As filed with the Securities and Exchange Commission on May 2, 1997
Registration No. 333-______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTERGAMES, INC.
(Exact name of Small Business Issuer in its Charter)
TEXAS 8732 74-2797240
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification No.)
Incorporation Code Number)
or Organization)
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3321 WESTLAKE DRIVE
AUSTIN, TEXAS 78746
(512) 306-8836
(Address and telephone number
of Principal Executive Offices
and Principal Place of Business)
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KATHLEEN S. SULLIVAN
3321 WESTLAKE DRIVE
AUSTIN, TEXAS 78746
(512) 306-8836
(Name, Address and Telephone Number of Agent for Service)
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COPIES TO:
WALTER EARL BISSEX, ESQ.
LISA N. TYSON, ESQ.
WINSTEAD SECHREST & MINICK P.C.
100 CONGRESS AVENUE
SUITE 800
AUSTIN, TEXAS 78701-4042
(512) 474-4330
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ________.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
NUMBER OF MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS SHARES TO BE OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
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Common Stock, $0.01 par value...... 400,000 $5.00 $2,000,000.00 $606.06
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
INTERGAMES, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN THE PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF PART I OF FORM SB-2
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ITEM REGISTRATION STATEMENT CAPTION OR LOCATION
NUMBER ITEM AND HEADING IN PROSPECTUS
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1. Front of Registration Statement
and Outside Front Cover of
Prospectus . . . . . . . . . . . Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus . . . . Inside Front and Outside
Back Cover Page
3. Summary Information and Risk
Factors . . . . . . . . . . . . . Prospectus Summary; Risk
Factors
4. Use of Proceeds . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . Outside Front Cover Page;
Determination of Offering
Price
6. Dilution . . . . . . . . . . . . Dilution
7. Selling Security-Holders . . . . Not Applicable
8. Plan of Distribution . . . . . . Outside Front Cover Page;
Plan of Distribution
9. Legal Proceedings . . . . . . . . Business
10. Directors, Executive Officers,
Promoters and Control Persons . . Management
11. Security Ownership of Certain
Beneficial Owners and Management. Principal Shareholders
12. Description of Securities . . . . Description of Securities
13. Interests of Named Experts and
Counsel . . . . . . . . . . . . . Not Applicable
14. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities . . . . . . . . . Risk Factors
15. Organization Within Last Five
Years . . . . . . . . . . . . . . Certain Relationships and
Related Transactions
16. Description of Business . . . . . Business
17. Management's Discussion and
Analysis or Plan of Operation . . Plan of Operation
18. Description of Property . . . . . Business
19. Certain Relationships and Related
Transactions . . . . . . . . . . Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters . . . Not Applicable
21. Executive Compensation . . . . . Management
22. Financial Statements . . . . . . Financial Statements
23. Changes in and Disagreements with
Accountants or Accounting and
Financial Disclosure . . . . . . Not Applicable
SUBJECT TO COMPLETION, DATED MAY 2, 1997
PROSPECTUS
400,000 Shares
INTERGAMES, INC.
Common Stock
InterGames, Inc., a Texas corporation ("Intergames" or the "Company"),
is offering up to 400,000 shares of its Common Stock, par value $0.01 per
share. Prior to this offering, there has been no public market for the
Common Stock, and there can be no assurance that such a market will develop
or, if developed, that it will be sustained.
The initial public offering price for the Common Stock will be $5.00 per
share. The initial public offering price has been arbitrarily determined by
the Company and does not necessarily bear any relationship to the Company's
book value, assets, net worth, financial condition or any other established
criteria of value. See "Determination of Offering Price."
Persons who wish to purchase shares of Common Stock in this offering
must submit a subscription agreement, together with the required payment, to
the Company. The minimum subscription is 50 shares. See "Plan of
Distribution."
The required minimum number of shares to be sold in the offering (the
"Minimum Offering") is 100,000 shares. Pending the sale of the Minimum
Offering, all proceeds of this offering will be deposited into a non-interest
bearing account (the "Escrow Account") at Brenham National Bank, Brenham,
Texas. In the event that the Minimum Offering is not sold within a period of
60 days from the date of this Prospectus (the "Initial Offering Period")
(which period may be extended, at the Company's discretion, for up to three
additional 30-day periods), this offering will terminate and all funds will
be promptly returned to subscribers by the Company, without interest. If the
Minimum Offering is sold within the Initial Offering Period, or any
extensions thereof, the offering will continue until the Company has sold all
of the 400,000 shares offered hereby (the "Maximum Offering"), or such
earlier date as the Company may close or terminate the offering.
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THE COMPANY HAS A LIMITED OPERATING HISTORY. THE SECURITIES OFFERED HEREBY
ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL
DILUTION FROM THE PUBLIC OFFERING PRICE. THE SECURITIES OFFERED HEREBY
SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE ENTIRE LOSS OF
THEIR INVESTMENT. SEE "RISK FACTORS" (BEGINNING ON PAGE 7 OF THIS
PROSPECTUS) FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Proceeds to
Public Company(1)
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Per Share . . . . . . . . . . $ 5.00 $ 5.00
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Total Minimum . . . . . . . . $ 500,000.00 $ 500,000.00
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Total Maximum . . . . . . . . $ 2,000,000.00 $2,000,000.00
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(1) Before deducting certain estimated expenses payable by the Company in the
amount of $75,000 for the Minimum Offering and $110,000 for the Maximum
Offering, and certain commissions or concessions in the amount of up to
$0.25 per share, which may be deducted from the offering price for sales
made to registered securities dealers or paid by the Company to registered
securities dealers.
