8-K/A 1 sea8ka.txt FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ Form 8-K/A Amendment No. 1 Current Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934 Date of Report March 9, 2001 Commission file number 333-88139 Sea Shell Galleries, Inc. (Exact name of Registrant as specified in its charter) Nevada 91-1985634 (State of Incorporation) (IRS Identification No.) 225 Oser Drive Hauppague, NY 11788 (631) 851 7000 (Registrant's address, including zip code and telephone number) Item 1 and 2. Changes in Control of Registrant/Acquisition or Disposition of Assets A. Transaction Effective March 1, 2001, Sea Shell Galleries, Inc. (the "Registrant") acquired approximately 85% of the shares of outstanding common stock of Cyfit Wellness Solutions, Inc., a Delaware corporation ("Cyfit") pursuant to a Share Exchange Agreement dated February 23, 2001 among the Registrant, Cyfit and holders of over 85% of the common stock of Cyfit ( the "Agreement"). The transactions contemplated by the Agreement were intended to be a tax-free exchange pursuant to Section 368 of the Internal Revenue Code of 1986. As a result of the share exchanges pursuant to the Agreement, the Registrant issued 17,930,550 shares of its common stock in exchange for a like amount of shares of Cyfit surrendered by Cyfit shareholders. Prior to the closing, and as a condition thereto, 11,950,000 shares of common stock of the Registrant were returned to the Registrant for cancellation, which reduced the number of outstanding shares to 2,700,000. In addition, all of the Registrant's Class A and Class B warrants were cancelled. Thus, as of March 1, 2001, there were 20,630,550 shares of common stock of the Registrant outstanding. Management believes that most, if not all of the remaining shareholders of Cyfit will exchange their shares, for shares of the Registrant in the near future. If all the remaining outstanding shares of Cyfit are exchanged by their holders, an additional 2,469,450 shares will be issued by the Registrant in exchange therefor. The Agreement contemplates that the holders of the Registrant's Class C warrants to acquire 2,610,000 shares of the Registrant's common stock can continue to exercise such warrants at $4.00 per share. In addition, there are holders of warrants to acquire 550,000 shares and 10,000 shares of Cyfit's common stock exercisable at $0.10 and $0.50 respectively. In accordance with the Agreement, holders of Cyfit's warrants will have the right to acquire the Registrant's shares in lieu of Cyfit shares, according to the same terms and conditions. B. Change of Management In connection with the closing, the officers and directors of the Registrant resigned from their positions. The following named persons, who are also officers and/or directors of Cyfit, were elected to the positions indicated: Eugene Fernandez Director and President Richard Kephart Director John Como Director and Secretary C. Description of Business 2 Cyfit, whose offices are located in Hauppague, New York, is a company which is developing an interactive, subscription-based, wellness business focused on enhancing and improving its members' wellness, lifestyle and fitness. Cyfit seeks to provide its members via the internet, "real time" one-on-one counseling, individualized in-depth assessments, performance and health portfolio tracking, discounted e-commerce, on-demand streaming video (created by Cyfit) and links to health and fitness content. Cyfit intends to offer a service that is interactive across diverse service levels within multiple areas of the health industry. The documents attached as exhibits to this report on Form 8-K, are incorporated by reference into this Item which is modified by the full text of those documents. Item 5. The Registrant has moved its principal executive offices to 225 Oser Avenue, Hauppague, New York, 11788. Item 7. Financial Statement and Exhibits (a) Financial Statements of Business Acquired (b) Pro Forma Financial Information* (c) Exhibits* 2.1 Share Exchange Agreement dated February 23, 2001 among Registrant, Cyfit certain shareholders of Cyfit. 17.1 Resignation of the officers and directors of the Registrant and election of new directors. *to be filed by amendment as soon as practicable SIGNATURES SEA SHELL GALLERIES, INC. May 14, 2001 By: /s/ Eugene Fernandez ------------------------------- Eugene Fernandez President 3 CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) REPORT FOR THE YEAR ENDED DECEMBER 31, 2000 CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors..............................................1 Consolidated Balance Sheet as of December 31, 2000..........................2 Consolidated Statements of Operations for the year ended December 31, 2000 and for the period from May 28, 1999 [date of inception] to December 31, 1999.................................................3 