status under the Exchange Act. In connection with such merger
which was consummated on March 20, 2000, the Company paid $150,000 in cash and
issued 100,000 shares of common stock of the Company to the former shareholders
of Cross.
In November 2000, we announced we had entered into an agreement to purchase
100% of the outstanding shares of America's Hometown Brand Center, Inc. (AHBC).
The agreement called for total cash payments of $350,000 in the first 90 days.
$100,000 due at closing and $250,000 due within 90 days. The closing should have
taken place on or before December 20, 2000. We did not have the cash available
to make the initial payments as required by the acquisition agreement. AHBC
determined that we were in default of the terms of the acquisition agreement and
on February 05, 2002 terminated the agreement. On July 9,2001 we entered into a
purchase agreement to obtain the assets of Family Savers, Inc. including its
membership base, accounts receivable and inventory. The agreement required the
payment of $475,000 in cash over a period of time, however we were unable to
obtain the capital necessary to make the initial cash payments and the
acquisition was abandoned by mutual agreement.
We executed an Acquisition Agreement on December 13, 2001 to acquire all
the outstanding membership interest of Eqtima LLC. Eqtima is a supplier of
metrics-based Employee Relationship Management (ERM) systems, specifically
targeted for contact centers (staff centers handling customer support,
telemarketing calls (inbound and outbound), technical support,etc.). Eqtima's
ERM suite (Value Agent) of products is designed to empoweagents, analyize
employee behavior patterns, automate feedback, and lay the
15
groundwork for a performance-recognition business culture.
Eqtima's strategy for 2002 is to penetrate the mainstream Work Force
management market by redefining Work Force Management. Work Force Management is
historically been nothing more than Forecasting and Scheduling. This is a very
limited vision. Eqtima expands the vision to encompass the whole life cycle of
an agent's experience with the company. Beyond just forecasting and scheduling,
it includes agent development, virtual supervision, and recognition/reward. It
sets the stage for a performance-based culture.
Eqtima's markets include North America, Asia, Europe, South America, and
Africa. We currently have customers in Africa and North America with
partnerships that also include Asia. Our purpose for acquiring Eqtima was
twofold, first to acquire the technology represented by Eqtima's software
product and to acquire the products themselves even though they are a departure
from our core buyer's club business.
Our agreement provides that we will make an initial payment of 1,000,000
shares of our common stock and then in years 2003 and 2004 we will give
additional shares based on a formula of our stock value divided by the gross
income generated by our sale of Eqtima's products.
PROPOSED BUSINESS
The Existing Market
Wholesale Shopping Clubs - National
The market for wholesale membership/shopping clubs is comprised of several
dominant national players and a landscape of small local and regional providers.
The top line revenues for the three largest industry players exceeded $64
billion in 2000. According to Warehouse Club Focus, a trade industry group in
Boston, MA, the combined revenues of these companies are projected to exceed $86
billion in 2003. If these figures hold, they represent 10.5% growth per year
over each of the next three years.
In the United States, the "Big 3" (BJ's, Costco and SAM's) have a total of
795 locations serving a membership of 60 million consumers. Their business
mission is to provide low prices to members on a limited selection of nationally
branded and privately labeled inventoried merchandise within a range of popular
product categories. Membership fees, rapid inventory turnover and low operating
overhead are required by these warehouse clubs to allow them to operate at lower
average margins (8% to 12%) than the discount chains and supermarkets which
operate on average margins of 20% to 30%. These very low margins are also the
direct result of their need to offer highly competitive - low mark-up consumer
staples.
The primary assumptions behind the HouseHold business plan involve several
distinct criteria: a) the market for its member service is desirable, proven and
that it already exists, b) the market opportunity exceeds $64 billion and is
growing; and, c) and we believe a significant segment of this market is ready to
be better served. As a consequence, our effort does not require the changing of
consumer habits but is merely an improved service platform that we believe will
be attractive to the existing and active market.
All three national wholesale shopping clubs represent a paid membership.
This is the basis for the HouseHold Direct recurring revenue cash flow model.
16
Calendar BJ's Wholesale Club
Year
Sales Share Comps Clubs
1995 $2,531 6.4% 1.2% 71
1996 2,864 6.7% 5.2% 81
1997 3,099 6.7% 3.6% 84
1998 3,448 6.8% 5.3% 94
1999 4,078 7.9% 7.9% 107
95-99 CAGR 12.7% 10.8%
Costco Wholesale
Calender
Year Sales Share Comps Clubs
1995 $18,096 46.7% 3.4% 261
1996 19,980 47.1% 6.4% 271
1997 22,350 48.6% 9.2% 285
1998 24,820 48.7% 8.0% 301
1999 28,600 49.8% 11.8% 319
95-99 CAGR 12.1% 5.1%
Calendar SAMS's Club
Year
Sales Share Comps Clubs
1995 $19,001 47.0% 0.8% 470
1996 19,593 46.2% 2.6% 476
1997 20,527 44.6% 4.1% 484
1998 22,671 44.5% 9.0% 497
1999 24,743 43.1% 7.6% 507
95-99 CAGR 6.8% 1.9%
Source: Warehouse Club Industry Guideline
These "Big-3" companies prove the market's existence, size and shareholder
valuation. Based on their combined top line revenues and stock market
capitalization, they have been consistent performers on any evaluation criteria.
Typically, these companies charge an annual membership fee of $25 to $140. The
membership fees provide a profitable revenue stream and allow these wholesale
shopping clubs to qualify their members for manufacturer approved special
pricing levels and to separate themselves from conventional discount stores.
Additionally, the suppliers to these companies are permitted to legally bypass
the special treatment federal regulations governing unfair competitive practices
(Robinson-Patman Act) allowing unique pricing structures unavailable to
non-membership based conventional discount retail outlets. Members of the "Big
3" pay their fee and shop in the traditional manner by going to the physical
location. Wholesale shopping clubs usually have a number of products on a
consistent day-in, day-out basis but rely mainly on non-current, bulk packaged
and overstock goods which change from time-to-time as a result of availability.
The wholesale shopping clubs have substantial overhead due to their
buildings, utilities, maintenance, personnel and the need to maintain inventory.
Their competitive advantage lies in the ability of their member-consumer to buy
at a variable discount and take their merchandise with them at the time of
purchase.
Wholesale Buying Clubs - Local and Regional
Adjunctive to the "Big 3" membership warehouse clubs are the local and
regional operators. These are comprised of much smaller local units that serve a
paid club membership market that is not only more fragmented but also whose
basic business model places more emphasis on much higher membership fees. This
distinct difference is at variance with that of their more traditional and
well-known brethren.
Buying Clubs vs. Shopping Clubs
Wholesale buying clubs operate differently than wholesale shopping clubs.
With a membership fee of $1,000 or more, instead of $140 or less, there is an
expectation on the part of the member-consumer that they will make a significant
enough volume of purchases to offset the membership fees that they are charged.
The industry has
17
historically realized significant profits from the sale of memberships.
The concept of the independent wholesale buying club began in 1971. These
clubs were originally conceived as an inflation protection mechanism for
consumer members. The idea behind the concept was that sufficient numbers of
members would create concentrated buying power thereby reducing the normal
retail mark-ups. United Consumers Club ("UCC"), the largest of the buying clubs,
represents a membership of about 500,000 through a network of 90 offices.
According to industry sources, over 150 private "buyer's clubs" currently
exist in the United States. These clubs serve a membership of approximately 2.5
million paid member-consumers. Currently, there is neither a dominant technology
provider nor a national buyer's club company within the independent wholesale
buying club market. Yet amazingly, the total annual revenues for these clubs are
believed to exceed $200 million.
HouseHold Strategy
Membership
Using the bottom up approach, we intend to immediately attempt to secure
the distribution sources that offer purchase and in-home delivery for large
products, such as furniture and appliances. This service is not readily
available from any of the competitive business organizations and hopefully will
provide a "hook" to secure membership interest. A significant part of our
business plan is to jump start our membership and operations by acquiring
existing buyer's clubs. If we are successful in our acquisition strategy to
acquire existing buyer's clubs the existing membership base and manufacturer
relationships will give us a base from which to expand. In addition, we will
utilize part of our working capital to advertise for new members. We plan to
offer four membership programs:
Program 1 Program 2 Program 3 Program 4
Entry Level Entry Level Entry Level Entry Level
$49.95 Initial $199.95 Initial $399 Initial $899 Initial
+ $9.95 Monthly + $9.95 Monthly + $9.95 Monthly + $9.95 Monthly
(after Year 1) (after Year 1) (after Year 1)
The strategy behind our membership fee model is to offer members access to
wider categories of products and higher discounts as their membership program
level increases. Currently we have just begun to offer memberships in a very
limited fashion and to date we have not received material membership fee income.
Pricing
Our goal is to provide our members with the ability to get
information or order almost any offered product at one of our physical sites, by
phone or over the Internet and thus also be attractive to potential new members.
To further differentiate ourselves from other buyer's and shopping clubs we
intend to price our services in what we believe to be a unique way. Currently
our competitors add a markup of 12-16% to each product they sell. We will not do
a product markup but charge a transaction fee of 10% or less, depending on the
type of product purchased. We believe that this strategy will allow us to sell
the products we will offer cheaper than our competition as they will be priced
directly at our cost. The company's wider range of services and its cost-plus
advantage of direct consumer
18
access to manufacturer pricing will make it much
easier to attract members from the existing membership population of both
wholesale shopping and buying clubs.
Manufacturers
We believe we will be able to develop purchasing relationships with a
number of domestic and foreign manufacturers and distributors through existing
relationships we would acquire as part of our buyer's club acquisitions which we
would then expand by direct solicitation. Although we do not currently have any
supply agreements in place our initial solicitation responses have been good. We
believe that once we have sufficient working capital to begin material
operations we will be successful in locating a sufficient supply of
manufacturers to support our initial members.
Because our business is based upon our members being able to purchase
products directly from manufacturers, if, for any reason, a significant number
of manufacturers would either not do business with us or discontinue doing
business with us then we would not have adequate products available to our
members to bring an insufficient sales revenue to sustain our operations and we
would most likely go out of business. Consequently, it is important for us to
locate and build a good working relationship with as many manufacturers as we
possibly can in an effort to maintain as wide of a product choice as
circumstances and our management limitations will allow.
Our business strategy will therefore primarily rely on:
1) acquisition of existing independent operators and their membership
base,
2) utilization of their established relationships with manufacturers and
distributors of the goods and merchandise most desired by existing
consumer members,
3) acquisition of new members and establishment of new supply
relationships, and
4) the acceptance by the members of our pricing methodology and
integration of technology through the Internet providing greater
product purchase information to our members.
Competition.
The Company competes with various companies that are both public and
privately owned. They come from three separate categories: (1) other private
buying clubs; (2) public wholesale discount clubs; and (3) a variety of Internet
sellers.
Some of the privately owned buying clubs are: (1) United Consumers Club
with about 90 locations; (2) Unimart, which has approximately 9 (7-clubs)
locations; and finally, (3) Uniway, which has both Company owned and franchised
locations totaling 13, locations. These clubs normally charge an initial fee of
$800 to $1,500 and annual renewal fees of about $50 to $100. It is from this
existing group of membership clubs that the Company will seek to locate
potential acquisition candidates.
The publicly owned discount clubs include Costco Wholesale Corporation,
Sam's Club (Wal-Mart Stores, Inc.), and BJ's Wholesale Club. Typically, these
companies charge an initial and annual membership fee of $25 to $140. Internet
sellers can be auction sites, web sites owned directly by the manufacturer or
other resellers of household products.
Trademarks and Franchises
We are currently investigating the possibility of utilizing franchising as
a method to help grow our business and have engaged iFranchise Group, Inc.,
franchise consultants, to assist us with our assessment. Should we decide to
become a franchisor we will need to create and register trademarks which will
identify our business and copyright our operations manuals that we would also
create to assist our potential franchisees. It should be emphasized that we are
in the very early stages of our franchise investigation and there can be
assurance that our management will decide that franchising will be beneficial to
our Company or if we do decide to proceed that we will be successful.
19
Government Regulations
Because we act primarily as a conduit for our members to buy goods directly
from manufacturers we are not directly affected by government regulations except
for those which effect all business who engage in interstate commerce. However,
we anticipate that a material portion of our business will come from Internet
sales. We are aware that the Congress of the United States is currently debating
several pieces of legislation dealing with allowing states to tax Internet sales
or regulating the content of the Internet itself. We believe that only the sales
tax legislation would have an impact on our business and that the primary
difficulty, in the event such legislation becomes law, will be in tracking all
or our member sales by state so that the proper tax can be collected and
remitted to the proper state.
Employees
We currently employ two (2) full time employees primarily located at our
corporate offices in Sandy Hook, Connecticut.
Reports to Security Holders
We will provide an annual report to our security holders on Form 10-KSB,
which includes audited financial statements, which are filed with the Securities
and Exchange Commission. The public may read and copy any materials filed with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet Web site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC and the address of that Web site is http://www.sec.gov.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
HouseHold Direct.com, Inc. is in the process of creating a unique new "consumer
services membership club" by creating a shopping platform that will offer direct
access to "cost-plus handling charge" prices from manufacturers and
distributors. The Company believes manufacturers are seeking a new Internet
based consumer service solution for the first time, which can be coupled to a
network of physical locations or service centers. Through its fulfillment
partners and direct relationships, the Company provides direct pricing from
brand name manufacturers/distributors on their entire current product line. The
Company believes the Management Team when completed will possess the required
skills and experience from corporate to startup backgrounds; and, will be
experienced in business development, marketing, operations, web-site design and
management, and database application support.
The Company was initially engaged, through its subsidiary PCNI, in the business
of developing and operating a wholesale buying club that, in addition provided
buying, marketing and financial services to third party owned wholesale buying
clubs. The traditional buying club business model (the "Traditional Model") was
predicated on the sale of memberships to the general public. The membership
entitled the holders to purchase goods and services through the wholesale buying
club at manufacturer direct prices (exclusive of separately charged taxes,
handling and shipping charges and a processing fee of up to 10%). During the
fourth quarter of 1998, the Company elected to suspend development and
implementation of the Traditional Model in preference to a new business model
(the "New Model") predicated on the mass marketing (through telemarketing and
the Internet) of memberships. Additionally, the operations of PCNI, based on the
Old Model were suspended and PCNI became inactive. Subsequently, the Company
sold all of the issued and outstanding capital stock of PCNI to Mr. John Folger
(the President, a member of the Board of Directors and a principle shareholder
of the Company) for nominal consideration of $1.00.