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The shares are being offered by the Company subject to certain conditions.
The Company reserves the right to withdraw or cancel such offer and reject any
order, in whole or in part.
The date of this Prospectus is _______, 1997
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 relating to the Common
Stock offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all of the information included in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement, including the exhibits and schedules thereto.
Statements contained in this Prospectus concerning the provisions or contents
of any contract, agreement or any other document referred to herein are not
necessarily complete. With respect to each such contract, agreement or
document filed as an exhibit to the Registration Statement, reference is made
to such exhibit for a more complete description of the matters involved.
The Registration Statement, including the exhibits and schedules thereto,
may be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
DC 20549 and at the Commission's regional offices at 7 World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661.
As a result of this offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and, in accordance therewith, will
file periodic reports, proxy statements and other information with the
Commission. Such periodic reports, proxy statements and other information will
be available for inspection and copying at the public reference facilities and
regional offices referred to above, and on the Company's Web site at
http://www.TheGameMaster.com. The Commission also maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the
Commission.
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements certified by independent
public accountants for each fiscal year and quarterly reports containing
unaudited consolidated financial statements for the first three quarters of
each fiscal year.
2
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE
READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA,
INCLUDING THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN
THIS PROSPECTUS.
THE COMPANY
The Company is engaged in the creation, design, development and
operation of an interactive entertainment site on the Internet, located at
www.TheGameMaster.com (the "Site"). Internet users may access the Site and
play games for no charge. Before playing a game on the Site, however, each
user must complete a one-time registration process that requires the user to
answer a series of lifestyle and demographic questions. The detailed data
collected from individuals who complete the registration process ("members")
is maintained by the Company in a proprietary database called
DeliveryMaster-TM-. The DeliveryMaster-TM- database is the foundation from
which the Company's revenues are to be generated.
Management believes that the Company's Site is the first interactive
Internet site to provide both passive and moderated game programs in which
participants can win instant prizes. The Company's moderated programs
provide television-style programming in an interactive environment that
allows a large audience to "watch" the programs, with contestants being called
from the audience. In addition to the entertainment value of watching the
game as a television-style experience, there is an incentive to participate
as a result of the possibility of winning a prize. Prizes are awarded both
during and at the conclusion of each program. The Company's primary
programming design strategy is to design interactive entertainment
programming that only requires the functions contained in the "normal" Internet
browser software utilizing standard Hyper Text Markup Language ("HTML")
commands. Management estimates that this design strategy allows 93% of the
potential market of Internet users access to the Site. To date, the Company
has designed six programs utilizing proprietary software. The initial
programs are COMEONDOWN!!!-TM- (audience programming utilizing other games),
SLOTS-OF-LUCK-TM- (individual play), TRIVIALMATTERS-TM- (individual play and
audience programming), TRICTRAX-TM- (individual play and audience
programming), PENNYWISE-TM- (individual play and audience programming) and
SEARCHPARTY-TM- (individual play).
The Company projects three primary sources of revenue: market research
sales, advertising sales and on-line catalog sales. To date, the Company has
had only limited advertising sales (all of which sales have been in the form
of contributed prizes), insignificant catalog sales and no market research
sales. The Company's long-term objective is to become a leading provider of
demographic, lifestyle and consumer information. Initially, this goal will
be accomplished by attracting members through interactive entertainment
programming on the Internet. In the future, the Company intends to position
itself for the convergence of the computer and other media technologies, such
as television, into a central entertainment access vehicle with direct
audience interaction, applying the Company's data collection model to new
communication technologies as they emerge.
The Company offers clients two market research models and intends to
develop additional market research models in the event that the Maximum
Offering is consummated. The Company has designed an interactive survey
model in the form of a "slot machine" game that resides on the Site. Members
answer survey questions designed by the client and are rewarded with "tokens"
for each question completed. These tokens are then used by the member to
"spin" the slot machine. Slot machine winners receive prizes offered by the
client. The slot machine gathers survey results and demographic information
about the members answering the questions and adds the required information
to the DeliveryMaster database. The Company also offers an e-mail survey
model that gives clients the ability to ask questions of individuals listed
in the DeliveryMaster database through a targeted e-mail program. Clients
create specific queries that the Company e-mails to targeted demographic
profiles in the existing DeliveryMaster database.
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3
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The Company provides its clients the opportunity to advertise on the
Site in connection with its entertainment programming. Advertisers may
purchase a full-page, scrollable, full color advertisement for any program,
reinforced with several banner advertisements on succeeding pages. Game
prizes may also be the client's products. Full-page advertisements may be
either general or targeted, utilizing a number of filters to identify
potential customers based upon the member's demographic and lifestyle profile.
The Company offers its clients the ability to sell products to its
registered members directly through its on-line catalog, called
PrizeCatalog-TM-. The PrizeCatalog may be accessed directly at
www.PrizeCatalog.com or through the Site. The products and services are
offered for sale only to the Company's registered members, and are bought by
the Company at wholesale and resold at retail or a discounted retail
depending on special promotions being run. Upon receipt of an order, the
sale is fulfilled directly by the client. PrizeCatalog serves as an on-line
retailer of products and services, without a fulfillment center (the Company
will keep no inventory). PrizeCatalog has a shopping cart system and "secure
server" for purchase of any product in the catalog. Visa, MasterCard,
Digicash and CyberCash are accepted for payment.