Consolidated Statements of Stockholders' Equity for the year ended December 31, 2000 and for the period from May 28, 1999 [date of inception] to December 31, 1999...................................4-5 Consolidated Statements of Cash Flows for the year ended December 31, 2000 and for the period from May 28, 1999 [date of inception] to December 31, 1999.................................................6 Notes to Consolidated Financial Statements..................................7-14 -i- REPORT OF INDEPENDENT AUDITORS To the Stockholders of Cyfit Wellness Solutions, Inc. and Subsidiaries Hauppauge, New York We have audited the accompanying consolidated balance sheet of Cyfit Wellness Solutions, Inc. and Subsidiaries [a development stage company] as of December 31, 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for the periods ended December 31, 2000 and 1999 and for the cumulative period from May 28, 1999 [date of inception] to December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 consolidated financial position of Cyfit Wellness Solutions, Inc. and Subsidiaries as of December 31, 2000 and the consolidated results of their operations and their cash flows for the periods ended December 31, 2000 and 1999 and for the cumulative period from May 28, 1999 [date of inception] to December 31, 2000, in conformity with generally accepted accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that Cyfit Wellness Solutions, Inc. and Subsidiaries (A Development Stage Company) will continue as a going concern. As discussed in Note 13 to the consolidated financial statements, Cyfit Wellness Solutions, Inc. and Subsidiaries incurred a net loss of approximately $3.9 million, for the year ended December 31, 2000 and has utilized approximately $2.0 million in cash for operating activities. These conditions raise substantial doubt about Cyfit Wellness Solutions, Inc. and Subsidiaries ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 13. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. MOORE STEPHENS, P.C. Certified Public Accountants Cranford, New Jersey May 11, 2000 CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEET DECEMBER 31, 2000

See notes to consolidated financial statements. -2- CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS CUMULATIVE FROM FROM MAY 28, 1999 MAY 28, 1999 [DATE OF FOR THE [DATE OF INCEPTION] TO YEAR ENDED INCEPTION] TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 2000 1999 ------------ ------------ ------------ REVENUES $ 1,105,012 $ 1,105,012 $ -- ------------ ------------ ------------ OPERATING EXPENSES: Compensation and related benefits 1,127,841 1,061,780 66,061 Occupancy cost 783,138 531,974 251,164 Contract work 159,388 159,388 -- Consulting fees 221,469 219,899 1,570 Advertising and promotion 446,547 430,196 16,351 Professional fees 253,677 251,994 1,683 General and administrative expense 982,705 749,133 233,572 Asset impairment charge 404,056 404,056 -- Loss on sale of subsidiary 61,995 61,995 -- Research and product development 1,375,574 401,019 974,555 Depreciation and amortization 713,695 713,695 -- Stock based compensation 166,250 -- 166,250 Interest and bank charges 74,628 62,269 12,359 ------------ ------------ ------------ Total operating expenses 6,770,963 5,047,398 1,723,565 ------------ ------------ ------------ NET LOSS $ (5,665,951) $ (3,942,386) $ (1,723,565) ============ ============ ============ See notes to consolidated financial statements -3- CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2000 AND FOR THE PERIOD MAY 28, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999

See notes to consolidated financial statements. -4- DEFICIT ACCUMULATED DURING THE TOTAL DEVELOPMENT STOCKHOLDERS' STAGE EQUITY ------------------------------- Issuance of common stock to $ $ 1,031 founders Issuance of common and preferred 1,747,437 stock in private placement, net [Note 10] Issuance of preferred stock to principal 861,670 shareholder and founder Issuance of preferred 370,941 stock to founders Stock based Compensation 166,250 Issuance of common stock for equipment acquisitions 195,000 Issuance of common stock for business acquisitions [Note 3] 1,262,250 Net loss (1,723,565) (1,723,565) ------------------------------- BALANCE - DECEMBER 31, 1999 (1,723,565) 2,881,014 ------------------------------- Issuance of common and preferred stock in private placement, net [Note 10] 1,394,534 Issuance of preferred stock to principal shareholder and founder 648,782 Issuance of common stock for acquisitions Internet website and promotional advertisement [note 8] 650,000 Issuance of common stock for promotional fees [note 11] 35,000 Issuance of common stock 517,584 Stock options granted for services rendered [note 15] 360,000 Treasury stock [note 2] (299,250) Net loss (3,942,386) (3,942,386) ------------------------------- BALANCE - DECEMBER 31, 2000 $(5,665,951) $ 2,245,278 =============================== See notes to consolidated financial statements. -5- CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASHFLOWS

See notes to consolidated financial statements -6- CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE COMPANY] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [1] Nature of Operations Description and Nature of Company Operations - Cyfit Wellness Solutions, Inc. ["the Company"] was incorporated in the state of Delaware in May 28, 1999, and is engaged in providing internet health and wellness services to improve its members fitness, diet and wellness of the body. The Company's business model anticipates recurring revenue with low fixed costs through a subscription-based membership. The Company plans on providing precedent-setting Internet services to its customer base [corporations, unions, associations] and end-user subscriber base in a "real-time, online, interactive environment. Since its inception, the Company has devoted substantially all of its efforts to business planning, website development, recruiting management and technical staff, acquiring operating assets and raising capital. Accordingly, the Company is considered to be in the development stage as defined in Statement of Financial Accounting Standards ("SFAS") No.7. [2] Summary of Significant Accounting Policies Consolidations - The accompanying consolidated financial statements include the operations of the Company and its subsidiaries. All material inter-company accounts and transactions have been eliminated in the consolidation. Use of Estimates - The preparation of the 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 disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. The Company has no cash equivalents as of December 31, 2000. The Company does not require collateral or other security to support financial instruments subject to credit risk. Property, Equipment and Depreciation - Property and equipment are recorded at cost. Depreciation is provided by the use of the straight-line method over the useful life of the asset, which range from 5 to 15 years. Improvements - that extend the useful life of the assets are capitalized, while costs of repairs and maintenance are charged to expense as incurred. Intangible Assets - are recorded at cost and amortized over a useful life under the straight line and sum of the year digits method, which range from 3 to 15 years. Revenue Recognition - During the year 2000, the Company derives revenue principally from membership and other related fees from its ownership of two health and fitness clubs. The Company recognizes such revenues at the time such services are earned. -7- CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE COMPANY] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] Advertising and Promotion Costs - Advertising and promotion costs are charged to operations when incurred. Advertising and promotion costs amounted to approximately $430,200 and $16,400 for the year ended December 31, 2000 and for the period May 28, 1999 [date of inception] to December 31, 1999 and are included as part of operating expenses in the consolidated statement of operations. Stock Options and Similar Equity Instruments - The Company adopted disclosure requirements of Statement of Financial Accounting Standards ["SFAS"] No.123. "Accounting for Stock-Based Compensation," for stock options and similar equity instruments [collectively, "Options"] issued to employees, however, the Company will continue to apply the intrinsic value based method of accounting for options issued to employees prescribed by Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees" rather than the fair value based on the method of accounting prescribed by SFAS No 123. SFAS No. 123 also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more measurable. Research and Product Development - The Company adopted Statement of Position 98-1 [Accounting for Costs of Computer Software Developed or Obtained for Internal Use] and adheres to the accounting guidance under the Emerging Issues Task Force issue 00-2 for accounting for web site development costs. The accounting guidance addresses the various stages as to the development of a web site and the related expenses of such capitalized costs. The Company incurred approximately $401,000 and $974,600 of planning stage costs and included such costs as part of the consolidated statement of operations for the year ended December 31, 2000 and for the period May 28, 1999 [date of inception] to December 31, 1999. During the year 2000, the Company has achieved certain stages of technological feasibility and as such these web site development costs of approximately $760,000 were capitalized. As of December 31, 2000 the Company has not recorded any related amortization expense, since such project costs have not been fully completed. Impairment - Certain long-term assets of the Company are reviewed when changes in circumstances require as to whether their carrying value has become impaired, pursuant to guidance established in the Statement of Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived assets to be Disposed Of." Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations [undiscounted and without interest charges]. If impairment is deemed to exist, the assets will be written down to fair value. Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to apply to taxable income in the year those temporary -8- CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE COMPANY] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Fair Value of Financial Instruments - SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," requires certain disclosures regarding the fair value of financial instruments. In assessing the fair value of these financial instruments, the Company has used a variety of methods and assumptions, which were based on estimates of market conditions and risks existing at that time. All instruments, including cash, note receivable, accounts payable, accrued expenses and taxes, debt and amount due to related party are reflected at fair value in the consolidated financial statements. [3] Business Combinations On December 31, 1999 the Company acquired Club Tech DDN, Inc. ("Club Tech") by issuing 500,000 shares of the Company's common stock and the assumption of liabilities of $47,100 for a total consideration of approximately $712,000. Immediately following this acquisition Club Tech was merged into the Company. The purchase price exceeded the fair value of the net assets acquired by $69,700. During December 2000, the Company sold the facility. On December 31, 1999 the Company purchased Aerobitron Club Management Systems, Inc. ("Aerobitron") and Spidervisions, Inc. ("Spidervision"), for 225,000 shares of the Company's common stock valued at $299,250 and the assumption of outstanding liabilities of approximately $400,000. Aerobitron Club Management Systems, Inc. provides business software to gyms and health clubs. During the year ended December 31, 2000, management recorded an impairment charge of approximately $404,000 related to the 1999 acquisition of Aerobitron Club Management Systems, Inc. The impairment charge results from Management's decision not to upgrade the software due to the cost of the upgrade being deemed not cost effective based upon the Company's business strategy. As part of this transaction, the former shareholder of Aerobitron returned the original 225,000 shares of common stock received as part of the Company's business acquisition in 1999. The Company recorded the acquired shares as treasury stock at the same consideration as originally paid for. On December 27, 1999 the Company, acquired Iron Works Personal Training, Inc. ("Iron Works") together with its S.M.A.R.T. (Scientific Management of Anatomical Response Training) program, by issuing 250,000 shares of the Company's common stock for a total consideration of $332,500. The S.M.A.R.T. program is an accredited college course for continuing education and is designed to raise the level of education of the industry's trainers. Immediately following this acquisition on December 27, 1999. Iron Works was merged into the Company. The 1999 acquisitions described above were accounted for by the purchase method. The estimated fair value of the assets acquired and liabilities assumed is as follows: Fixed assets $ 153,900 Intangible assets 1,442,100 Excess purchase price over fair value of assets acquired 69,700 Other 105,700 ---------- Total assets 1,771,400 Less: liabilities assumed 509,200 ---------- Capital stock issued as consideration $1,262,200 ========== The results of operations related to the above purchased business combinations are included in the accompanying consolidated financial statements since the dates of acquisition. -9- CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE COMPANY] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [4] Sale of Subsidiary On December 7, 2000 the Company sold its health club facility in East Islip New York to a stockholder of the Company. The consideration under the contract aggregated approximately $650,000 which included the assumption of certain liabilities of approximately $260,000 by the buyer and the forgiveness of a promissory note in the amount of $350,000. The Company realized a loss on the disposal of the subsidiary of approximately $62,000. During the year ended December 31, 2000 the Company recorded revenues of approximately $800,000 from this health club facility which is included as part of the consolidated statement of operations. [5] Note Receivable During May 2000, the Company loaned $50,000 to a strategic partner. The note bears an interest rate of 9% per annum with principal and interest payments to be paid in equal monthly installments commencing July 1, 2001 until the maturity date of June 1, 2002. On April 18, 2001 the Company assigned the note to a shareholder for consideration of $50,000 and as such the note receivable is classified as part of current assets. [6] Property and Equipment Fixed assets consist of the following. Leasehold Improvements $ 917,431 Fitness Equipment 561,950 Office Equipment 583,986 Furniture and Equipment 167,566 ------------ Total Cost $ 2,230,933 Accumulated Depreciation 344,722 ------------ Net Carrying Value $ 1,886,211 ============ During the year ended December 31, 2000 the Company recorded depreciation expense of approximately $396,000. During the period May 28, 1999 [date of inception] to December 31, 1999 no depreciation expense was recorded due to the inception of the business. [7] Customer List and Other Intangible Assets Customer List and other intangible assets consisted of the following: Customer List $ 325,831 Video Production 160,400 Computer Software 92,944 Other 15,700 ------------ Total Cost 594,875 Accumulated Amortization 209,818 ------------ Net Carrying Value $ 385,057 ============ During the year ended December 31, 2000 the Company recorded amortization expense of approximately $317,700. During the period May 28, 1999 [date of inception] to December 31, 1999 no amortization expense was recorded due to the inception of the business. -10- CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE COMPANY] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [8] Acquisition of Internet Website and Advertisement Rights On September 18, 2000, the Company entered into an agreement to acquire the domain and URL (WWW.TONYLITTLE.COM) of an internet website and the advertisement and promotional spots on certain infomercials to be aired in the future for 650,000 shares of common stock at an estimated fair value of approximately $650,000. Using various pricing methods the Company used an estimated allocation basis of $150,000 for the website and the remaining balance of $500,000 for deferred advertising benefits to be used over a three year period. The website plans to be fully integrated with the Company's website currently under construction. The company recorded no amortization charge related to this website in year 2000. As additional consideration under this agreement, the Company agreed to pay seller a percentage of gross revenue from the sale of eCommerce products. The Company has guaranteed minimum royalty payments to the seller ranging from $100,000 to $150,000 per annum for a term of three years as defined. [9] Income taxes The Company has incurred operating losses during the year ended December 31, 2000 and for the period from May 28, 1999 [date of inception] to December 31, 1999. As such, the company has not recorded a provision for income taxes as part of the statement of operations. The availability of recording asset tax benefits related to these net operating loss deductions have been reduced to zero by a valuation allowance due to the uncertainty the Company will be able to generate sufficient taxable income in the future necessary to utilize these assets. [10] Private Placement Memorandum During the year 2000 the Company raised additional capital proceeds by selling units, each consisting of two (2) shares of preferred stock and one (1) share of common stock at $4.00 per unit. The preferred stockholders shall be entitled to dividends at the annual rate of 9% payable semi-annually if and when such dividends are lawfully declared by the Company's Board of Directors, before any dividends are declared on the Company's common stock. The Company may elect to pay all or part of such dividends in cash or in the form of common stock. The preferred stock has a liquidation preference of $2.00 per share. The preferred stock shall be automatically convertible on a one for one basis, at the earlier of (i) the Company's initial public offering, (ii) three (3) years from the closing of this offering, or (iii) the date on which the Company raises $10 million or more in equity financing. A holder of the Preferred Stock may voluntarily convert its shares of Preferred Stock at any time. The preferred stock is redeemable by the Company at $4.00 per share. The holders of Preferred Stock shall have no voting. During the years 2000 and 1999 the Company raised approximately $1.4 million and $1.7 million, respectively from the sale of its capital stock. The Company used the proceeds principally to fund the cost of its website development, acquire operating assets and to fund its ongoing working capital position. -11- CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE COMPANY] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [11] Commitments