The services being developed by the Company are expected to create a substantial
benefit for two constituent groups - consumer and manufacturer. The consumers
benefit by a dramatic reduction in product prices. While supplying this price
advantage, the Company collects significant and valuable personal data and
product preferences information on the members who purchase products from the
Company.
20
This rich demographic product and psychographic data can be helpful to
manufacturers in developing a consumer-direct, knowledge based, product order
and fulfillment capability. These manufacturers are expected to contribute
advertising dollars and participation fees for these services. Value added
service providers, such as insurance and financial services can also be allied
strategically with the Company. This innovative concept of "cost-plus handling
charge" may position the Company in a groundbreaking new business category for
Internet service companies and informational content providers, and drive
revenue for membership fees and advertising.
The Company expects to expand its membership base by using a "members only"
style of telemarketing program. Residual monthly membership revenues could be
increased by the introduction of additional bundled services. The inexpensive
monthly fee for core services allows for the bundling of additional ISP
(Internet Service Provider), Telco and utility payment services. This revenue
stream, coupled with rich consumer data, will become a valuable corporate asset.
Financing efforts will center on: a) guiding the Company from its planning stage
into an aggressive implementation phase, pursuing the consolidation strategy; b)
providing and coordinating a wide range of skills from strategic planning,
market assessment, technology evaluation, financial analysis, deal structure and
negotiation, and financial and legal engineering; c) advisement and coordination
of the near term expansion of the management team and the nomination of the
Board of Directors; d) providing a full spectrum of investment banking services,
focused upon a contemplated series of acquisitions to begin the Company's
consolidation of the private wholesale buying club industry; e) separate
financing for each acquisition, combining debt, equity, and/or coordinating the
multi-disciplinary activities of other experts and advisors to participate in
the due diligence and integration process of anticipated acquisitions.
We had signed a definitive financing contract for a $10 million equity credit
line with JJ&T Investors, an investment fund associated with Wall Street
Financing Group of Boca Raton, Florida. The agreement signed with JJ&T has been
replaced by an agreement with DRH Capital and Dutchess Private Equities Fund,
L.P., for the same amount of equity financing and $100,000 bridge-financing.
We are working out the schedule by which to draw against the larger equity
package, which is related to the Company filing an amended SB-2 Registration
Statement which was originally filed in July 2001.
On July 6, 2001 the Company signed an agreement with Family Savers Inc., a
Charleston, South Carolina based consumer services membership club, to acquire
100% of the assets. As part of the agreement, a schedule of cash payments
extending to October 31, 2001 was established. The payments total $475,000
sellers' compensation, working capital and debt reduction against total sellers
liability of over $1 million. The Company made the initial $50,000 payment as
part of a good faith deposit required by the agreement. As the second $25,000
payment was initiated, the seller demanded a controlling interest in the public
corporation as a result of a 1 or 2 delay in funds settlement. The Company has
declined this offer, turned the matter over to counsel for resolution and is
awaiting the outcome of this matter.
RESULTS OF OPERATIONS
Revenues
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended
September 30, 2000.
The Company has been in its developmental stage since May 18, 1998. Net
Revenues for the nine months ended September 30, 2001 were $127,319 as compared
to revenues for the nine months ended September 30, 2000 which were $393,339.
The Company has not focused its attention on revenues until it can get its
financing in place.
From Inception May 18, 1988 to September 30, 2001
Company revenues earned since inception were $627,296. Revenues from sales were
$256,990 or 41% of the total revenues from inception. Consulting income was
$308,593 which is 49% of the total revenues, over the same period. Membership
fees, all earned from January 1, 2000, were only 10% of the total revenues.
Operating Expenses
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended
September 30, 2000.
Total Operating Expenses other than Cost of Sales for the nine months ended
September 30, 2001 were $1,475,853 compared with $2,191,672 for the same period
in 2000, a decrease of 33%.
Salaries and related costs decreased from $546,601 for the nine months ended
September 30, 2000 to $112,380 for the nine months ended September 30, 2001; a
79% decrease. This is primarily attributable to the Company's closing the two
Southern facilities and the Company's two remaining executives working almost
exclusively to arrange financing.
Consulting and professional fees increased by $212,719 (31%) from $692,080 for
the nine months ended September 30, 2000 to $904,799, for the nine months ended
September 30, 2001. The reason for the increase was fees paid in stock to
financial advisors, lawyers, consultants and underwriters.
Research and development costs are primarily to develop the Company's Web site.
General and Administrative expenses decreased from $845,979 for the nine months
ended September 30, 2000 to $404,852 for the same period in 2001.
Liquidity and Future Plans
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended
September 30, 2000.
For the nine months ended September 30, 2001, net cash used by operations was
$224,116 principally due to the quarterly loss of $164,097. This was partially
offset by depreciation of $25,274, amortization of $8,760 and shares issued for
services in the amount of $737,012 while current assets and liabilities provided
$382,353. For the quarter ended September 30, 2000, net cash used by operations
was $1,377,677 which was offset by depreciation and amortization of $53,971 and
shares issued for services $154,750, while current assets and liabilities
contributed cash of $346,646.
Cash used by investing activities for the nine months ended September 30, 2001
were $0. For the nine months ended September 30, 2000, cash used in investing
activities was $147,790.
The Company anticipates that the current working capital deficiency of
$2,349,605 will be supplemented in the short term by the sale of common stock
and short term borrowing.
From Inception May 18, 1988 to September 30, 2001
The net cash outflow from operations was $4,442,039, over the period May 18,
1998 to September 30, 2001. Primarily, through issuance of common stock, the
Company obtained the funds needed to pay for the operating cash deficiency and
the investment of $209,003 in property, equipment, and other assets. The use of
equity and debt to offset cash deficiency was $4,658,038.
The net loss of the Company was $8,237,803. The loss was essentially financed
through issuance of $4,381,023 common stock for cash and $1,522,944 for
services. The issuance of common stock provided 71% of the net loss amount.
Essentially, accounts payable and accrued salaries of $2,139,186 provided the
additional 26% of the funding for the net loss.
The Company plans to continue the policy of financing its operations primarily
through issuance of common stock for cash and services until such time as the
development stage is completed.
RESULTS OF OPERATIONS
Revenues
Twelve Months Ended December 31, 2000 Compared to The Twelve Months Ended
December 31, 1999
The Company has been in a developmental stage since May 18, 1998. Net
Revenues for the twelve months ended December 31, 2000 were $446,560 comprising
sale of merchandise of $236,357, consulting services of $174,300 and membership
fees of $35,903. Revenues for the twelve months ended December 31, 1999 were
$53,418 from consulting services.
The increase in sales of merchandise for the twelve months ended December
31, 2000 resulted from the Company's service agreement with Personal Consumer
Services, Inc. (PCS), a member-based consumer products organization. Consulting
services are for third party Web site design and management which are a result
of the acquisition of Thunderstick. Membership fees are for the wholesale buying
club (PCS ) which allows its members to purchase goods at wholesale prices plus
a 10% processing fee using the Internet. In November, 2000 and January 2001, the
Company closed the PCS Birmingham, AL and Atlanta, GA offices, respectively. The
offices were small, and poorly designed to accommodate the expansion plans of
the Company. The membership and customer service requirements are now being
handled by a third party, Absolute Quality, through their service bureau outside
of Washington, DC. The Company expects to build or acquire a showcase facility
as soon as the proceeds from the sale of the registered securities described in
the memorandum become available. Outstanding consulting contracts have been
completed, and in 2001 Thunderstick's efforts will be focused on developing the
Company's Web site. Therefore, it is projected there will be no income from
consulting services in the near future.
From Inception May 18, 1988 to December 31, 2000
The Company revenues earned since inception were $499,978. The revenues
from sales were $236,357 or 47% of the total revenues from inception. The
consulting income was $227,718 which is 46% of the total revenues, over the same
period. The membership fees, all earned in the year 2000, were only 7% of the
revenues.
Operating Expenses
Twelve Months Ended December 31, 2000 Compared to The Twelve Months Ended
December 31, 1999
Total Operating Expenses other than Cost of Sales for the twelve months
ended December 31, 1999 were $2,277,807 compared with $4,128,985 for the same
period in 2000, an increase of 81%. Cost of merchandise, $214,322, was 91% of
sales revenues.
Salaries and related costs increased from $430,581 for the twelve months
ended December 31, 1999 to $665,624 for the twelve months ended December 31,
2000; a 54% increase. This is primarily attributable to the Company's hiring of
executives in key positions in order to begin operations and for the payment of
compensation to the personnel of Thunderstick. At year end, four executives left
the Company with annual salaries of $240,000. They have not been replaced.
21
Consulting fees increased by $538,539 (78%) from $688,213 for the twelve
months ended December 31, 1999 to $1,226,752 for the twelve months ended
December 31, 2000. Consulting fees were expended mostly for developing a
marketing plan.
Research and development costs are primarily to develop the Company's Web
site. In 1999, development costs were $121,072 as compared with $606,596 in the
year 2000, an increase of $485,524 or 401%. Most of research and development
costs involve payments to consultants for their services.
General and Administrative expenses increased from $1,014,331 for the
twelve months ended December 31, 1999 to $1,560,853 for the same period in 2000.
The increase of 54% is primarily the result of increased accounting and auditing
fees of $70,671 and increased investor relations costs $256,902. Included in
general and administrative expenses is the total write off of the purchase of
CrossCheck Corp. of $169,030 in the year 2000.
From Inception May 18, 1988 to December 31, 2000
Since inception, the Company has expended $2,836,363 for general and
administrative activities. The general and administrative expenses account for
42% of total operating expenses, since inception. Other operating expenses were:
consulting expenses, $1,943,423 (29% of total), salaries and benefits, $1,16,080
(17% of total), research and development $737,668 (11% of total), and
Depreciation and amortization $92,205 (1% of total), from inception to December
31, 2000.
Income Tax
The Company had net operating losses (NOBS) of $6,087,453 at December 31,
2000, primarily because of expenses associated with development stage
activities. These NOBS and corresponding estimated tax assets, computed at a 35%
tax rate, expire at various dates through the year 2019. Realization of deferred
tax assets associated with the NOL is dependent upon generating sufficient
taxable income prior to their expiration.
Management believes that as there is a risk that these NOBS may expire
unused, they have established a 100% valuation allowance against them and have
not recognized any tax benefit to the NOBS.
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL COMMITMENTS
Twelve Months Ended December 31, 2000 Compared to The Twelve Months Ended
December 31, 1999
For the twelve months ended December 31, 2000, net cash used by operations
was $1,223,745 principally due to the year-to-date loss of $3,897,711. This was
partially offset by depreciation of $57,760, amortization of $11,399 and shares
issued for services in the amount of $2,013,506, while current assets and
liabilities provided $591,301. For the year ended 1999, net cash used by
operations was $918,833 which was offset by depreciation and amortization of
$23,610 and shares issued for services of $479,503, while current assets and
liabilities provided cash of $803,320.
Cash used by investing activities for the twelve months ended December 31,
2000 were principally related to the investment in software $36,750 and the
addition of computer and office equipment in the amount of $98,120. For the year
ended December 31, 1999, cash used in investing activities was $61,788,
primarily for the acquisition of property and equipment amounting to $79,603.
The Company anticipates that the current working capital deficiency of
$2,157,218 will be supplemented in the short term by the sale of common stock
and short term borrowing.
For a description of certain factors that could adversely affect the
Company's future capital requirements and the adequacy of its available funds,
including factors that are beyond the Company's control, see the discussion
under Note 2 to the financial statements attached hereto for the year ended
December 31, 2000.
22
From Inception May 18, 1988 to December 31, 2000
The net cash outflow from operations was $2,205,133, over the period May
18, 1998 to December 31, 2000. Primarily, through issuance of common stock, the
Company obtained the funds need to pay for the operating cash deficiency and the
investment of $255,749 in property, equipment, and other assets. The use of debt
was limited to $43,000 of advances on notes payable.
The net loss of the Company was $6761,661. The loss was essentially
financed through issuance of $2,390,834 common stock for cash and $2618,249 for
services. The issuance of common stock provided 74% of the net loss amount.
Essentially, the accounts payable of $1,451,773 and accrued salaries of $339,127
provided the additional 26% of the funding for the net loss.
The Company plans to continue the policy of financing its operations
through issuance of common stock for cash and services until such time as the
development stage is completed.
DESCRIPTION OF PROPERTY
The Company's executive offices are located at 3 Glen Road, Sandy Hook,
Connecticut 06482 and the term of the Lease is one (1) year having commenced on
July 1, 2001. The Company pays a base monthly rental of $800 and an additional
$560 quarterly for maintenance, taxes and city services.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors, Officers and Shareholders of the Company, John Folger and Ann
Jameson, have entered into various transactions with the Company since
inception. In the years 1999 and 2000, they deposited cash of $863,440 and
withdrew cash of $553,442. They loaned their personal shares of the Company that
were used to pay vendors valued at $267,235. They also loaned their shares for
the acquisition of Thunderstick and Megappliance valued at $39,720.
As of December 31, 1998, PCNI was wholly owned by John Folger. During 1999,
the Company made payments totaling $190,622 on behalf of PCNI. It was determined
that this amount would not be collected by the Company and therefore written off
against the amounts payable to related parties. In year 2000, John Folger and
Ann Jameson received 2,857,142 common shares of the Company valued at $320,000
in payment of a significant portion of their loan. The balance of the loan due
them on December 31, 2000 was $106,330.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Stock
Registrants common stock is currently traded on the National Association of
Security Dealers, Inc.'s Over-the-Counter Bulletin Board under the symbol BYIT.