The Company was incorporated under the laws of the State of Texas in
October 1996, and its principal executive offices are located at 3321
Westlake Drive, Austin, Texas 78746. The Company's telephone number is
512/306-8836.
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4
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THE OFFERING
Common Stock offered hereby. . . . . A minimum of 100,000 shares and a maximum of 400,000 shares.
Offering price . . . . . . . . . . . $5.00 per share
Minimum subscription . . . . . . . . 50 shares
Escrow . . . . . . . . . . . . . . . All subscriptions will be deposited by the Company into the Escrow
Account. If the Minimum Offering is not sold within the Initial
Offering Period, or any extensions thereof, all monies received will
be refunded promptly to investors without interest. After the Initial
Closing (defined below), proceeds of additional subscriptions will be
deposited into the Escrow Account pending Subsequent Closings (defined
below). See "Plan of Distribution."
Initial closing. . . . . . . . . . . The initial closing of the offering (the "Initial Closing") will occur
upon receipt of subscriptions acceptable to the Company sufficient to
complete the Minimum Offering.
Subsequent closings. . . . . . . . . Sales of shares of Common Stock after the Initial Closing ("Subsequent
Closings") will be closed from time to time up to an aggregate of the
Maximum Offering.
Common Stock to be outstanding
after the offering(1). . . . . . . 1,000,000 shares if the Minimum Offering is sold, and 1,300,000 shares
if the Maximum Offering is sold.
Use of proceeds. . . . . . . . . . . To repay indebtedness; to hire additional technical and administrative
personnel for the purpose of expanding and improving programming; to
hire additional sales personnel and to finance marketing activities;
for general corporate purposes; and, if the Maximum Offering is sold,
to finance additional research and development.
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(1) Excludes 35,000 shares of Common Stock issuable upon the exercise of
currently exercisable stock options. See "Management - Stock Options."
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5
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SUMMARY FINANCIAL DATA
The Company is a development stage company and has no significant revenues or
earnings from operations.
From Inception Three Months
(October 1, 1996) Ended
to March 31, 1997
December 31, 1996 (unaudited)
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Summary of Loss Data:
Net Revenues $ 5,635 $ 25,200
Expenses 42,614 68,005
Net loss during development stage (36,979) (42,805)
Loss per common share (0.04) (0.05)
Operating Data:
Registered members(1) 1,928 7,341
Banner impressions per week(2) 12,522 27,866
March 31, 1997
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Actual As Adjusted(3)
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Minimum Maximum
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Balance Sheet Data:
Working Capital $(58,149) $366,851 $1,831,851
Total Assets $ 39,652 $405,941 $1,870,941
Total Liabilities $ 58,711 0 0
Shareholders' Equity $(19,059) $405,941 $1,870,941
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(1) Number reflects actual number as of last day of period.
(2) Number reflects actual number for the last week of the period.
(3) Adjusted to reflect the sale by the Company of the Minimum Offering
and the Maximum Offering at a public offering price of $5.00 per
share, and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."
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4
RISK FACTORS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN OF THE RISK FACTORS SET FORTH BELOW AND
ELSEWHERE IN THIS PROSPECTUS. AN INVESTMENT IN THE COMMON STOCK OFFERED
HEREBY INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER
INFORMATION IN THIS PROSPECTUS, PRIOR TO MAKING AN INVESTMENT IN THE COMMON
STOCK OFFERED IN THIS PROSPECTUS.
RISKS INHERENT IN A START-UP COMPANY
NO OPERATING HISTORY/DOUBTS AS TO GOING CONCERN. The Company is a newly
formed development stage company with no history of operations and no
significant revenues. As a result of the Company's limited operating history
and the nature of the markets in which it competes, the Company is unable to
accurately forecast its revenues. The Company currently intends to increase
its operating expenses substantially following the offering to hire additional
personnel, to fund marketing programs and possibly to fund research and
development programs. To the extent that such expenses are not subsequently
followed by increased revenues, the Company's business condition and operating
results will be materially adversely affected.
Businesses that are starting up or in their initial stages of
development present substantial business and financial risks and may suffer
significant losses from which they cannot recover. The Company will face all
of the challenges of any new business enterprise, including but not limited
to (i) developing and implementing a workable business plan; (ii) engaging
the services of qualified support personnel, consultants and management;
(iii) establishing budgets; and (iv) implementing appropriate financial
controls and internal operating policies and procedures. In addition, the
Company and its prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in the new and rapidly
evolving market for Internet products and services. There can be no
assurance that the Company will be successful in addressing such risks.
The Company does not have significant cash and has not had significant
operations since the inception of its development stage. As noted in the
independent accountants opinion, there is substantial doubt about the
Company's ability to continue as a going concern without the realization of
additional adequate financing.