and Contingencies Litigation - The Company is subject to lawsuits arising in the ordinary course of business. Management after review and consultation with counsel believes it has meritorious defenses and considers that any potential outcome for these matters would not materially affect the Company's consolidated financial position or statement of operations. Leases - During the year ended December 31, 2000, the Company rented its corporate headquarters and two health club facilities. Rent expense for the year ended December 31, 2000 and for the period May 28,1999 [date of inception] to December 31, 1999 under these leases amounted to approximately $405,400 and $168,800, respectively. These expenses have been recorded as part of occupancy cost in the consolidated statement of operations. During December 2000, the Company sold one of its health club facilities. In addition, the Company leases certain equipment under long-term lease agreements. The following is a schedule by year of future minimum lease payments under capital and operating leases, together with the present value of the net minimum lease payments as of December 31, 2000. Capitalized Operating Operating Leases Leases Leases (Equipment) (Rental Space) (Equipment) ------------------------------------------ Year ending December 31, 2001 $259,000 $ 224,000 $66,000 2002 122,000 232,000 2003 37,000 242,000 2004 32,000 251,000 2005 261,000 Years subsequent to 2005 527,000 Total minimum lease payments $450,000 $1,737,000 $66,000 ---------- ------- Less: amount representing interest 72,000 -------- Present value of net minimum lease payments 378,000 Less: current maturities 194,000 -------- Long term lease obligations $184,000 ======== Capital leases included in property and equipment, net amounted to approximately $586,600 at December 31, 2000. Amortization of equipment under capital leases is included with depreciation expense in the consolidated statement of operations for year 2000. On September 11, 2000, the Company entered into a binding agreement with a major fitness sponsor to consult, advertise and promote certain products on the Company's behalf. The initial term of the agreement began on August 1, 2000 and expires on July 31, 2003 with an option to renew. The annual retainer is $120,000, and included the transfer of 250,000 shares of common stock valued at $250,000, which was recorded as a contra stockholders equity account. During the year ended December 31, 2000, the Company amortized $35,000 of such costs to advertising and promotion. Costs of approximately $85,000 related to this contract has been expensed as part as sales advertising and promotion expense in the consolidated statement of operations for the year ended December 31, 2000. -12- CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE COMPANY] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [12] New Authoritative Pronouncement In March 2000, FASB issued Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation." Among other issues, the Interpretations clarifies (a) the definition of an employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the term of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The Company has adopted this pronouncement. [13] Going Concern The consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern and realization of assets and settlement of liabilities and commitments in the normal course of business. The Company has incurred a net loss of approximately $3.9 million and $1.7 million for the year ended December 31, 2000 and for the period May 28, 1999 [date of inception] to December 31, 1999. The Company has utilized approximately $2.0 million and $1.4 million in cash during operations for the year ended December 31, 2000 and for the period May 28, 1999 [date of inception] to December 31, 1999. It is anticipated this trend will continue since minimal revenue recognition is planned to be realized until the Internet web site is completed. During the third quarter of year 2000 the Company's business model anticipates minimal subscription based revenue derived from the use of its web site. The inability of the Company to generate cash from operations, considering currently available funds, creates uncertainty about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The Company plans to raise additional capital proceeds to fund the completion of its website, general working capital purposes and sustain development stage operations during the year 2001. In addition management continues to implement various cost saving programs. The continuation of the Company as a going concern is dependant upon the success of these plans [14] Significant Risks and Uncertainties [A] Legal standards relating to the protection of intellectual property rights in Internet-related industries are uncertain and still