The following table shows the range of reported low bid and high bid per
share quotations for our common stock for the periods indicated. The high and
low bid prices for the periods indicated reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
Low Bid High Bid
1999
First Quarter.................................0.430 0.900
Second Quarter................................0.350 0.560
Third Quarter.................................0.150 0.460
Fourth Quarter................................0.090 1.563
2000
First Quarter.................................0.625 1.875
Second Quarter................................0.313 1.156
23
Third Quarter.................................0.260 0.520
Fourth Quarter................................0.060 0.090
Penny Stock Regulation
Our shares are subject to the Penny Stock Reform act of 1990 which may
potentially decrease your ability to easily transfer our shares. Broker-dealer
practices in connection with transactions in "penny stocks" are regulated. Penny
stocks generally are equity securities with a price less than $5.00. The penny
stock rules require a broker-dealer prior to a non-exempt transaction to deliver
a standardized risk disclosure document and make a special determination that
penny stocks are a suitable investment for each investor. In addition the
broker-dealer must receive the investor's written agreement to the transaction.
These disclosure requirements may have the affect of reducing the level of
trading activity in our stock and make it more difficult for you to resell your
stock in our Company.
24
Shareholders
The approximate number of holders of record of the Common stock as of the
date of this prospectus is 4,700 inclusive of those brokerage firms and/or
clearing houses holding shares of common stock for their clientele (with each
such brokerage house and/or clearing house being considered as one holder).
Dividend Policy
We have not declared or paid any dividends on our shares of common stock.
We intend to retain future earnings, if any, that may be generated from our
operations to finance our future operations and expansion and do not plan for
the reasonably foreseeable future to pay dividends to holders of our common
stock. Any decision as to the future payment of dividends will depend on our
results of operations and financial position and such other factors as our board
of directors in its discretion deems relevant.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to certain executive
officers of the registrant for the three years ended December 31, 2000:
Summary Compensation Table
Name and Other
Principal (a) Annual
Position Year Salary Bonus Compensation
John Folger
President, CEO 2000 $ 75,000 -- 9,932(1)
and Director 1999 75,000 -- 4,226
1998(3)
Ann Jameson
Vice President 2000 $ 75,000 -- 4,250(2)
Secretary- 1999 75,000 -- 4,250
Treasurer 1998(3)
and Director
Awards Payouts
------------------------ ----------
Name and Restricted
Principal Stock Options/ LTIP
Position Year Awards(#) SARS(#)Payouts
John Folger
President, CEO 2000 -- -- --
and Director 1999 -- 870,000 --
1998(3)
Ann Jameson
Vice President 2000 -- -- --
Secretary- 1999 -- 750,000 --
Treasurer 1998(3)
and Director
(1) Includes Auto Allowance and Medical Insurance
(2) Includes Auto Allowance Only
(3) There was no Officers Payroll for the year 1998
Directors are not paid or reimbursed for attending meetings.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Some of the statements under the "Prospectus Summary," "Risk Factors,"
"Management Discussion and Analysis or Plan of Operation," "Business" and
elsewhere in this prospectus constitute forward-looking statements. These
statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, levels of activity, performance, or achievements
to be materially different from any future results, levels of activity,
performance, or achievement expressed or implied by such forward-looking
statements. Such factors include, among other things, those listed under "Risk
Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "intent,", "expects," "plan,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of such terms or other comparable terminology.
25
HOUSEHOLD DIRECT.COM, INC.
INDEX TO FINANCIAL STATEMENTS
CONTENTS
Independent Auditors' Report F-1
Consolidated Balance Sheet at December 31, 2000 F-2 to F-3
Consolidated Statements of Operations for the
years ended December 31, 2000 and 1999 and from
Inception to December 31, 2000 F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 2000 and 1999 and from
Inception to December 31, 2000 F-5 to F-7
Consolidated Statements of Shareholders' Deficit
for the years ended December 31, 2000 and 1999
and from Inception to December 31, 2000 F-8 to F-11
Notes to Consolidated Financial Statements F-12 to F-25
Consent of Certified Public Accountant F-26
Consolidated Balance Sheets for the nine months
ended September 30, 2001 F-27
Consolidated Statements of Operations for the
nine Months ended September 30, 2001 and 2000,
three Months ended September 30, 2001 and 2000,
and from inception on May 18, 1998 to September 30, 2001 F-28 to F-29
Consolidated Statements of Cash Flows for the nine
Months ended September 30, 2001 and 2000, and from
inception on May 18, 1998 to September 30, 2001 F-30 to F-31
Consolidated Statements of Shareholders' Deficit
for the years ended December 31, 2000 and 1999
and from Inception to December 31, 2000 F-32 to F-35
Notes to Consolidated Financial Statements F-36 to F-40
Independent Auditors' Report
To the Board of Directors
HouseHold Direct.com, Inc.
900 Main Street South
Southbury, CT 06488
We have audited the accompanying consolidated balance sheet of HouseHold
Direct.com, Inc. (a development stage enterprise) as of December 31, 2000 and
the related consolidated statements of operations, stockholders' deficit and
cash flows for the year ended December 31, 2000. These financial statements are
the responsibility of HouseHold Direct.com, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of HouseHold Direct.com, Inc.
as of December 31, 1999 and for the year then ended and for the period from May
18, 1998 (inception) to December 31, 1999 were audited by other auditors whose
report dated June 9, 2000 expressed an unqualified opinion on those financial
statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the general-purpose 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 general-purpose
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 HouseHold
Direct.com, Inc. as of December 31, 2000 and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that HouseHold Direct.com, Inc. will continue as a going concern. As discussed
in Note 2 to the financial statements, HouseHold Direct.com, Inc. is a
development stage Company that has suffered recurring losses from operations and
has a net capital deficiency 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 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Bloom and Company, LLP
Hempstead, New York
March 31, 2000
F-1
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000
Assets
Current assets:
Cash and cash equivalents $ --
Prepaid expenses and other current assets 4,600
Inventory 64,056
-------
Total current assets 68,656
Property and equipment, net 113,989
Intangible assets, net 41,991
Other assets - contracts receivable 58,500
Deposits as security 7,564
---------
Total assets $ 290,700
=======
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000
(CONTINUED)
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable $ 1,451,773
Accrued salaries 500,324
Current portion of note payable 8,072
Amounts payable to related parties 265,705
----------
Total current liabilities 2,225,874
Note payable, net of current portion 23,031
Deferred revenue 54,000
Commitments and contingencies
Shareholders' deficit:
Common stock, 50,000,000 shares of $0.001 par value
authorized; 34,145,276, Shares issued and outstanding
at December 31, 2000 34,145
Additional paid-in capital 4,749,666
Common stock subscriptions receivable (34,355)
Deficit accumulated during the
development stage (6,761,661)
Total Shareholders' deficit (2,012,205)
---------
Total liabilities and shareholders' deficit $ 290,700
==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
HOUSEHOLD DIRECT.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
For Year Ended May 18, 1998
December 31, (Inception) to
------------
2000 1999 December 31, 2000
---- ---- -----------------
Revenues:
Consulting services $ 174,300 $ 53,418 $ 227,718
Membership Fees 35,903 -- 35,903
Sales 236,357 -- 236,357
--------- ------- ---------
Total revenues 446,560 53,418 499,978
Cost of sales 214,322 -- 214,322
--------- ------- --------
Gross profit 232,238 53,418 285,656
Operating expenses:
Salaries and benefits 665,624 430,581 1,116,080
Research and development 606,596 121,072 737,668
Depreciation and amortization 69,159 23,610 92,205
Consulting fees 1,226,753 688,213 1,943,422
General and administrative 1,560,853 1,014,331 2,836,363
--------- --------- ---------
Total operating expenses 4,128,985 2,277,807 6,725,739
--------- --------- ---------
Loss from operations (3,896,747) (2,224,389) (6,440,083)
--------- --------- ---------
Other expense:
Interest expense 964 877 1,841
Loss from subsidiary PCNI -- -- 319,737
---------- --------- ---------
Total other expense 964 877 321,578
---------- --------- ---------
Net income before income tax (3,897,711) (2,225,266) (6,761,661)
Income tax provision -- -- --
---------- --------- ---------
Net loss $(3,897,711) $(2,225,266) $(6,761,661)
========= ========= =========
Net loss per weighted average
share of common stock
outstanding $ (.16) $ (.12) $ (.33)
=== === ===
Weighted average number of
shares of common stock
outstanding 24,409,500 17,902,094 20,383,377
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Year Ended May 18, 1998
December 31, (Inception) to
------------ December 31,
2000 1999 2000
---- ---- ----
Cash flows from operating activities
Net loss $(3,897,711) $(2,225,266) $(6,761,661)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation 57,760 21,530 78,726
Goodwill Amortization 11,399 2,080 13,479
Services in exchange for stock
and options 2,013,506 479,503 2,618,249
Interest paid with stock -- -- 20,500
(Increases) decreases in
operating assets:
Accounts receivable (58,500) (4,600) (63,100)
Prepaid expenses and other
current assets 9,565 (9,565) --
Deferred Compensation 15,000 -- --
Inventory (64,056) -- (64,056)
Increases (decreases) in operating
liabilities:
Accounts payable 780,432 655,099 1,451,773
Amounts payable to related parties ( 84,277) 162,386 107,830
Deferred revenue 54,000 -- 54,000
Accrued Salaries ( 60,873) -- 339,127
--------- --------- --------
Net cash used in operating activities (1,223,755) (918,833) (2,205,133)
--------- ------- ---------
Cash flows from investing activities:
Cash acquired from acquisition of
Thunderstick
investment in Megappliance -- 17,815 ( 18,720)
Purchase of software (36,750) -- ( 36,750)
Additions to property and equipment (98,120) (79,603) ( 192,715)
Deposits as security ( 7,564) -- ( 7,564)
------- -------- --------
Net cash used in investing activities (142,434) (61,788) (255,749)
------- ------ -------
Cash flows from financing activities:
Stock issued for cash 1,311,694 902,179 2,390,834
Cash received on stock
subscriptions receivable -- 38,645 38,945
Advances on notes payable 32,000 11,000 43,000
Payments on notes payable ( 8,518) ( 3,379) (11,897)
-------- -------- ---------
Net cash provided by
financing activities 1,335,176 948,445 2,460,882
--------- -------- ---------
F-5
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
For Year Ended May 18, 1998
December 31, (Inception) to
------------ December 31,
2000 1999 2000
---- ---- ----
Net increase (decrease) in cash (31,013) ( 32,176) $ --
Cash, beginning of period 31,013 63,189 --
------ ------ ------
Cash and cash equivalents, end of period -- $ 31,013 $ --
====== ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period
for interest $ 964 $ 877 $ 2,494
==== ==== =====
Cash paid during the period
for income taxes -- -- --
==== ==== =====
The accompanying notes are an integral part of these consolidated financial
statements.
SUPPLEMENTAL INFORMATION
The Company had the following non-cash transactions since inception:
1998
1. The Company issued 10,000,000 shares for the acquisition of PCNI for $10,000.
2. The Company issued 914,000 shares valued at $100,540 for services.
3. The Company issued 175,905 shares in lieu of $20,500 interest payable on a
note payable.
4. The Company received subscriptions for 200,000 shares for $50,000.
F-6
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
1999
1. The Company issued 1,488,800 shares for services valued at $369,372.
2. The Company received subscriptions for 50,000 shares valued at $23,000.
3. The Company borrowed 624,000 shares of common stock from stockholders
in order to consummate the Thunderstick and Megappliance acquisition
and reclassified $9,999 payables to related parties as paid-in capital.
4. The Company issued 2,445,000 options for services valued at $125,131.
2000
1. The Company issued 100,000 shares to acquire a public company shell
(CrossCheck) valued at $34,642.
2. The Company issued 124,000 shares to pay related parties loans in the amount
of $39,720.
3. The Company issued 2,924,286 shares to pay accrued salaries and bonuses
valued at $166,504. Of these shares, 1,785,714, which were valued at $101,328,
were issued to two shareholder-officers of the Company.
4. The Company issued 2,922,435 shares valued at $660,892 for investor relations
and professional services.
5. The Company issued 2,857,142 shares valued at $162,125 to repay loans made to
the Company by officer-shareholders.
6. The Company issued 356,095 shares valued at $151,285 to consultants for
research and development of the Company's Web site.
7. The Company issued 624,000 shares to pay back shares related parties lent to
the Company so the Company could purchase Thunderstick, 500,000 shares, and
Megappliance, 124,000 shares. Furthermore, the Company issued 500,000 shares in
connection with the acquisition of Thunderstick
8. The Company issued 1,000,000 shares in exchange for $50,000 in cash and
consulting services valued at $474,266.