LIMITED CAPITAL/NEED FOR ADDITIONAL CAPITAL. The Company currently has
no significant operating capital and is totally dependent upon receipt of the
proceeds of this offering to finance operations. Even if the Maximum
Offering is sold, the amount of capital available to the Company will be
extremely limited, and may not be sufficient to enable the Company to fully
conduct its proposed business operations without additional fund raising. If
only the Minimum Offering is sold, management estimates the Company will be
able to fully implement and operate the Site as originally designed for
approximately one year, after which time the Company may be forced to seek
additional financing, through public or private offerings of debt or equity.
The Company has no commitments for additional cash funding beyond the
proceeds expected to be received from this offering, and there can be no
assurance that such funding will be available, or, if available, that the
terms thereof will be attractive to the Company.
LEVERAGE. If the Company obtains additional financing in the form of
public or private debt, particularly if only the Minimum Offering is sold,
the Company may become highly leveraged and may have substantial debt service
obligations. Such leverage could present significant risks to an investor in
the Common Stock. There can be no assurance that the Company would be able
to generate sufficient cash flow to make timely payments of principal and
interest on indebtedness. In that event, the Company could default on such
indebtedness, which could result, among other things, in a foreclosure or
other actions of creditors against collateral securing such indebtedness.
LACK OF DEPTH OF MANAGEMENT. As compared to many other public
companies, the Company lacks a depth of managerial and technical personnel.
The Company has no full-time employees and depends entirely upon the efforts
of its founders for its operations. The Company believes that its future
success depends in large part on its ability to attract, retain and motivate
highly skilled management personnel. The Company has no plans to hire any
management personnel unless greater than the Minimum Offering is sold, and
there can be no assurance that the Company will succeed in attracting such
management personnel.
7
DEPENDENCE ON THE EFFORTS OF FOUNDERS. The Company currently has no
employees and, therefore, the success of the Company will depend in large
measure on the efforts and assistance of its founders. All of the founders
of the Company maintain part- to full-time employment outside the Company and
may not be able to devote sufficient attention to the Company to ensure its
success until earnings justify additional time be devoted to the Company.
Such outside employment may also create conflicts of interest. There is no
assurance such conflicts could be resolved favorably for the Company;
however, Texas corporate law requires all officers and directors of the
Company to act according to their fiduciary duties to the stockholders.
PAYMENT OF DIVIDENDS. The Company has not paid dividends on its Common
Stock to date and does not anticipate paying dividends on its Common Stock in
the foreseeable future. There is no assurance that the Company's operations
will generate net profits from which to pay cash dividends. Investors who
anticipate the need of immediate income from an investment should not
purchase the shares of Common Stock being offered hereby.
RISKS RELATED TO THE NATURE OF THE COMPANY'S BUSINESS
DEPENDENCE ON CONTINUED GROWTH IN USE OF INTERNET. The Company's future
success is substantially dependent upon continued growth in the use of the
Internet and the Web. Rapid growth in the use of and interest in the
Internet and the Web is a recent phenomenon. There can be no assurance that
communication or commerce over the Internet will become widespread. The
Internet may not prove to be a viable commercial marketplace for a number of
reasons, including potentially inadequate development of the necessary
infrastructure, such as a reliable network backbone, or timely development of
performance improvements. In addition, to the extent that the Internet
continues to experience significant growth in the number of users and level
of use, there can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed upon it by such potential
growth. In addition, the Internet could lose its viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Changes in or insufficient availability of telecommunications
services to support the Internet could result in slower response times and
adversely affect the usage of the Web and the Company's services. If use of
the Internet does not continue to grow, or if the Internet infrastructure
does not effectively support growth that may occur, the Company's business,
results of operations and financial condition would be materially and
adversely affected.
COMPETITION ON THE INTERNET. The market for Internet products and
services is highly competitive and competition is expected to continue to
increase significantly. Management estimates that there are currently over
800,000 Web sites on the Internet. The cost of creating an Internet Web site
is relatively low, thus increasing the likelihood that competition for
impressions on the Internet will become even more intense, and that the
Internet will become even more cluttered with sites, making the Company's
Site difficult to find.
ABILITY TO ATTRACT PAID ADVERTISERS. Because the Company expects to
derive a substantial portion of its revenues from advertising, the future
success of the Company is highly dependent on the development of the Internet
as an advertising medium. Most of the Company's advertising customers will
have only limited experience with the Web as an advertising medium, have not
allocated a significant portion of their advertising budget for Web-based
advertising, and may not find such advertising to be effective for promoting
their products and services relative to traditional print and broadcast
media. No standards have yet been widely accepted for the measurement of the
effectiveness of Web-based advertising, and there can be no assurance that
such standards will develop significantly to support Web-based advertising as
a significant advertising medium. The Internet industry is young and has few
proven products and services. Moreover, critical issues concerning the
commercial use of the Internet (including security, reliability, cost, ease
of use and access, quality of service and acceptance of advertising) remain
unresolved and may negatively affect the growth of Internet use or the
attractiveness of Internet advertising. If widespread commercial use of the
Internet does not develop as an effective and measurable means for
advertising, the Company's business, results of operations and financial
condition will be materially and adversely affected.
The Company's ability to generate advertising revenues will not only
depend on advertisers' acceptance of the Internet as an attractive and
sustainable medium, but also on the Company's ability to generate a large
base of registered members and to provide member demographics that will be
attractive to advertisers. The Company's ability to provide timely, accurate
and pertinent data to potential advertisers will depend on its ability to
collect high quality data through player registrations. If player
receptivity to the Company's registration process is low or if the Company
for any reason cannot rely on the integrity of the data it receives, the
Company will not be able to provide high quality, useful data to potential
advertisers.