evolving. As a result, the future viability or value of the Company's intellectual property rights, as well as those of other companies in the Internet industry is unknown. [B] The adoption of new laws or the application of existing laws to the Internet may decrease the growth in the use of the Internet, which could in turn decrease the demand for the Company's services, increase it's cost of doing business or otherwise have a material adverse impact on it's business, financial condition and operating results. [A] Reverse Acquisition - Effective March 1, 2001, Sea Shell Galleries, Inc. (the "Registrant ") acquired approximately 85% of the shares of outstanding common stock of Cyfit Wellness Solutions, Inc. and Subsidiaries, a Delaware corporation ("Cyfit") pursuant to a Share Exchange Agreement dated February 23, -13- CYFIT WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE COMPANY] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [15] Subsequent Events 2001 among the Registrant, Cyfit and holders of 85% of the common stock of Cyfit (the "Agreement") The transactions were intended to be a tax-free exchange. As a result of the share exchanges pursuant to the Agreement, the Registrant issued 17,930,550 shares of its common stock in exchange for a like amount of shares of Cyfit surrendered by Cyfit shareholders. Prior to the closing, and as a condition there to 11,950,000 shares of common stock of the Registrant were returned to the Registrant for cancellation, which reduced the number of outstanding shares to 2,700,000. In addition, all of the Registrant's Class A and Class B warrants were cancelled. Thus as of March 1, 2001 there were 20,630,550 shares of common stock of the Registrant outstanding. Management believes that most if not all of the remaining shareholders of Cyfit will exchange their shares, for shares of the Registrant in the near future. If all the remaining outstanding shares of Cyfit are exchanged by their holders, an additional 2,469,450 shares will be issued by the Registrant in exchange therefore. The Agreement contemplates that the holders of the Registrant's Class C warrants to acquire 2,610,000 shares of the Registrant's common stock can continue to exercise such warrants at $4.00 per share. In addition, there are holders of warrants to acquire 550,000 shares and 10,000 shares of Cyfit's common stock exercisable at $0.10 and $0.50 respectively. In accordance with the Agreement, holders of Cyfit's warrants will have the right to acquire the Registrant's shares in lieu of Cyfit shares, according to the same terms and conditions. At the closing, Cyfit and its shareholders are expected to hold approximately 88.3% of the Registrant. For all accounting purposes Cyfit is deemed to be the acquiror. [B] Employment Contracts - On February 28, 2001 the Company entered into employment contracts for two officers of the Company at a minimum compensation level of $115,000 per annum for each officer. [C] Stock Option Plan - During March 2001, the Company established a stock option plan to promote the growth and general prosperity of the Company by offering incentive to directors, officers, employees, consultants and advisors of the Company. The maximum number of shares under the plan shall not exceed 3 million shares of common stock. During the year ended December 31, 2000, the Company entered into various consulting agreements to render services principally related to ("the Agreement") the completion of its subscription based website. For stock options as defined under the Agreement, the Company had to adopt the stock option plan on or before March 31, 2001, which the Company did. These options will expire, five years from the signing of the Agreement. The estimated fair value of the options amounted to approximately $360,000, determined using the Black Scholes Model, for services rendered in the year 2000. These costs have been capitalized as part of website development costs in the balance sheet at December 31, 2000. On March 23, 2001 the Company granted 400,000 of stock options to certain key employees. The exercise price is $0.10 and is discounted from a fair market value of approximately $0.31 at the date of grant. The term of the issued stock options are for a period of five years. The Company will record a stock based compensation charge in year 2001. [D] Upon execution of an Agreement in 2001, an investor who in May 2000 invested $145,000 for 145,000 shares of the Company's stock, will convert the $145,000 - into a Note due fifteen months from the effective date with interest accruing at a rate of 14% in exchange for returning 65,000 shares to the Company. The remaining 80,000 will be retained by the note holder. The value of those shares will be charged in 2001 as a finance charge to be amortized over the term of the Note. -14-

SEA SHELL GALLERIES INC 8-K/A