F-7
HOUSEHOLD DIRECT.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS DEFICIT
Common Stock Additional Stock
------------ Paid-in Subscriptions
Shares Par Value Capital Receivable
------- --------- -------- -----------
1998
Reinstatement and
Recapitalization,
May 18, 1998 1,000,000 1,000 $ -- $ --
Stock issued for
cash 1,627,095 1,627 174,334 --
Stock issued for
Services 914,000 914 99,626 --
Stock issued for
Purchase of PCNI 10,000,000 10,000 -- (10,000)
Sale of PCNI -- -- -- 1
Stock issued in lieu
of interest 175,905 176 20,324 --
Stock issued for
Subscriptions
receivable 200,000 200 49,800 (50,000)
Net loss -- -- --
---------- ------- --------- -------
Balance, December
31, 1998 13,917,000 13,917 344,084 (59,999)
1999
- ----
Stock issued for cash 4,784,504 4,785 897,394 --
Stock issued for
services 1,488,800 1,489 367,883 --
Stock issued for
subscriptions
receivable 50,000 50 22,950 (23,000)
Cash received on
stock subscriptions
receivable -- -- -- 38,645
Reclassify related
party payable -- -- -- 9,999
Options granted for
services -- -- -- --
Deferred
Compensation
Net Loss -- -- -- --
---------- ----- -------- --------
Balance, December
31, 1999 20,240,304 $20,241 $1,632,311 $ (34,355)
F-8
HOUSEHOLD DIRECT.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS DEFICIT
Deficit
During Total
Options Deferred Development shareholders
Outstanding Compensation Stage Deficit
----------- ------------ ----------- ----------
1998
Reinstatement and
Recapitalization,
May 18, 1998 -- $ -- $ 1,000
Stock issued for
cash -- -- 175,961
Stock issued for
Services -- -- 100,540
Stock issued for
Purchase of PCNI -- -- --
Sale of PCNI -- -- 1
Stock issued in lieu
of interest -- -- 20,500
Stock issued for
Subscriptions
receivable -- -- --
Net loss -- (638,684) (638,684)
------- -------- ------- ---------
Balance, December
31, 1998 -- (638,684) (340,682)
1999
- ----
Stock issued for cash -- -- 902,179
Stock issued for
services -- -- 369,372
Stock issued for
subscriptions
receivable -- -- --
Cash received on
stock subscriptions
receivable -- -- 38,645
Reclassify related
party payable -- -- 9,999
Options granted for
services 125,131 -- 125,131
Deferred
Compensation 15,000 15,000
Net Loss -- -- (2,225,266) (2,225,266)
-------- -------- ----------- ----------
Balance, December
31, 1999 $125,131 $ 15,000 $ (2,863,950) (1,105,622)
F-9
HOUSEHOLD DIRECT.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS DEFICIT
(CONTINUED)
Common Stock Additional Stock
------------ Paid-in Subscriptions
Shares Par Value Capital Receivable
------- --------- -------- -----------
2000
Stock issued for cash,
rights offering 408,359 408 122,099 --
Stock issued for cash 2,212,655 2,213 1,136,974 --
Stock issued for cash
and services 1,000,000 1,000 523,266 --
Stock issued for
Services:
Salaries 2,924,286 2,924 163,580 --
Investor relations,
etc. 2,922,435 2,922 657,970 --
Repay loans 2,857,142 2,857 159,268 --
Research and
Development 356,095 356 150,929 --
Stock issued to
return shares
used to acquire
Thunderstick and
Megappliance 624,000 624 39,096 --
Stock issued to
purchase Thunderstick 500,000 500 4,500 --
Stock issued to
purchase corporate
shell (CrossCheck) 100,000 100 34,542 --
Deferred Compensation
Net Loss -- -- -- --
---------- ------- ------- ---------
Balance, December
31, 2000 34,145,276 $34,145 $4,624,535 $( 34,355)
========== ======= ========== =========
The accompanying notes are an integral part of the financial statements.
F-10
HOUSEHOLD DIRECT.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS DEFICIT
(CONTINUED)
Deficit
During Total
Options Deferred Development shareholders
Outstanding Compensation Stage Deficit
----------- ------------ ----------- ----------
2000
Stock issued for cash,
rights offering -- -- 122,507
Stock issued for cash -- -- 1,139,187
Stock issued for cash
and services -- -- 524,266
Stock issued for
Services:
Salaries -- -- 166,504
Investor relations,
etc. -- -- 660,892
Repay loans -- -- 162,125
Research and
Development -- -- 151,285
Stock issued to
return shares
used to acquire
Thunderstick and
Megappliance -- -- 39,720
Stock issued to
purchase Thunderstick -- -- 5,000
Stock issued to
purchase corporate
shell (CrossCheck) -- -- 34,642
Deferred Compensation (15,000) ( 15,000)
Net Loss -- -- (3,897,711) (3,897,711)
-------- -------- --------- ----------
Balance, December
31, 2000 $ 125,131 $ -- $(6,761,661) $(2,012,205)
========= ======== ========= =========
The accompanying notes are an integral part of the financial statements.
F-11
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
On January 2, 1992, RDI Marketing, Inc. ("RDI") (AKA HouseHold Direct.com) was
formed as a Florida corporation. Upon formation, RDI issued 1,000 shares of
common stock. RDI essentially remained dormant with no direct or indirect
business activity until reinstatement on May 18, 1998. On May 18, 1998, RDI
adopted a plan of recapitalization whereby the 1,000 shares of common stock were
converted into 1,000,000 shares of .001 par value common stock. In addition to
the recapitalization on May 18, 1998, RDI filed a disclosure statement under
Rule 15C2-11 of the Securities and Exchange Act of 1934 (hereafter the "Exchange
Act") with the National Association of Securities Dealers ("NASD"). As a result,
commencing on June 11, 1998, RDI's common stock was quoted on the OTC Bulletin
Board.
On July 10, 1998, RDI exchanged 10,000,000 shares of common stock for all of the
outstanding stock of Preferred Consumer Network International, Inc. ("PCNI").
PCNI, incorporated on June 13, 1997, was engaged in the business of developing
and operating a wholesale buying club that, in addition provided buying,
marketing and financial services to third party owned wholesale buying clubs.
The traditional buying club business model (the "Traditional Model") being
utilized by PCNI was predicated on the sale of memberships to the general
public, which memberships entitled the holders to purchase goods and services
through the wholesale buying club at wholesale prices (exclusive of separately
charged taxes, handling and shipping charges and a processing fee of up to 10%).
During the fourth quarter of 1998, RDI elected to suspend development and
implementation of the Traditional Model in preference to a new business model
(the "New Model") predicated on the mass marketing (through telemarketing and
the Internet) of memberships. Additionally, the operations of PCNI, based on the
Old Model were suspended and PCNI became inactive. Subsequently, RDI sold all of
the issued and outstanding capital stock of PCNI to Mr. John Folger (the
President, a member of the Board of Directors and a principle shareholder of
RDI) for nominal consideration of $1.00.
RDI, in furtherance of the development of the New Model, entered into several
acquisitions during 1999. On May 7, 1999, the Company acquired all of the common
stock of Thunderstick LLC in exchange for 1,000,000 shares of the Company's
common stock. A shareholder loaned 500,000 shares to the Company and the shares
were given as 50% of the consideration to the former shareholders of
Thunderstick. The Company recorded a liability of $5,000 as due to the former
owner of Thunderstick, pending the issuing of an additional 500,000 shares. In
May 2000, the Company issued the additional 500,000 shares to the former
shareholders of Thunderstick and charged off the liability. Thunderstick,
through its wholly-owned affiliate Thunderstick Software, LLC, is engaged in the
business of developing and marketing Internet software which will be utilized to
support the Company's Web site and e-commerce operations and in providing
similar services, on a consulting basis, to third parties.
In July, 1999, RDI, changed its corporate domicile from Florida to Delaware,
and its name to HouseHold Direct.com, Inc. (the "Company"). These changes were
effectuated by merging the Company into its wholly-owned Delaware subsidiary,
and such merger had no impact on the shareholders or the capital accounts of the
Company.
F-12
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION (Continued)
In September, 1999, the Company entered into an acquisition agreement with
Megappliance, Inc. ("Mega") pursuant to which the Company agreed to acquire a
Web site (including software, technology and related commercial relationships)
in exchange for 124,000 shares of the Company's common stock.
On March 9, 2000, the Company executed an Agreement and Plan of Merger with
CrossCheck Corp., a Colorado corporation ("Cross") and a Letter Agreement with
the shareholders of Cross. Pursuant to such agreements, the Company merged Cross
(which had no business operations but was registered, and fully reporting, under
the Exchange Act) into the Company so that the Company could achieve "successor
issuer" status under the Exchange Act. In connection with such merger which was
consummated on March 20, 2000, the Company paid $150,000 in cash and issued
100,000 shares of common stock of the Company to the former shareholders of
Cross. The Company expensed the acquisition in the second quarter of 2000 in the
amount of $164,130.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which contemplate the
continuation of the Company as a going-concern. However, the Company is in the
development stage, and since inception has been engaged primarily in raising
capital and developing its Web site, product, and market strategy. The Company
has not generated significant revenues from operations, and in the course of
funding product and Web site development and other start-up activities, has
experienced cumulative net losses of $6,761,661 for the period from May 18, 1998
(inception) to December 31, 2000, and has used cash in operations of $2,205,133
for the period from May 18, 1998 (inception) to December 31, 2000. The Company
expects that it will continue to incur net operating losses as it expends
substantial resources on Web site development and sales and marketing in an
attempt to capture market share and develop market recognition. Management is
continually trying to raise additional capital through issuance of stock and
debt. Management of the Company believes that the additional capital that is
expected to be raised in the future will be sufficient to cover its working
capital needs until the Company's revenue volume reaches a sufficient level to
cover operating expenses. The absence of assurances of additional capital,
raises a substantial doubt about the Company's ability to continue as a
going-concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
F-13
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. Intercompany transactions and balances
have been eliminated in consolidation.
Research and Development Costs
Research and development costs are expensed as incurred.
Start-up Costs
The Company has implemented the Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities," (SOP 98-5) which requires costs of start up
activities to be expensed as incurred.
Revenue Recognition
Revenue for services is recognized when the service is rendered, while product
revenue is recognized when the product is shipped to the customer. Revenue
consisted of products sold and shipped pursuant to the operating agreements with
PCNI and PCS, consulting services performed by Thunderstick, and service income
earned related to the contract entered into with Personal Consumer Services,
Inc. ("PCS").
Deferred Revenues
Deferred revenues, as presented on the balance sheet, relate to unpaid service
agreement fees to be paid by PCS from uncollected accounts receivable of
Personal Consumer Services, Inc (PCS). Due to the uncertainty of collection
history of PCS, only the fee actually paid by PCS to the Company during the year
and the first two months of 2000 were recorded as revenue. Only revenues
projected to be collected in the next year are shown as current.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives, ranging from three to five
years. Maintenance and repair costs are expensed as incurred.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosure About Fair Value
of Financial Instruments," requires disclosure about the fair value of all
financial assets and
F-14
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
liabilities for which it is practicable to estimate. At December 31, 2000, the
carrying value of all of the Company's accounts receivable, accounts payable and
accrued liabilities approximate fair value because of their short-term nature.
The note payable carrying value approximates fair value based on the borrowing
rate currently available for similar loans
Goodwill/Intangibles
Goodwill reflects the excess of purchase price over the fair value of net assets
purchased and is amortized on a straight-line basis over 3 years.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments with initial maturities of three months or less to
be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
principally on the average cost method. Inventory of merchandise available for
resale was $64,056, at December 31, 2000:
Common Stock Issued for Consideration Other Than Cash
When common stock is issued for consideration other than cash, the fair market
value of the stock or the fair market value of the property or services,
whichever is more objectively determinable is used to record the transaction.
The quoted market values of the shares, restricted as to marketability, are
discounted for limited liquidity. The discount factor is computed as the
difference between the average price of the shares issued for cash, computed
from the beginning of the year until the date of transaction, and the market
price of the shares at the date of transaction. The average cash prices, during
the current year, are used: to recognize substantial yearly changes in the
nature and size of the Company's operations; to reduce the impact of random
price movements associated with low volume transactions; and to incorporate
recently available market value information.
Website Development Costs
The Company accounts for website development costs in accordance with the AICPA
Statement of Position 98-12, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". Computer software costs that are
incurred in the preliminary project stage are expensed as incurred. Internal and
external costs incurred to develop
F-15
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
internal-use software during the application development stage are capitalized.
Post implementation and operation costs of training and maintenance are expensed
as incurred.
Loss per Share
Net loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding for the period. Net loss per share has been
stated for all periods presented in accordance with SFAS No. 128.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of the revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Income Taxes
Deferred income taxes, reflecting the net tax effects of temporary differences
between the carrying amount of assets and liabilities recognized for financial
reporting purposes and the amounts recognized for income ax purposes, are based
on tax laws currently enacted. A valuation allowance is established when
necessary to reduce deferred tax assets to the amount expected to be realized.
NOTE 3. ACQUISITIONS AND SALES
Preferred Consumer Network International, Inc. ("PCNI")
On July 10, 1998, the Company acquired PCNI in exchange for 10,000,000 shares of
common stock at $0.001 par value per share. This acquisition was accounted for
by using the purchase method of accounting, and accordingly the deficit assumed
was initially recorded by the Company based on estimated fair values at the date
of acquisition:
Deficit $ (693,716)
Goodwill 703,716
-------
Purchase consideration $ 10,000
=======
On December 31, 1998, the Company sold PCNI to a major shareholder of the
Company for $1 and the payment by Mr. Folger to the Company of $190,622 due from
PCNI to the Company. Two officers of the Company are currently involved in
winding up the business of
F-16
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITIONS AND SALES (Continued)
Preferred Consumer Network International, Inc. PCNI had entered into an
operating agreement with United Buyers Service of Massachusetts and Connecticut,
which was engaged in the sale of memberships in and the operation of a consumer
wholesale buyers club. As a result of the failure of these businesses, certain
payroll taxes were left unpaid. The Internal Revenue Service ("IRS") has
instituted collection of the payroll taxes and placed liens on certain real
property of Mr. Folger and Ms. Jameson. Both parties are currently attempting to
obtain and complete a settlement of the IRS claims.
Thunderstick, Inc.
On May 7, 1999, a related party loaned to the Company 500,000 shares of .001 par
value per share personally held common stock (par value $5,000) of the Company
which the Company utilized for 50% of the purchase consideration for all of the
stock of Thunderstick. The Company agreed to replace the shares so applied and
therefore, $5,000 was included in amounts payable to related parties at December
30, 1999. The outstanding portion, 500,000 shares of common stock (par value
$5,000), was issued in May 2000 by the Company from its authorized but unissued
common stock.
This acquisition was accounted for by using the purchase method of accounting,
and accordingly the equity assumed was initially recorded by the Company based
on estimated fair values at the date of acquisition:
Equity $ 28,580
Negative goodwill (18,580)
------
Purchase consideration $ 10,000
======
The market value of the Company's shares on May 7, 1999 was $0.346 per share,
equating to a value of $346,000. Based on the substance of the purchase
agreement, as well as the underlying net assets of the acquired company, the
transaction was recorded at fair value and subsequently written down to the par
value of the Company's shares. The non-current assets of the purchased company
were reduced by the negative goodwill.