8
There is intense competition in the sale of advertising on the Internet.
Competition among current and future providers of Web-based advertising, as
well as competition with other traditional media for advertising placements,
could result in significant price competition and reductions in advertising
revenues.
COMPETITION AMONG MARKET RESEARCH PROVIDERS. Overall, the
technology-focused market research industry is highly competitive. The
Company will compete directly with significant providers of (i)
analyst-based, technology-focused market research (such as Intelliquest,
Gartner Group, Inc., META Group, Inc. and Forrester Research, Inc.); (ii)
survey-based, general market research (such as A. C. Nielsen Company, NFO
Research, Inc., Information Resources, Inc. and The NPD Group, Inc.); and
(iii) analyst-based general business consulting. Although only a few of these
competitors have to date offered survey-based, technology-focused market
research that competes directly with the Company's products and services,
many of these competitors have substantially greater financial, information
gathering and marketing resources than the Company and could decide to
increase their resource commitments to the Company's market. Moreover, each
of these companies currently competes indirectly, if not directly, for funds
available within aggregate industry-wide market research budgets. There are
few barriers to entry into the Company's market, and increased competition
could adversely affect the Company's operating results. There can be no
assurance that the Company will be able to compete successfully against
existing or new competitors.
ABILITY TO ATTRACT PLAYERS AND REGISTERED MEMBERS. The Company's future
success depends upon its ability to deliver original and entertaining
programming in order to attract users with demographic characteristics
valuable to the Company's customers. There can be no assurance that the
Company's programming will be attractive to a sufficient number of users to
generate market research and advertising revenues. There also can be no
assurance that the Company will be able to anticipate, monitor and
successfully respond to rapidly changing consumer tastes and preferences so
as to attract a sufficient number of users to its Site. Internet users can
freely navigate and instantly switch among a large number of Internet sites,
making it difficult for the Company to distinguish its Site and attract
users. If the Company is unable to develop programming that allows it to
attract, retain and expand a loyal base of registered members, the Company
will be unable to generate revenues, and its business, financial condition
and operating results will be materially adversely affected.
The market for computer and television entertainment-related products and
the consumers utilizing them is highly competitive. The Company expects to
encounter intense competition in the computer-game and television entertainment
field, competing with companies that have been in existence for a longer period
than the Company and have significantly greater financial, marketing, personnel
and other resources than the Company. In addition, it is likely that
competition for computer-game and television entertainment products will become
even more intense with the expansion of game-related programs developed and
marketed by such companies as Sony, Nintendo and SEGA. There can be no
assurance that the development of the Company's Site will successfully attract
a sufficient number of players and registered members to adequately provide for
the Company's financial requirements. Failure to attract a sufficient number
of players and registered members would have a material adverse effect on the
Company's business, results of operations and financial conditions.
ENHANCEMENT OF SITE AND DEVELOPMENT OF NEW PRODUCTS. To remain
competitive, the Company must continue to enhance and improve the
functionality and features of the Site, as well as other branded media
properties that may be developed. There can be no assurance that the Company
will be able to successfully achieve these goals. If only the Minimum
Offering is completed, relatively few resources will be budgeted for research
and development of new programs or enhancement of existing programs.
Certain key elements of the Company's business strategy are the
development and introduction of new programs and improved technology for its
database. There can be no assurance that the Company will be successful in
developing or introducing such products or that such products will achieve
market acceptance or enhance the Company's brand name recognition.
Furthermore, enhancements of or improvements to the Company's Site or
database may contain undetected errors that require significant design
modifications, resulting in a loss of customer confidence. Any failure of
the Company to effectively develop and introduce these products, or failure
of such products to achieve market acceptance, could adversely affect the
Company's business, results of operations and financial conditions.
TECHNOLOGICAL CHANGE. The market for Internet products and services is
characterized by rapid technological developments, evolving industry
standards and customer demands, and frequent new product introductions and
enhancements. These market characteristics are exacerbated by the emerging
nature of this market and the fact that many companies are
9
expected to introduce new Internet products and services in the near future.
The Company's future success will depend in significant part on its ability
to continually improve the performance, features and reliability of its Site
and database in response to both evolving demands of the marketplace and
competitive product offerings, and there can be no assurance that the Company
will be successful in doing so.
RISK OF CAPACITY CONSTRAINTS AND SYSTEMS FAILURES. A key element of the
Company's strategy is to generate a high volume of registered members and
impressions. Accordingly, the performance of the Company's programs and
database technology is critical to the Company's reputation, its ability to
attract advertisers and to achieve market acceptance of these products. Any
system failure that causes interruption or an increase in response time of the
Company's products could result in less traffic to the Company's Site and, if
sustained or repeated, could reduce the attractiveness of the Company's
products to customers and players. The Company does not carry business
interruption insurance to compensate the Company for losses that may occur. An
increase in the volume of players and impressions could strain the Company's
capacity, which could lead to slower response time or system failures, and
adversely affect the number of impressions received by advertising and thus the
Company's advertising revenues. In addition, as the number of Web users
increases, there can be no assurance that the Company's products, media
properties and infrastructure will be able to scale accordingly.
ONLINE ORDER RISK. A key element of the Company's strategy is to expand
and develop the online catalog of the products of the Company's advertisers.
Online purchasing of goods and services by consumers is in an early stage of
development and has been hindered to date by, among other things, a lack of
widely accepted secure payment mechanisms. Failure to produce significant
catalog sale revenues could have a material adverse effect on the Company.
GOVERNMENT REGULATION. There are strict federal and state laws regulating
prize fulfillment, free giveaways and sweepstakes. Failure by the Company to
comply with such laws could have a material adverse impact on the Company. In
addition, a number of legislative initiatives exist domestically and abroad
that seek to regulate the electronic collection of data about persons. An
increasing number of court cases have been brought seeking damages and
injunctive relief for actions allegedly violating so-called "rights of
privacy." The law in this area, both statutory and case law, is highly
unsettled. No assurance can be given, therefore, that the Company will be
allowed to continue to pursue existing or proposed products and services.
As a provider of Internet content, the Company is subject to the
provisions of the recently enacted Communications Decency Act (the "CDA"),
which, among other things, imposes criminal penalties on anyone that
distributes "obscene" or "indecent" material over the Internet. The manner
in which the CDA will be interpreted and enforced and its effect on the
Company's operations cannot yet be fully determined. The CDA could dampen
the growth of the Internet generally and decrease the acceptance of the
Internet as an advertising medium, and could have a material adverse effect
on the Company's business, financial condition or operating results. It is
also possible that new laws and regulations will be adopted covering issues
such as privacy, copyright infringement, obscene or indecent communication
and the pricing, characteristics and quality of Internet products and
services. Application to the Internet of existing laws and regulations
governing issues such as property ownership, libel and personal privacy is
also subject to substantial uncertainty.
Except as described above, the Company is not currently subject to
direct regulation by any governmental agency in the United States, other than
regulations applicable to businesses generally
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's
operating results may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside the Company's control. These
factors include the level of usage of the Internet, demand for Internet
advertising, seasonal trends in both Internet usage and advertising
placements, the advertising budgets of advertisers, the amount and timing of
capital expenditures and other costs relating to the expansion of the
Company's operations, the introduction of new products or services by the
Company or its competitors, pricing changes in the industry, technical
difficulties, general economic conditions and economic conditions specific to
the Internet and online media. Due to all of the foregoing factors, in some
future quarter the Company's operating results may fall below the expectations
of securities analysts and investors. In such event, the price of the
Company's Common Stock would likely be materially and adversely affected.
TRADEMARKS AND PROPRIETARY RIGHTS. The Company has not registered any
of its unique intellectual property, including all of its technologies,
programs and tradenames. The Company relies on a combination of copyright,
trademark and trade secret laws and third-party non-disclosure agreements to
protect its intellectual property. There can be no assurance, however, that
the steps taken by the Company to date to protect its intellectual property
will be adequate to prevent misappropriation of such rights or that third
parties will not independently develop functionally equivalent or superior
systems,
10
software or procedures. Use or infringement of the Company's intellectual
property by others could have an adverse effect on the Company's business,
results of operations and financial condition. See "Business--Intellectual
Property."
RISKS RELATED TO THE OFFERING
BEST EFFORTS OFFERING/NO FIRM COMMITMENT. The Common Stock offered
hereby is offered by the Company on a "best efforts" basis. There is no
underwriter and no firm commitment from anyone to purchase any of the shares
offered. No assurance can be given that any or all of the shares will be
sold.
UNCERTAIN PUBLIC MARKET FOR SHARES/SHARES NOT LISTED. At present, the
Company's Common Stock is not traded publicly. There is no assurance that a
trading market will develop, or, if developed, that it will be sustained. The
Company will not list the shares on any exchange or on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ") because it will not
be able to meet the financial criteria for any such listing. Therefore, any
investment in the Common Stock will be very illiquid. The Company does intend
to post a list of potential buyers and sellers on the Company's Site and to
implement a matching system on its Site for potential buyers and sellers of the
Common Stock; however, there can be no assurance that these efforts will create
a viable market for the Common Stock. A purchaser of shares of Common Stock
may find it difficult to resell such shares should he or she desire to do so.
Furthermore, the shares are not marginable and it is unlikely that a lending
institution would accept the Company's Common Stock as collateral for a loan.
ARBITRARY OFFERING PRICE. The offering price of the Common Stock has
been arbitrarily determined by the Company. There is not necessarily any
relationship between the offering price of the Common Stock and the Company's
book value, assets, earnings, net worth or other economic or recognized
criteria of future value of the Company's Common Stock.
VOLATILITY OF STOCK PRICE. If a public market develops for the Common
Stock, many factors will influence the market prices. The Common Stock will
be subject to significant fluctuation in response to variations in operating
results of the Company, investor perceptions of the Company, supply and
demand, interest rates, general economic conditions and those specific to the
industry, developments with regard to the Company's activities, future
financial condition and management.
BROAD DISCRETION AS TO USE OF PROCEEDS. The Company's management will
have wide discretion as to the exact allocation and priority and timing of
the allocation of funds raised in the offering. The allocation of the
proceeds of the offering may vary significantly depending upon numerous
factors, including the success that the Company has marketing its services.
Accordingly, management will have broad discretion with respect to the
expenditure of the net proceeds of the offering. Investors purchasing the
Common Stock offered hereby will be entrusting their funds to the Company's
management, upon whose judgment the subscribers must depend. See "Use of
Proceeds."