Megappliance, Inc. ("Mega")
On September 9, 1999, a related party loaned 124,000 shares of personally held
stock of the Company valued at $34,720 to the Company which was utilized by the
company to acquire certain asset of Mega. This acquisition was accounted for by
using the purchase method of accounting, and accordingly the assets assumed were
initially recorded by the
F-17
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITIONS AND SALES (Continued)
Company based on estimated fair values at the date of acquisition:
Computer equipment $ 16,000
Goodwill 18,720
------
Purchase consideration $ 34,720
=======
The Company replaced the shares so applied on August 2, 2000.
America's Hometown Brand Center Hometown Brand Center
In November 2000, the Company announced it had entered into an agreement to
purchase 100% of the outstanding shares of America's Hometown Brand Center
Hometown Brand Center, Inc. (AHBC). The agreement called for total cash payments
of $350,000 in the first 90 days. $100,000 due at closing and $250,000 due
within 90 days. The closing should have taken place on or before December 20,
2000. The Company did not have the cash available to make the initial payments.
On January 25, 2001 the agreement was terminated.
NOTE 4. RELATED PARTY TRANSACTIONS
Directors, Officers and Shareholders of the Company, John Folger and Ann
Jameson, have entered into various transactions with the Company since
inception. In the years 1999 and 2000, they deposited cash of $863,440 and
withdrew cash of $553,442. They loaned their personal shares of the Company that
were used to pay vendors valued at $267,235. They also loaned their shares for
the acquisition of Thunderstick and Megappliance valued at $39,720.
As of December 31, 1998, John Folger wholly owned PCNI. During 1999, the Company
made payments totaling $190,622 on behalf of PCNI. It was determined that this
amount would not be collected by the Company and therefore written off against
the amounts payable to Mr. Folger. In year 2000, John Folger and Ann Jameson
received 2,857,142 common shares of the Company valued at $162,125 in payment of
a significant portion of their loan. The balance of the loan due them on
December 31, 2000 was $265,705.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2000:
Office equipment $ 58,795
Motor Vehicles 49,565
Computer equipment 58,603
Computer software 25,452
-------
192,715
Less: accumulated depreciation ( 78,726)
--------
$ 113,989
=======
Depreciation expense for the two years ended December 31, 2000 were $21,530 for
1999 and $57,760 for 2000.
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. FORMATION OF ADDITIONAL SUBSIDIARIES
During the year 2000, the Company formed additional wholly owned subsidiaries
for the purpose of expanding and pursuing other related business opportunities;
none of which subsidiaries are, or have been, actively engaged in business.
NOTE 7. AGREEMENT WITH PERSONAL CONSUMER SERVICES, INC.
During the early part of 1999, the Company entered into negotiations with
Personal Consumer Services, Inc. (PCS), a third party wholesale buying club
located in Atlanta, GA. In order to sustain PCS's operations and maintain their
brand name integrity, the Company advanced PCS in 1999 $256,235 against their
accounts receivable and prospective membership renewal fees. In 1999, because of
the uncertain value of PCS's underlying accounts receivable and continued
membership participations, the Company expensed $256,235 as bad debts.
In January 2000, the Company finally entered into a service agreement (the
"Agreement") with PCS. The Company was to provide services for PCS members in
exchange for a base fee and monthly retainer as defined in the Agreement. The
Agreement expires in December 2005 with an option to extend the term for an
additional five years. As of December 31, 2000, the value of what the Company is
owed is approximately
$600,000 from PCS, of which $595,500 has been recorded as deferred revenue. The
Company has had no prior history of collection on this receivable, which is
secured by only membership, and accounts receivable of PCS that in most
instances are at least one year old. Because of this fact, the Company has set
up a reserve of $541,500 against the receivable which is offset as a reduction
of deferred revenue. In 2000, the Company advanced $190,060 to sustain the PCS
operation. Because of the uncertainty of the receivable, the Company expensed
the advance of $190,060 as bad debts. In November, 2000 and January, 2001, the
Company closed the Atlanta and Birmingham operations to conserve cash flow,
respectively.
F-18
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8. INTANGIBLE ASSETS/GOODWILL
Investment CISI $36,750
Investment Megappliance 18,720
------
Total 55,470
Less: Accumulated Amortization 13,479
------
$41,991
======
For the two years ended December 31, 2000, amortization of Intangible Assets was
$11,339 and $2,080, respectively.
NOTE 9. PURCHASE OF CROSSCHECK CORP.("CROSS")
On March 9, 2000, the Company executed an Agreement and Plan of Merger with
Cross and a Letter of Agreement with the shareholders of Cross. Pursuant to such
agreements, the Company merged Cross (which had no business operations but was
registered, and fully reporting, under the Exchange Act) into the Company so
that the Company could achieve "successor issuer" status under the Exchange Act.
In connection with such merger which was consummated on March 20, 2000, the
Company paid $150,000 in cash and issued 100,000 shares of common stock of the
Company to the former shareholders of Cross.
Pro-forma information is not presented for this acquisition since Cross was an
inactive company with no significant assets and liabilities.
NOTE 10. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" which
requires the use of the "liability method" of accounting for income taxes.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.
The Company had NOLs of approximately $6,761,661 at December 31, 2000, primarily
because of the development stage expenses. These NOLs and corresponding
estimated tax assets, computed at 35% tax rate, expire as follows:
Year loss Expiration Loss Estimated
incurred Date Amount Tax Asset
1998 2018 $ 638,684 $ 223,940
1999 2019 2,225,266 778,843
2000 2020 3,897,711 1,364,199
--------- ---------
Total 6,761,661 2,366,982
Valuation Allowance (2,366,982)
---------
$ --
=========
F-19
HOUSEHOLD DIRECT.COMNC.
(DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Realization of deferred tax assets associated with the NOL is dependent upon
generating sufficient taxable income prior to their expiration. Management
believes that there is a risk that these NOLs may expire unused and,
accordingly, has established a valuation allowance against them. The valuation
allowance of $223,940 as of December 31, 1998 was increased by $778,843 and
$1,364,199, in 1999 and 2000, respectively, as a consequence of recognizing
additional deferred tax assets in those years.
NOTE 11. NOTE PAYABLE
On April 7, 1999, the Company entered into a note payable agreement with a third
party for $13,500. A $2,500 payment was made by the Company. The note payable
bears interest at 12% per annum and requires monthly principal and interest
payments of $518 beginning May 1, 1999. The balance of note payable, $2,020, is
payable by May 1, 2001.
On August 18,2000, the Company entered into a note payable agreement with a
third party for $35,525 to purchase an auto. A $540 payment was made by the
Company at the signing of the agreement. The note bears interest at 2.16% which
is an inducement by the auto Company to attract buyers. The Company has not
discounted the value of the asset purchased to better reflect the market rate of
interest. Monthly payments are $561.70 and the note expires on July 18, 2005.
2001 $ 6,052
2002 6,212
2003 6,376
2004 6,545
2005 3,898
------
$ 29,083
======
NOTE 12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain office space under an operating lease that requires
monthly rental payments of approximately $2,522 and expires April 30, 2002.
Total rent expense related to this lease totaled $22,698 for the year ended
December 31, 1999 and $30,939 for the year ended December 31, 2000, and this
information is included in general and administrative expenses in the
accompanying consolidated statement of operations.
Future minimum lease payments are as follows:
Year ended December 31, 2000:
2001 $ 31,866
2002 8,025
-------
$ 39,891
=======
F-20
HOUSEHOLD DIRECT.COM, INC.
(DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Realization of deferred tax assets associated with the NOL is dependent upon
generating sufficient taxable income prior to their expiration. Management
believes that there is a risk that these NOLs may expire unused and,
accordingly, has established a valuation allowance against them. The valuation
allowance of $223,940 as of December 31, 1998 was increased by $778,843 and
$1,364,199, in 1999 and 2000, respectively, as a consequence of recognizing
additional deferred tax assets in those years.
NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued)
Internal Revenue Service Contingent Liability
PCNI, a temporary wholly owned subsidiary of the Company during five months in
1998, was subsequently purchased and is currently owned by another shareholder
of the Company. PCNI has been assessed a tax liability by the Internal Revenue
Service ("IRS") for taxes, related to wages paid to employees, for an
approximate total amount of $83,000. It is the opinion of the Company's legal
counsel that this liability will not significantly impact the Company. However,
there is currently no legal determination as to whether the Company may be
liable, at some point, for the entire amount. As of December 31, 2000, the
Company recorded approximately $11,000 of this liability that was incurred
during the time of temporary ownership. This amount is included in accounts
payable in the accompanying consolidated balance sheets.
Officers Employment Agreements
During the year 2000, the Company had employment agreements with seven of its
employees with annual salaries ranging from $75,000 to $120,000 per year and
terms ranging from 2 to 5 years. Maximum annual incentive bonuses based on
earnings range from $75,000 to $125,000 per year for three of the four contracts
remaining currently. Four of the seven employees have resigned from the Company
and their contracts have been cancelled.
The Company may be subject to other various legal proceedings and claims that
arise in the ordinary course of business. Management currently believes that
resolving these matter(s) will not have a material adverse impairment on the
Company's financial position or its results of operations.
F-21
HOUSEHOLD DIRECT.COMNC.
(DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. CAPITAL STOCK
Common Stock Shares Issued
During 1998, the Company issued an aggregate of 12,917,000 shares of Common
Stock at $.001 par value ("the Common Stock"). The aggregate consideration
received by the Company in connection with the issuance of such shares consisted
of (a) $175,961 in the form of cash payments, received in connection with the
issuance of 1,627,095 shares, (b) $100,540 in the form of services performed for
or an behalf of the Company received in connection with the issuance of 914,000
shares, (c) 175,905 shares issued in lieu of interest of $20,500: and (d) on
December 28, 1998, the Company issued 200,000 shares at $0.25 per share to an
unrelated third party under the terms of a stock subscription agreement; the
amount is payable on demand.
The outstanding stock subscriptions are classified in the accompanying
consolidated balance sheets and statement of changes in shareholders' deficit as
a contra account to shareholders' deficit. No payments for stock subscriptions,
were received as of December 31, 1998. The Company also received all of the
outstanding shares of the capital stock of PCNI in connection with the issuance
of (e) 10,000,000 shares of the Company's common stock. The 10,000,000 shares
were recorded as common stock subscriptions receivable since it was deemed that
the purchase of PCNI resulted in little to no value to the Company. During
calendar year 1999, the Company issued an additional 6,323,304 shares of Common
Stock ("the Additional Shares"); and in connection with such issuance received
(f) $902,179 in the form of cash in connection with issuance of 4,784,504
Additional Shares, (g) $369,372 in the form of services in connection with the
issuance of 1,488,800 Additional Shares; and (h) on April 6, 1999, the Company
issued 50,000 shares at $0.46 per share to an unrelated third party under the
terms of a stock subscription agreement; the amount is payable on demand. The
outstanding amounts are classified in the accompanying consolidated balance
sheets and statement of changes in shareholders' deficit as a contra account to
shareholders' deficit. A total amount of $38,645 was received as of December 31,
1999 in respect of all stock issued for subscriptions receivable. The $9,999
stock subscriptions receivable related to the PCNI transaction were reclassed
against the amounts payable to related parties balance at December 31, 1999.
All stock for services were valued at the average stock for cash value .01 to
.50 in 2000 ($.19 in 1999 and $.11 in 1998). However, where specific values of
services could be determined, those values were used to record the transactions.
The quoted market values of the shares, restricted as to marketability, were
discounted for limited liquidity. The discount factor was computed as the
difference between the average price of the shares issued for cash, computed
from the beginning of the year until the date of transaction, and the market
price of the shares at the date of transaction. The average cash prices, during
the current year, are used: to recognize substantial yearly changes in the
nature and size of the Company's operations; to reduce the impact of random
price movements associated with low volume transactions; and to incorporate
recently available market value information. The computed discount factors
ranged between 37% to 47.6% of the market values in the year ended December 31,
2000,
Detail Stock Transactions
For the period from May 18, 1998 to December 31, 2000, for the common stock of
the Company, the dates of issuance, number of shares issued, type of
consideration received, and the value of the shares issued are presented below:
1998
Number of
Issue Date Shares Amount
Stock issued
in for cash:
May 18 1,000,000 $ 1,000
August 20 125,000 13,750
October 2 245,000 51,500
October 6 200,000 500
October 20 50,000 1,000
October 9 135,000 8,100
November 6 792,095 92,311
November 24 55,000 6,050
December 3 25,000 2,750
----------- --------
1,727,095 176,961
Stock issued in lieu of interest:
November 20 175,905 20,500
Stock issued for acquisition of PCNI:
July 10 10,000,000 10,000
Stock issued for subscriptions receivable:
December 28, 200,000 50,000
Stock issued for
services:
August 26 100,000 11,000
September 17 180,000 19,800
October 6 224,000 24,640
October 20 100,000 11,000
November 16 210,000 23,100
November 23 25,000 2,750
December 8 50,000 5,500
December 15 25,000 2,750
-------- -------
914,000 100,540
------- -------
Total 1998 13,917,000 $ 358,001
========== =======
F-22
HOUSEHOLD DIRECT.COMNC.
(DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. CAPITAL STOCK (Continued)
Detail Stock Transactions (Continued)
1999
- ----
Number of
Issue Date Shares Amount
---------- --------- --------
Stock issued in
1999 for cash:
February 2 150,000 $ 35,500
February 11 101,000 46,020
February 16 50,000 23,000
February 18 100,000 46,000
February 19 250,000 98,250
February 23 1,300,000 130,000
February 25 100,000 19,000
March 3 369,109 60,189
March 8 200,000 38,000
March 18 550,000 136,355
March 19 300,000 75,000
May 4 505,000 11,870
May 14 100,000 15,645
December 6 494,117 80,000
December 20 215,278 87,350
--------- --------
4,784,504 $ 902,179
Stock issued for
subscriptions receivable:
April 6 50,000 $ 23,000
Stock issued for
services:
February 2 150,000 $ 57,300
February 11 138,300 26,277
February 23 195,000 37,050
March 1 100,000 76,700
March 3 50,000 9,500
May 4 70,000 13,300
August 2 15,000 2,850
August 9 100,000 19,000
September 22 86,500 16,435
December 6 515,000 97,850
December 69,000 13,110
---------- --------
1,488,800 369,372
Total 1999 6,323,304 $ 1,294,551
========= =========
HOUSEHOLD DIRECT.COM, INC.
(DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. CAPITAL STOCK (Continued)
Detail Stock Transactions (Continued)
2000
Stock issued in 2000 for cash:
Number of
Issue Date Shares Amount
January 3 215,000 $ 191,586
January 19 385,000 292,600
April 3 442,478 435,000
April 3 180,000 90,000
May 31 210,527 40,000
October 6 408,359 122,507
October 20 384,650 50,000
November 7 145,000 25,000
November 27 250,000 15,000
--------- ---------
2,621,014 1,261,694
Stock issued for cash and services
January 3 1,000,000 $ 524,266
Stock issued to related parties as return of loan of shares:
August 500,000 5,000
August 7 124,000 34,720
------- -------
624,000 39,720
Stock issued to officers in lieu of salaries:
December 11 22,500 1845
December 27 1,785,714 101,328
December 27 1,116,072 63,330
--------- --------
2,924,286 166,504
Stock issued for payment of loans made to the Company:
December 27 2,857,142 162,125
Stock issued to purchase corporate shell (CrossCheck):
May 8 100,000 34,642
Stock issued to acquire consulting business (Thunderstick):
May 31 500,000 5,000
F-23
HOUSEHOLD DIRECT.COM, INC.
(DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 13. CAPITAL STOCK (Continued)
Detail Stock Transactions (Continued)
2000
Shares issued for research and development- Website
January 26 200,000 $ 131,067
June 14 3,800 1,011
November 7 82,570 10,412
November 8 69,725 8,794
------ ---------
356,095 151,284
Stock issued for investor relations, consulting, technical, and professional
fees:
January 3 125,000 $ 98,300
January 3 125,000 98,300
January 3 50,000 39,320
January 3 25,000 19,660
February 5 50,000 24,641
May 26 300,000 81,657
August 11 40,000 9,898
July 3 100,000 22,889
August 16 40,000 11,135
October 16 230,000 33,353
October 19 200,000 25,220
October 26 500,000 69,354
November 1 50,000 6,305
November 2 8,000 1,110
November 2 500,000 69,354
November 3 35,435 4,915
November 3 25,000 3,468
November 3 32,000 4,439
November 8 32,000 4,035
November 28 45,000 5,107
December 4 360,000 24,967
December 4 25,000 1,734
December 7 25,000 1,734
------ --------
2,922,435 660,892
--------- --------
Total 2000 13,904,972 $ 3,006,128
========== =========
HOUSEHOLD DIRECT.COM, INC.
(DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. STOCK GRANTS, OPTIONS AND WARRANTS
The Company has a nonqualified stock option plan that provides for the granting
of the options to employees and consultants. The option price, number of shares,
and grant date are determined at the discretion of the Company's Board of
Directors. Grantees vest in the options at various intervals as determined by
the Board of Directors. Options granted under the plan are exercisable for a
period of up to five years from the grant date. Options were also granted to
third parties to obtain capital.
During the year 2000, no new options were granted and no options were exercised.
The balance of options and warrants outstanding as of December 31, 2000 is as
follows:
Date Number of Exercise Expiration Outstanding
Issued Shares Price Date Value
------ ---------- ---------- ------------- ----------
11/11/99 610,000 1.35 12/1/04 2,025,000
11/11/99 2,800,000 .15 11/1/04 420,000
---------
Value of options 2,445,000
=========
The Company accounts for its stock based awards to employees using the intrinsic
value method in accordance with APB 25, "Accounting for Stock Issued to
Employees," and its related interpretations. Deferred compensation of $15,000
was recorded in accordance with APB 25. The fair value of each option grant was
estimated in accordance with SFAS 123 using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
1999
Dividend Yield 0.0%
Expected Volatility 0.294%
Risk-free rate of return 6.8%
Expected life 5 Years
Compensation costs for stock options determined at the grant date in accordance
with the fair value method consistent with SFAS 123, requires no additional
amounts in compensation costs to be recognized for the years ended December 31,
1999 and 1998 as fair market value calculated using the Black-Scholes model, was
lower than the option prices in all cases. Where options were issued to third
parties for services rendered, the value of the consideration received is used
to record the transactions, as allowed by SFAS 123. A total amount of $110,131
was recorded in 1999 on this basis. This amount is included in consulting fees
in the accompanying consolidated statements of operations.
F-24
HOUSEHOLD DIRECT.COM, INC.
(DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. SUBSEQUENT EVENTS
In January 2001, the Company closed its offices in Atlanta, GA and Birmingham,
AL to conserve cash flow because sales of products and new memberships were not
significant. The Company Web site was not ready and therefore the employees
located there had a minimal amount of productive work to do. To conserve cash
flow, the Company closed the office.
In order to fund the Company's ongoing operations in 2001, the Company has had
to borrow $200,000 from corporate associates. The terms of the notes are:
Date Amount Rate Term Collateral
2/02/01 $100,000 12% 60 days Assets of
Borrower
2/12/01 $ 50,000 12% 60 days Assets of
Borrower
02/15/01 $ 50,000 18% 150 days N/A
F-25
CONSENT OF CERTIFIED PUBLIC ACCOUNTANT
We consent to the incorporation by reference in this Annual Report on Form
10-K-SB of HouseHold Direct.com, Inc. of our report dated March 15, 2001,
included in the Annual Report to Stockholders of HouseHold Direct.com, Inc.
Bloom and Company
s/Bloom and Company
Hempstead, New York
March 31, 2001
F-26
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
September 30
2001
----
CURRENT ASSETS
Cash and cash equivalents $ 6,996
Prepaid expenses and other
current assets 59,600
Inventory --
-----------
Total current assets 66,596
PROPERTY AND EQUIPMENT, net 48,967
Intangible assets, net
of accumulated amortization 33,229
Other assets - contracts receivable --
Deposits 17,831
-----------
TOTAL ASSETS $ 166,623
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 2,101,686
Accrued salaries 37,500
Current portion of note payable 233,548
Amounts payable to related parties 43,467
-----------
Total current liabilities 2,416,201
Note Payable, net of current portion 23,031
Deferred revenue --
-----------
TOTAL LIABILITIES 2,439,232
-----------
SHAREHOLDERS' DEFICIT
Common stock, 100,000,000 shares
of $0.001 par value authorized;
62,226,692, Shares issued and
outstanding at September 30, 2001 62,226
Additional paid-in capital 5,937,323
Common stock subscriptions receivable ( 34,355)
Deficit accumulated during the
development stage (8,237,803)
-----------
TOTAL SHAREHOLDERS' DEFICIT (2,272,609)
-----------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 166,623
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
HOUSEHOLD DIRECT.com, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Cumulative
During
Development
Stage Nine Months Ended
May 18, 1998 to September 30,
September 30, 2001 2001 2000
------------------ ------- -------
REVENUES:
Consulting services $ 308,593 $ 80,875 $ 168,300
Service fees 61,713 -- 77,323
Sales 256,990 46,444 147,716
--------- ------- --------
TOTAL REVENUES 627,296 127,319 393,339
--------- ------- --------
OPERATING EXPENSES:
Cost of Goods Sold 238,741 24,419 133,843
Salaries and benefits 1,228,460 112,380 546,601
Research and development 757,454 19,786 53,311
Depreciation and amortization 126,241 34,036 53,701
Consulting and professional fees 2,848,222 904,799 692,080
General and administrative 3,241,214 404,852 845,979
--------- -------- --------
TOTAL OPERATING EXPENSES 8,440,332 1,500,272 2,325,515
--------- --------- ---------
LOSS FROM OPERATIONS (7,813,036) (1,372,953) (1,932,176)
---------- ---------- ----------
OTHER EXPENSE:
Interest expense 16,670 14,829 591
Loss from subsidiary - PCNI 319,737 --
Write-off Inventory and Equipment 88,360 88,360 --
------- ------ -------
TOTAL OTHER EXPENSE 424,767 103,189 591
------- ------- -------
NET LOSS BEFORE INCOME TAX
PROVISION (8,237,803) (1,476,142) (1,932,767)
INCOME TAX PROVISION -- -- --
------------ --------- -----------
NET LOSS $ (8,237,803) $(1,476,142) (1,932,767)
=========== ========== ==========
Basic and diluted net loss per weighted
average share of common stock
outstanding 3.77 (.04) (.08)
====== ===== =====
Weighted average number of shares of
basic and diluted common stock
outstanding 31,113,346 40,142,402 23,303,865
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
HOUSEHOLD DIRECT.com, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
(UNAUDITED)
Three Months Ended
September 30,
2001 2000
--------- --------
REVENUES:
Consulting services $ 11,300 $ 65,000
Service fees -- 21,730
Sales 7,157 51,356
----------- -----------
TOTAL REVENUES 18,457 138,086
----------- -----------
OPERATING EXPENSES:
Cost of Goods Sold -- 46,223
Salaries and benefits 2,886 259,749
Research and development -- --
Depreciation and amortization 10,722 17,648
Consulting and professional fees 106,056 144,876
General and administrative 62,723 205,423
----------- -----------
TOTAL OPERATING EXPENSES 182,387 673,919
----------- -----------
LOSS FROM OPERATIONS (163,930) (535,833)
----------- -----------
OTHER EXPENSE:
Interest expense (167) (201)
----------- -----------
TOTAL OTHER EXPENSE (164,097) (201)
----------- -----------
NET LOSS BEFORE INCOME TAX
PROVISION (164,097) (536,034)
INCOME TAX PROVISION -- --
--------- -----------
NET LOSS $(164,097) $ (536,034)
========= ===========
Basic and diluted net loss per weighted
average share of common stock
outstanding (.003) (.02)
=========== ===========
Weighted average number of shares of
basic and diluted common stock
outstanding 52,333,074 23,303,865
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the For the Cumulative
Period from Period from During
January 1, January 1, Development
2001 to 2000 to Stage May 18,
September 30, September 30, 1998 to
2001 2000 September 30,2001
------------ ------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,476,142) $ (1,932,764) $(8,237,803)
Adjustments to reconcile net
loss to net cash
used in operating activities:
Depreciation 25,274 46,740 107,234
Amortization 8,760 7,231 32,242
Shares issued for services,
consulting and purchases
of Company's 737,012 154,750 1,522,944
Write-off Inventory and Equipment 88,361 -- --
Interest paid with stock -- -- 30,727
(Increases) decreases in
operating assets:
Accounts receivable -- (99,995) --
Notes receivable 3,500 -- --
Prepaid expenses and other
current assets (70,996) ( 59,600)
Inventory 15,443 (120,500) --
Increases (decreases) in
operating liabilities:
Accounts payable and accrued
salaries 649,913 530,449 2,139,186
Amounts payable to related parties (222,237) -- --
Deferred revenue (54,000) 92,688 23,031
Deferred compensation -- 15,000 --
-------- -------- ---------
Net cash used in operating
activities (224,116) (1,377,667) (4,442,039)
------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Intangible assets -- -- ( 34,971)
Investment in Software -- (26,785)
Cash acquired from acquisition
of Thunderstick -- --
Additions to property and equipment -- (121,005) ( 156,201)
Deposits 10,266) -- ( 17,831)
Investment cross check -- --
---------- --------- ---------
Net cash used in investing
activities (10,266) (147,790) ( 209,003)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock issued for cash 15,902 1,225,318 4,381,023
Advances on notes payable 225,476 -- --
Payments on notes payable -- (4,669) --
Loans payable to shareholders 273,992 277,015
Increase in notes payable 31,103
---------- --------- ---------
Net cash provided by
financing activities 241,378 1,525,744 4,658,038
---------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 6,996 287 6,996
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD -- 31,013 --
---------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 6,996 $ 31,300 $ 6,996
========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period
for interest 3,270 591 --
========== ========= =========
Cash paid during the period
for income taxes -- -- --
========== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
SUPPLEMENTAL INFORMATION SEPTEMBER 30, 2001:
1. During the period January 1, 2001 to September 30, 2001 the company issued
7,475,909 shares for financial advisory services office expense and
accounts payable valued at $301,456. The Company also issued shares to four
officers in relief of accrued wages in the amount of $500,324.
The accompanying notes are an integral part of these consolidated financial
statements.
SUPPLEMENTAL INFORMATION
The Company had the following non-cash transactions since inception:
1998
1. The Company issued 10,000,000 shares for the acquisition of PCNI for $10,000.
2. The Company issued 914,000 shares valued at $100,540 for services.
3. The Company issued 175,905 shares in lieu of $20,500 interest payable on a
note payable.
4. The Company received subscriptions for 200,000 shares for $50,000.
F-30
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
1999
1. The Company issued 1,488,800 shares for services valued at $369,372.
2. The Company received subscriptions for 50,000 shares valued at $23,000.
3. The Company borrowed 624,000 shares of common stock from stockholders
in order to consummate the Thunderstick and Megappliance acquisition
and reclassified $9,999 payables to related parties as paid-in capital.
4. The Company issued 2,445,000 options for services valued at $125,131.
2000
1. The Company issued 100,000 shares to acquire a public company shell
(CrossCheck) valued at $34,642.
2. The Company issued 124,000 shares to pay related parties loans in the amount
of $39,720.
3. The Company issued 2,924,286 shares to pay accrued salaries and bonuses
valued at $166,504. Of these shares, 1,785,714, which were valued at $101,328,
were issued to two shareholder-officers of the Company.
4. The Company issued 2,922,435 shares valued at $660,892 for investor relations
and professional services.
5. The Company issued 2,857,142 shares valued at $162,125 to repay loans made to
the Company by officer-shareholders.
6. The Company issued 356,095 shares valued at $151,285 to consultants for
research and development of the Company's Web site.
7. The Company issued 624,000 shares to pay back shares related parties lent to
the Company so the Company could purchase Thunderstick, 500,000 shares, and
Megappliance, 124,000 shares. Furthermore, the Company issued 500,000 shares in
connection with the acquisition of Thunderstick
8. The Company issued 1,000,000 shares in exchange for $50,000 in cash and
consulting services valued at $474,266.