APPLICABILITY OF LOW PRICED STOCK RISK DISCLOSURE REQUIREMENTS. If the
trading price of the shares of Common Stock offered hereby falls below $5.00
per share, such shares will be considered low priced securities under rules
promulgated under the Exchange Act. Under these rules, broker-dealers
participating in transactions in low priced securities must first deliver a
risk disclosure document that describes the risks associated with such
stocks, the broker-dealer's duties, the customer's rights and remedies, and
certain market and other information, and make a suitability determination
approving the customer for low priced stock transactions based on the
customer's financial situation, investment experience and objectives.
Broker-dealers must also disclose these restrictions in writing to the
customer and obtain specific written consent of the customer, and provide
monthly account statements to the customer. The likely effect of these
restrictions will be a decrease in the willingness of broker-dealers to make
a market for the Common Stock, decreased liquidity of the Common Stock and
increased transaction costs for sales and purchases of the Common Stock as
compared to other securities.
BENEFITS TO PRESENT STOCKHOLDERS/DISPROPORTIONATE RISKS. Collectively,
the existing shareholders of the Company own 900,000 shares of the Company's
currently outstanding Common Stock, for which they paid $0.01 per share. If
the Minimum Offering is sold, upon completion of the offering, present
stockholders will own 90% of the then outstanding Common Stock, and investors
in the offering will own the remaining 10%, for which they will have paid
$500,000. If the Maximum Offering is sold, upon completion of the offering
present stockholders will own 69.2% of the then outstanding Common Stock, and
investors in the offering will own the remaining 30.8%, for which they will
have paid $2,000,000. Thus, investors in the offering will contribute to the
capital of the Company a disproportionately greater percentage than the
ownership they receive.
11
DILUTION. The present shareholders of the Company acquired their Common
Stock for $0.01 per share, substantially less than the $5.00 per share to be
paid by investors in the offering. Investors who purchase the shares of
Common Stock sold in this offering will experience immediate substantial
dilution in the book value of the Common Stock that they acquire of $4.63 per
share (or 92.6%) if the Minimum Offering is sold, and of $3.58 per share (or
71.6%) if the Maximum Offering is sold, which amounts represent the
respective differences between the net tangible book per share of the Common
Stock after the offering and the initial public offering price of $5.00 per
share. See "Dilution."
POTENTIAL ISSUANCE OF ADDITIONAL COMMON AND PREFERRED STOCK. The
Company is authorized to issue up to 8,000,000 shares of Common Stock, of
which no more than 1,300,000 shares will be issued and outstanding upon
completion of this offering. To the extent of such authorization, the Board
of Directors of the Company will have the ability, without seeking
shareholder approval, to issue additional shares of Common Stock in the
future for such consideration as the Board of Directors may consider
sufficient. The issuance of additional Common Stock in the future will
reduce the proportionate ownership and voting power of the Common Stock
offered hereby. The Company is also authorized to issue up to 2,000,000
shares of preferred stock, the rights and preferences of which may be
designated in series by the Board of Directors. To the extent of such
authorization, such designations may be made without shareholder approval.
The Board of Directors has not designated any series or issued any shares of
preferred stock. The designation and issuance of series of preferred stock
in the future would create additional securities which would have dividend
and liquidation preferences over the Common Stock offered hereby. See
"Description of Securities."
SHARES ELIGIBLE FOR FUTURE SALE. All of the existing 900,000 shares of
Common Stock currently outstanding were offered and sold by the Company in
private transactions in reliance upon an exemption from registration under
the Securities Act of 1933, as amended (the "Securities Act"). Accordingly,
all of such shares are "restricted securities" as defined by Rule 144 under
the Securities Act and cannot be resold without registration except in
reliance on Rule 144 or another applicable exemption from registration. In
general, under Rule 144 a person (or persons whose shares are required to be
aggregated), including any affiliates of the Company, who beneficially owns
restricted shares for a period of at least one year is entitled to sell
within any three month period shares equal in number to the greater of (i)
one percent of the then outstanding shares of Common Stock (13,000 shares if
the Maximum Offering is sold) or (ii) the average weekly trading volume of
the same class of shares during the four calendar weeks preceding the filing
of the required notice of sale with the Commission. The seller must also
comply with the notice and manner of sale requirements of Rule 144, and there
must be current public information available about the Company. In addition,
any person (or persons whose shares are required to be aggregated) who is
not, at the time of sale, nor during the preceding three months, an affiliate
of the Company, and who has beneficially owned restricted shares for at least
two years, can sell such shares without regard to notice, manner of sale,
public information or the volume limitations described above. Shares of
Common Stock will first become eligible for resale under Rule 144 in October
1998, assuming the other requirements of Rule 144 are met.
As of the date of this Prospectus, currently exercisable options to
purchase 35,000 shares of the Company's Common Stock are outstanding. See
"Management--Stock Options." No prediction can be made as to the effect, if
any, that future sales of the Common Stock issuable upon exercise of these
options, future sales of the above described outstanding Common Stock, or the
availability of such Common Stock for sale, will have on the market price
prevailing from time to time. Sales of substantial amounts of such Common
Stock in the public market, or the perception that such sales could occur,
could adversely affect the then prevailing market price.