F-31
HOUSEHOLD DIRECT.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS DEFICIT
Additional
Common Stock Paid-in Subscriptions
Shares Par Value Capital Receivable
------- --------- -------- -----------
1998
Reinstatement and
Recapitalization,
May 18, 1998 1,000,000 1,000 $ -- $ --
Stock issued for
cash 1,627,095 1,627 174,334 --
Stock issued for
Services 914,000 914 99,626 --
Stock issued for
Purchase of PCNI 10,000,000 10,000 -- (10,000)
Sale of PCNI -- -- -- 1
Stock issued in lieu
of interest 175,905 176 20,324 --
Stock issued for
Subscriptions
receivable 200,000 200 49,800 (50,000)
Net loss -- -- -- --
---------- ------ ------- ------
Balance, December
31, 1998 13,917,000 13,917 344,084 (59,999)
1999
- ----
Stock issued for cash 4,784,504 4,785 897,394 --
Stock issued for
services 1,488,800 1,489 367,883 --
Stock issued for
subscriptions
receivable 50,000 50 22,950 (23,000)
Cash received on
stock subscriptions
receivable -- -- -- 38,645
Reclassify related
party payable -- -- -- 9,999
Options granted for
services -- -- -- --
Deferred
Compensation -- -- -- --
Net loss -- -- -- --
---------- ----- --------- -------
Balance December
31, 1999 20,240,304 $20,241 $1,632,311 $(34,355)
(continued)
F-32
HOUSEHOLD DIRECT.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS DEFICIT
(continued)
Deficit
During Total
Options Deferred Development Shareholders
Outstanding Compensation Stage Deficit
----------- ------------ ----------- ----------
1998
Reinstatement and
Recapitalization,
May 18, 1998 $ -- $ -- $ 1,000
Stock issued for
cash -- -- 175,961
Stock issued for
services -- -- 100,540
Stock issued for
purchase of PCNI -- -- --
Stock issued in lieu
of interest -- -- 20,500
Stock issued for
subscriptions receivable -- -- --
Net loss -- (638,684) (638,684)
------- ------- ------
Balance December
31, 1998 -- (638,684) (340,682)
Stock issued for cash -- -- 902,179
Stock issued for services -- -- 369,372
Stock issued for
subscriptions receivable -- -- --
Cash received on
stock subscriptions
receivable -- -- 38,645
Reclassify related
party payable -- -- 9,999
Options granted for
services 125,131 -- 125,131
Compensation -- 15,000 -- 15,000
Net loss -- -- (2,225,266) (2,225,266)
------- -------- --------- ---------
Balance December 31,
1999 $125,131 $15,000 $(2,863,950) (1,105,622)
F-33
HOUSEHOLD DIRECT.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS DEFICIT
(CONTINUED)
Additional Stock
Common Stock Paid-in Subscriptions
Shares Par Value Capital Receivable
------ --------- ------- ----------
2000
Stock issued for cash,
rights offering 408,359 408 122,099 --
Stock issued for cash 2,212,655 2,213 1,136,974 --
Stock issued for cash
and services 1,000,000 1,000 523,266 --
Stock issues for
Services:
salaries 2,924,286 2,924 163,580 --
Investor relations,
Etc. 2,922,435 2,922 657,970 --
Repay loans 2,857,142 2,857 159,268 --
Research and
Development 356,095 356 150,929 --
Stock issued to
return shares
used to acquire
Thunderstick and
Megappliance 624,000 624 39,096 --
Stock issued to
purchase Thunderstick 500,000 500 4,500 --
Stock issued to
purchase corporate
shell (CrossCheck) 100,000 100 34,542 --
Deferred Compensation
Net Loss -- -- -- --
---------- ---- ------ ------
Balance, December
31, 2000 34,145,276 $34,145 $4,624,535 $(34,355)
========== ======= ========== =========
(continued)
The accompanying notes are an integral part of the financial statements.
F-34
HOUSEHOLD DIRECT.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS DEFICIT
(CONTINUED)
Deficit
During Total
Options Deferred Development Shareholders
Outstanding Compensation Stage Deficit
----------- ------------ ----------- ----------
2000
Stock issued for cash;
rights offering -- -- 122,507
Stock issued for cash -- -- 1,139,187
Stock issued and Services -- -- 524,266
Stock issued for
Services;
Salaries -- -- 166,504
Investor relations,
etc. -- -- 660,892
Repay loans -- -- 162,125
Research and
Development -- -- 151,285
Stock issued to
return shares
used to acquire
Thunderstick and
Megappliance -- -- 39,720
Stock issued to
purchase Thunderstick -- -- 5,000
Stock issued to purchase
corporate shell
(Crosscheck) -- -- 34,642
Deferred Compensation -- (15,000) -- (15,000)
Net loss -- -- (3,897,711) (3,897,711)
---------- -------- --------- ---------
Balance December
31, 2000 125,131 -- $(6,761,661) $(2,012,205)
========== ======== ========= ==========
The accompanying notes are an integral part of the financial statements.
F-35
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
On January 2, 1992, RDI Marketing, Inc. ("RDI") (AKA HouseHold Direct.com) was
formed as a Florida corporation. Upon formation, RDI issued 1,000 shares of
common stock. RDI essentially remained dormant with no direct or indirect
business activity until reinstatement on May 18, 1998. On May 18, 1998, RDI
adopted a plan of recapitalization whereby the 1,000 shares of common stock were
converted into 1,000,000 shares of .001 par value common stock. In addition to
the recapitalization on May 18, 1998, RDI filed a disclosure statement under
Rule 15C2-11 of the Securities and Exchange Act of 1934 (hereafter the "Exchange
Act") with the National Association of Securities Dealers ("NASD"). As a result,
commencing on June 11, 1998, RDI's common stock was quoted on the OTC Bulletin
Board.
On July 10, 1998, RDI exchanged 10,000,000 shares of common stock for all of the
outstanding stock of Preferred Consumer Network International, Inc. ("PCNI").
PCNI, incorporated on June 13, 1997, was engaged in the business of developing
and operating a wholesale buying club that, in addition provided buying,
marketing and financial services to third party owned wholesale buying clubs.
The traditional buying club business model (the "Traditional Model") being
utilized by PCNI was predicated on the sale of memberships to the general
public, which memberships entitled the holders to purchase goods and services
through the wholesale buying club at wholesale prices (exclusive of separately
charged taxes, handling and shipping charges and a processing fee of up to 10%).
During the fourth quarter of 1998, RDI elected to suspend development and
implementation of the Traditional Model in preference to a new business model
(the "New Model") predicated on the mass marketing (through telemarketing and
the Internet) of memberships. Additionally, the operations of PCNI, based on the
Old Model were suspended and PCNI became inactive. Subsequently, RDI sold all of
the issued and outstanding capital stock of PCNI to Mr. John Folger (the
President, a member of the Board of Directors and a principle shareholder of
RDI) for nominal consideration of $1.00.
RDI, in furtherance of the development of the New Model, entered into several
acquisitions during 1999. On May 7, 1999, the Company acquired all of the common
stock of Thunderstick LLC in exchange for 1,000,000 shares of the Company's
common stock. A shareholder loaned 500,000 shares to the Company and the shares
were given as 50% of the consideration to the former shareholders of
Thunderstick. The Company recorded a liability of $5,000 as due to the former
owner of Thunderstick, pending the issuing of an additional 500,000 shares. In
May 2000, the Company issued the additional 500,000 shares to the former
shareholders of Thunderstick and charged off the liability. Thunderstick,
through its wholly-owned affiliate Thunderstick Software, LLC, is engaged in the
business of developing and marketing Internet software which will be utilized to
support the Company's Web site and e-commerce operations and in providing
similar services, on a consulting basis, to third parties.
In July, 1999, RDI, changed its corporate domicile from Florida to Delaware, and
its name to HouseHold Direct.com, Inc. (the "Company"). These changes were
effectuated by merging the Company into its wholly-owned Delaware subsidiary,
and such merger had no impact on the shareholders or the capital accounts of the
Company.
F-36
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION (Continued)
In September, 1999, the Company entered into an acquisition agreement with
Megappliance, Inc. ("Mega") pursuant to which the Company agreed to acquire a
Web site (including software, technology and related commercial relationships)
in exchange for 124,000 shares of the Company's common stock.
On March 9, 2000, the Company executed an Agreement and Plan of Merger with
CrossCheck Corp., a Colorado corporation ("Cross") and a Letter Agreement with
the shareholders of Cross. Pursuant to such agreements, the Company merged Cross
(which had no business operations but was registered, and fully reporting, under
the Exchange Act) into the Company so that the Company could achieve "successor
issuer" status under the Exchange Act. In connection with such merger which was
consummated on March 20, 2000, the Company paid $150,000 in cash and issued
100,000 shares of common stock of the Company to the former shareholders of
Cross. The Company expensed the acquisition in the second quarter of 2000 in the
amount of $164,130.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which contemplate the
continuation of the Company as a going-concern. However, the Company is in the
development stage, and since inception has been engaged primarily in raising
capital and developing its Web site, product, and market strategy. The Company
has not generated significant revenues from operations, and in the course of
funding product and Web site development and other start-up activities, has
experienced cumulative net losses of $ 8,237,803 for the period from May 18,
1998 (inception) to September 30, 2001, and has used cash in operations of
$4,442,039 for the period from May 18, 1998 (inception) to September 30, 2001.
The Company expects that it will continue to incur net operating losses as it
expends substantial resources on Web site development and sales and marketing in
an attempt to capture market share and develop market recognition. Management is
continually trying to raise additional capital through issuance of stock and
debt. Management of the Company believes that the additional capital that is
expected to be raised in the future will be sufficient to cover its working
capital needs until the Company's revenue volume reaches a sufficient level to
cover operating expenses. The absence of assurances of additional capital,
raises a substantial doubt about the Company's ability to continue as a
going-concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
F-37
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. Intercompany transactions and balances
have been eliminated in consolidation.
Research and Development Costs
Research and development costs are expensed as incurred.
Start-up Costs
The Company has implemented the Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities," (SOP 98-5) which requires costs of start up
activities to be expensed as incurred.
Revenue Recognition
Revenue for services is recognized when the service is rendered, while product
revenue is recognized when the product is shipped to the customer. Revenue
consisted of products sold and shipped pursuant to the operating agreements with
PCNI and PCS, consulting services performed by Thunderstick, and service income
earned related to the contract entered into with Personal Consumer Services,
Inc. ("PCS").
Deferred Revenues
Deferred revenues, as presented on the balance sheet, relate to unpaid service
agreement fees to be paid by PCS from uncollected accounts receivable of
Personal Consumer Services, Inc (PCS). Due to the uncertainty of collection
history of PCS, only the fee actually paid by PCS to the Company during the year
and the first two months of 2000 were recorded as revenue. Only revenues
projected to be collected in the next year are shown as current.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives, ranging from three to five
years. Maintenance and repair costs are expensed as incurred.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosure About Fair Value
of Financial Instruments," requires disclosure about the fair value of all
financial assets and
F-38
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
liabilities for which it is practicable to estimate. At September 30, 2001, the
carrying value of all of the Company's accounts receivable, accounts payable and
accrued liabilities approximate fair value because of their short-term nature.
The note payable carrying value approximates fair value based on the borrowing
rate currently available for similar loans
Goodwill/Intangibles
Goodwill reflects the excess of purchase price over the fair value of net assets
purchased and is amortized on a straight-line basis over 3 years.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments with initial maturities of three months or less to
be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
principally on the average cost method. Inventory of merchandise available for
resale was $0, at September 30, 2001. During the first half of 2001 the Company
closed out the inventory of merchandise it was holding in its two Southern
facilities and realized a loss on the sale of $48,613.
Common Stock Issued for Consideration Other Than Cash
When common stock is issued for consideration other than cash, the fair market
value of the stock or the fair market value of the property or services,
whichever is more objectively determinable is used to record the transaction.
The quoted market values of the shares, restricted as to marketability, are
discounted for limited liquidity. The discount factor is computed as the
difference between the average price of the shares issued for cash, computed
from the beginning of the year until the date of transaction, and the market
price of the shares at the date of transaction. The average cash prices, during
the current year, are used: to recognize substantial yearly changes in the
nature and size of the Company's operations; to reduce the impact of random
price movements associated with low volume transactions; and to incorporate
recently available market value information.
Website Development Costs
The Company accounts for website development costs in accordance with the AICPA
Statement of Position 98-12, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". Computer software costs that are
incurred in the preliminary project stage are expensed as incurred. Internal and
external costs incurred to develop
F-39
HOUSEHOLD DIRECT.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
internal-use software during the application development stage are capitalized.
Post implementation and operation costs of training and maintenance are expensed
as incurred.
Loss per Share
Net loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding for the period. Net loss per share has been
stated for all periods presented in accordance with SFAS No. 128.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of the revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Income Taxes
Deferred income taxes, reflecting the net tax effects of temporary differences
between the carrying amount of assets and liabilities recognized for financial
reporting purposes and the amounts recognized for income ax purposes, are based
on tax laws currently enacted. A valuation allowance is established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Prospective Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations, and Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
Statement No. 141 requires all business combinations initiated after June 30,
2001, to be accounted for using the purchase method of accounting. Under
Statement No. 142, goodwill will no longer be subject to amortization over its
estimated useful life. Rather, goodwill will be subject to at least an annual
assessment for impairment by applying a fair-value-based test. In addition,
Statement No. 142 requires separate recognition for certain acquired intangible
assets that will continue to be amortized over their useful lives.
NOTE 3. RELATED PARTY TRANSACTIONS
Directors, Officers and Shareholders of the Company, John Folger and Ann
Jameson, have entered into various transactions with the Company since
inception. The balance of the loan due them on September 30, 2001 was $43,467.
F-40
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels or
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.
Prior to the completion of the Company's initial audit, the Company's
independent accountants, King Griffin and Adamson, P.C., resigned effective
April 17, 2000. The Company engaged Wallace Sanders Company, 8131 LBJ Freeway,
Suite 875, Dallas, Texas 75251, to complete the audit upon resolution of its
Board of Directors on April 24, 2000. On September 11, 2000, Wallace Sanders &
Company resigned as auditor. The Company subsequently retained the services of
Bloom & Company. See below for further details.
As this was the Company's first audit, there has been no prior adverse
opinion, disclaimer of opinion, modification or qualification by the Company's
former independent accountants. While the Company knows of no specific reason or
difference of opinion why its former accountants resigned, to issuer's knowledge
there were no disagreements as to the Company's audit report as there had been
no draft report given to issuer for review.
As a result of said resignation, there has not been any change in the scope
of the audit nor has the Company's new accountants initiated any investigation
or inquiry.
On September 11, 2000, the Company was notified that Wallace Sanders &
Company had merged with McGladrey & Pullen, LLP, and that Wallace Sanders &
Company would no longer be the auditor for the Registrant. On September 21,
2000, the Company appointed the accounting firm of Bloom & Company ("Bloom &
Company"), as the Company's new outside auditors, subject to shareholder
ratification of such appointment on the Company's next annual meeting or, if
called prior thereto, special shareholders' meeting. Due to the Company's
increased financing and development activities, as well as the Company's
expected future operations, the Board had determined that the Company's
requirements would be better served by Auditors who are situated in close
proximity to the Company's management office and, based on a review of several
accounting firms, selected Bloom & Company, which has public Company and
auditing experience.
The auditors' report from Wallace Sanders & Company for the Registrant's
fiscal years ending December 31,1999 and 1998 however the opinions contained an
explanatory paragraph expressing uncertainty regarding the continuation of the
Company as a going concern.
During the Registrant's two most recent fiscal years and the subsequent
interim period preceding the change, there have been no disagreements with
Wallace Sanders & Company on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
Prior to engaging Bloom & Company, the Company consulted with Bloom and
Company as to its qualifications, experiences and ability to audit the Company's
financial statements. The Company and Bloom & Company did not have substantive
discussions regarding the application of accounting principals to a specified
transaction, either complete or proposed, or the type of audit opinion that
might be rendered on the Registrant's financial statements and there are no
reports nor written or oral advice provided by the new accountants' used in
deciding to retain Bloom & Company. Further, as noted, there was no matter that
was the subject of a disagreement as described in Item 304(a)(1)(iv) of
Regulation S-K, promulgated by the Securities and Exchange Commission.
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICES
As a Delaware corporation any indemnification our officer and directors may
have is provide under the provisions of Delaware law, specifically subsection
145 of the Delaware General Corporate Law.
Subsection 145. Indemnification of officers, directors, employees and
agents; insurance, of the Delaware General Corporate Law states as follows:
26
(a) A corporation shall have power to 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 the person 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 the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person 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 the
person's 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 the person 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 reasonable cause to believe that the
person's conduct was unlawful.
(b) A corporation shall have power to 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 the person 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 the person in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of 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 other court shall deem proper.
(c) To the extent that a present or former director or officer 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, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person 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 present or former
director, officer, employee or agent is proper in the circumstances because the
person has met the applicable standard of conduct set forth in subsections (a)
and (b) of this section. Such determination shall be made, with respect to a
person who is a director or officer at the time of such determination, (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the stockholders.
(e) Expenses (including attorneys' fees) 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 or officer to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the corporation
as authorized in this section. Such expenses (including attorneys' fees)
incurred by former directors and officers or other employees and agents may be
so paid upon such terms and conditions, if any, as the corporation deems
appropriate.
(f) The indemnification and advancement of 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 of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or
27
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
incorporation, 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 such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the corporation would have the power to
indemnify such person 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, and 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 such
person 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 any 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 such person
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 a person.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the sale
and distribution of the securities being registered, which will be paid solely
by HouseHold Direct, Inc. (the "Registrant"). All amounts shown are estimates,
except the Commission registration fee:
Commission registration fee $ 2,600
Printing and mailing expenses 0
Legal fees and expenses 55,000
Accounting fees and expense 15,000
........
Total $ 90,600
RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has sold securities which were not
registered under the Securities Act of 1933, as amended, which are as follows:
10,000,000 Shares issued at par, pursuant to an exemption provided by Section
4(2) of the Securities Act of 1933, as amended, to five founders on July 10,
1998 for the acquisition of PCNI.
28
Shares Issued to Founders
The Year Ended December 31,1998
Number of
Date Name Shares Consideration
7/15/98 John Folger 8,008,650 $ 8,008
7/15/98 Ann Jameson 999,000 999
7/15/98 Martin Gersten (1) 699,300 699
7/15/98 Trudy Patron 146,525 147
7/15/98 Ed Nahom 146,525 147
---------- -------
Total 10,000,000 $ 10,000
========== =======
$10,000
(1) Corporate Counsel
We have issued 1,014,540; 1,858,172; and 8,198,383 shares in 1998,1999 and
2000 respectively pursuant to Section 4(2) of the Securities Act of 1933 for
investor relations, consulting, technical, professional and other services.
Inclusive of the shares issued to the founders described above we issued
12,902,460; 4,465,132; and 5,706,589 shares in 1998, 1999, and 2000 respectively
pursuant to Section 4(2) and 4(6) of the Securities Act of 1933 for cash or cash
equivalents. Except for the sales described below the aforementioned sales were
without compensation and did not involve any general solicitation as they were
sold strictly by officers and beneficial owners of the Company.
We have issued 7,600,000 shares in 2001 pursuant to Sections 4(2) and 4(6)
of the Securities Act of 1933 for cash, cash equivalents and as up front
compensation to Dutchess for the equity line investment agreement.
Private Placement
Pursuant to four offering memos dated December 1, 1999, December 23, 1999,
January 13, 2000 and March 10, 2000, the Company issued 215,278, 201,670,
308,000 and 500,000 shares for net consideration of $87,350, $191,586, $292,600
and $435,000, respectively. Commissions paid on the sales were $4,650, $10,084,
$15,400 and $65,000, respectively. The securities were offered pursuant to the
exemption provided by Regulation D, Rule 504, under the Securities Act of 1933,
as amended. The principal underwriter of the above transaction was Orienstar
Financial Ltd., 11249 West 103rd Drive, Westminster, CO 80021.
Rights Offering
On August 3, 2000, the Company offered each stockholder of record, as of
the close of business on July 25, 2000 (the "Record Date"), the right to
purchase additional shares of common stock, .001 par value, at $.30 per share.
Each Stockholder of record on the record date received one right to purchase one
share for each five shares of common stock owned. Each shareholder had the right
to purchase shares until September 30, 2000 (the "Expiration Date"). On October
6, 2000, the Company issued 408,359 shares for an aggregate selling price of
$122,508 to 40 shareholders. The offering was made pursuant to an exemption from
registration under the Securities Act of 1933, as amended.
The Company has relied on Section 4(2) of the Securities Act of 1933 for
its private placement exemption, such that the sales of the securities were
transactions by an issuer not involving any public offering. All of the
aforesaid securities have been appropriately marked with a restricted legend and
are "restricted securities" as defined in Rule 144 of the rules and the
regulations of the Securities and Exchange Commission, Washington, D.C. 20549.
All of the aforesaid securities were issued for investment purposes only and not
with a view to redistribution, absent registration. All of the aforesaid persons
have been granted access to the complete books, financial records, contracts,
and other business documents of HouseHold Direct.com, Inc. Each has also had the
opportunity to ask questions of the management, employees, advisors, attorneys
and accountants for HouseHold Direct, Inc.
29
In addition, each was granted physical access to HouseHold Direct.com, Inc.'s
facilities for inspection. Transactions by the Registrant involving the sales of
a portion of these securities set forth above were issued under the "private
placement" exemptions under the Securities Act of 1933 as transactions by an
issuer not involving any public offering. The Registrant has made its own
independent determination, based on its own investigation, that each person is
(i) a sophisticated investor capable of assessing the risks inherent in a
private offering, (ii) able to bear the economic risk of his investment and
(iii) aware that the securities were not registered under the Securities Act of
1933 and cannot be re-offered or re-sold until they have been so registered or
until the availability of an exemption therefrom.
EXHIBITS
Exhibit Number Description
3.1** Amended Charter
3.2* Amended and Restated Charter
3.3* Bylaws
3.4 Certificate of Amendment
5.1* Opinion of Counsel
10.1* Debenture Subscription Agreement
10.2* Equity Line Investment Agreement
10.3* Office Lease
10.4 Subscription Agreement
10.5 *** Eqtima Acquisition Agreement
* Previously filed in earlier versions of this Form SB2
** Filed earlier with the Commission as an exhibit to form 8K filed 6/28/2000.
*** Filed earlier with the Commission as an exhibit to Form 8K filed 01/11/2002
UNDERTAKING
The Registrant hereby undertakes the following:
(1) To file during periods of offers or sales a post-effective amendment to this
registration statement, to: (a) include the prospectus required by Section
10(a)(3) of the `33 Act; (b) reflect in the prospectus any facts/events arising
after the effective date (or most recent post effective amendment) which
individually or in the aggregate represents a fundamental change in information
contained in this registration statement; and (c) include any material
information with respect to the plan of distribution not previously disclosed in
this registration statement.
(2) To remove from registration, through filing of a post-effective amendment,
and registered securities which remain unsold at the termination of this
offering.
EQUITY LINE OF CREDIT AGREEMENT
On July 12, 2001 we signed a private equity investment agreement with
Dutchess Private Equities Fund, L.P. Pursuant to this investment agreement and
subject to the satisfaction of certain conditions, HouseHold Direct may sell and
issue to Dutchess, from time to time, up to an aggregate of $10,000,000 of our
common stock. Beginning on the date that a registration statement covering the
resale of the shares issuable pursuant to the equity line is declared effective
by the Commission, and continuing for thirty six (36) months thereafter, we may,
from time to time, in our sole discretion, sell or "put" shares of our common
stock to Dutchess at a price equal to 91% of the average lowest three (3)
closing bid prices reported for our common stock for the ten (10) trade days
following the receipt of our notice to access our equity line.
The maximum advance amount on any advance notice date is equal (i) one
hundred percent (100%) of the average daily volume (computed using the 30
trading days prior to the advance notice) multiplied by (ii) the market price.
At no time will an advance be made or advance notice be given so as to cause
Dutchess to hold in excess of 4.9% of our then issued and outstanding common
shares. Our ability to put shares of common stock to Dutchess is subject to
certain conditions and limitations, including but not limited to, the following:
30
- the requirement that this registration statement not be suspended or
our common stock not be delisted from the Bulletin Board or any
exchange;
- our representations and warranties to Dutchess contained in the equity
investment agreement must be accurate as of the date of each put;
- we must have performed, satisfied and complied in all respects with
all covenants, agreements and conditions required to be performed,
satisfied or complied with at or prior to the date of each put;
- we must have obtained all permits and qualifications required by any
applicable state in accordance with the registration rights agreement
for the offer and sale of the put shares, or shall have the
availability of exemptions therefrom. The sale and issuance of the put
shares must be legally permitted by all laws and regulations to which
we are subject;
- at least fifteen (15) trading days must have elapsed since the last
date we put shares to Dutchess.
We cannot assure you that we will satisfy all of the conditions required
under the investment agreement or that Dutchess, will have the ability to
purchase all or any of the shares of common stock put to it thereunder.
Under the investment agreement, we agreed to register the common stock for
resale by Dutchess which will permit Dutchess to resell the common stock from
time to time in the open market or in privately-negotiated transactions. We will
prepare the registration statement and file amendments and supplements thereto
as may be necessary in order to keep it effective as long as the equity line of
credit agreement remains in effect or Dutchess owns any of our common stock. We
have agreed to bear certain expenses, other than broker discounts and
commissions, if any, in connection with the preparation and filing of the
registration statement and any amendments to it.
SUBSCRIPTION AGREEMENT
Effective January 14, 2002 we entered into a subscription agreement with
Sprout Investments, LLC which allows us to sell them 8,400,000 shares of our
common stock subject to the terms and conditions of the agreement. The agreement
allows us to notify Sprout that we wish to sell or "put" a number of our shares
and Sprout must purchase the shares we tender to them as long as:
- The amount of shares we put to Max Capital at any given time does not
exceed the number of shares equal to 15% of the daily average share
trading volume for the 20 trading day period prior to the date of our
put notice to Sprout;
- Sprout will pay us a per share purchase price equal to 90% of the
lowest three day average closing bid price reported for our common
stock for the 5 day trading period ending the day prior to the date of
our put notice to Sprout;
- We have complied with all the covenants and not breached any of the
warranties we have given to Sprout as stated in the terms of the
agreement;
- The shares we sell to Sprout are registered by us for resale so that
Sprout can resell them from time to time on the open market or in
private sales transactions that might be negotiated by them. We have
agreed to pay the costs of the registration and including the expenses
of amending the registration documents from time to time until such
time as we have sold all 8,400,000 shares to Sprout or no longer sell
shares to Sprout under the terms of the agreement.
There can be no assurance that we will be able to meet the requirements
necessary to sell shares to Sprout or that something adverse may cause Max
Capital to breach the agreement with us.
SIGNATURES
31
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on this Amended Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Sandy Hook, State of Connecticut, on February
05, 2002.
HOUSEHOLD DIRECT, INC.
/s/ JOHN D. FOLGER
John D. Folger
President
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
/s/ JOHN D. FOLGER /s/ ANN D. JAMESON
- ------------------ ------------------
John D. Folger Ann D. Jameson
President, CEO, Director Vice President, Secretary/Treasurer, Director
32
Index to Exhibits
Exhibit Number Description Sequential Page Number
3.1** Amended Charter
3.2* Amended and Restated Charter
3.3* Bylaws
3.4 Certificate of Amendment
5.1* Opinion of Counsel
10.1* Debenture Subscription Agreement
10.2* Equity Line Investment Agreement
10.3* Office Lease
10.4 Subscription Agreement
10.5 *** Eqtima Acquisition Agreement
* Previously filed in earlier versions of this Form SB2
** Filed earlier with the Commission as an exhibit to form 8K filed 6/28/2000.
*** Filed earlier with the Commission as an exhibit to Form 8K filed 01/11/2002
33