LIMITED LIABILITY OF OFFICERS AND DIRECTORS. The Company's Articles of
Incorporation provide that to the fullest extent permitted by Texas law, no
director shall be personally liable to the Company or its shareholders for
monetary damages for acts or omissions that occur in the directors' capacity as
directors, except for acts or omissions for (i) a breach of the duty of loyalty
to the Company or its shareholders; (ii) a bad faith breach of a director's
duty to the Company, intentional misconduct, or a knowing violation of the law;
or (iii) transactions from which a director received an improper benefit,
whether or not the benefit resulted from an action taken within the scope of
the director's office. Under the Texas Business Corporations Act (the "TBCA")
this provision of the Articles of Incorporation relieves the Company's
directors from personal liability to the Company or its shareholders for
monetary damages for breach of fiduciary duty as a director, except for
liability arising from a judgment or other final adjudication establishing
(i) any breach of the director's duty of loyalty; (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; or (iii) transactions in which the director received an improper benefit.
In addition, subject to the same provisions set forth above, the Company's
12
Bylaws provide that persons employed by or agents of the Company may be
indemnified to the same extent as directors of the Company.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being offered, the Company will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
DETERMINATION OF OFFERING PRICE
The offering price of the Common Stock offered hereby has been
arbitrarily determined by the Company, and should not be viewed as an
indication of the actual value of the Company. There is not necessarily any
relationship between the offering price of the Common Stock and the Company's
book value, assets, earnings, net worth or other economic or recognized
criteria of future value of the Company's shares. Each prospective investor
should make an independent evaluation of the fairness of such price. See
"Plan of Distribution."
LIMITED STATE REGISTRATION
Only residents of those states in which the Common Stock offered hereby
has been qualified for sale under applicable securities or Blue Sky laws may
purchase shares in this offering. Each potential investor will be required
to execute a subscription agreement which, among other things, requires the
potential investor to certify his or her state of residence. A potential
investor who is a resident of a state other than a state in which the Common
Stock offered hereby has been qualified for sale may request that the Company
register the shares in the state in which such investor resides, however, the
Company is under no obligation to do so and may refuse any such request.
13
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby (after
offering expenses, but not considering any selling commissions or concessions
that may be paid by the Company) are estimated to range from $425,000 if the
Minimum Offering is sold to $1,890,000 if the Maximum Offering is sold. The
Company intends to use the net proceeds of this offering as set forth below.
See "Plan of Operation."
APPROXIMATE APPROXIMATE
MINIMUM PERCENTAGE OF MAXIMUM PERCENTAGE OF
OFFERING NET PROCEEDS OFFERING NET PROCEEDS
-------- ------------- -------- -------------
Repayment of bridge financing(1) $100,000 23.5% $ 100,000 5.3%
Personnel:
Administrative 15,600 3.7 83,950 4.4
Sales 18,000 4.2 117,000 6.2
Technical 41,500 9.9 184,350 9.8
Management fees 72,000 16.9 -- 0.0
Monthly overhead 24,000 5.6 41,850 2.2
Marketing 37,800 8.9 680,450 36.0
Professional services 68,000 16.0 84,000 4.4
Technical equipment 8,500 2.0 34,000 1.8
Research and development -- 0.0 179,500 9.5
Working capital 39,600 9.3 384,900 20.4
-------- ------ ---------- ------
Total $425,000 100.0% $1,890,000 100.0%
-------- ------ ---------- ------
-------- ------ ---------- ------
- ----------------
(1) The bridge financing is evidenced by a promissory note (the "Bridge Note")
that bears interest at a compounded annual rate of 10% and is payable on
demand. See "Certain Transactions."
The foregoing represents the best estimate by the Company of its use of
net proceeds based upon present planning and business conditions. The
proposed application of proceeds is subject to change as market and financial
conditions change. Although the Company does not contemplate material
changes in the proposed use of net proceeds, to the extent the Company finds
that adjustment is required by reason of changing business conditions or
other changes, the amounts shown may be adjusted among the intended uses.
All proceeds from the sale of the Common Stock offered hereby will be
deposited into the Escrow Account. After release from escrow, the proceeds
will be invested by the Company in short-term obligations of the U.S.
government, its agencies and divisions, pending the uses described above.
DIVIDEND POLICY
The Company has not paid or declared cash distributions or dividends to
date and does not intend to pay cash dividends on the Common Stock in the
foreseeable future. The Company currently intends to retain all earnings, if
any, to finance the development and expansion of its operations. The
declaration of cash dividends in the future will be determined by the Board
of Directors based upon the Company's earnings, financial condition, capital
requirements and other relevant factors.
14
DILUTION
The net tangible book value of the Company as of March 31, 1997 was
($54,855), or approximately ($0.06) per share of Common Stock outstanding at
that date. Net tangible book value per share represents the amount of the
Company's shareholders' equity less intangible assets, divided by the number of
shares of Common Stock outstanding. As of March 31, 1997, the Company had
intangible assets with a net book value of $35,798. Net tangible book value
per share dilution represents the difference between the amount per share paid
by purchasers of Common Stock in the offering and the pro forma net tangible
book value per share after the offering.
The following tables set forth, assuming the sale of both the Minimum
Offering and the Maximum Offering, the difference between the existing
shareholders and the purchasers of Common Stock in the offering with respect to
the number of shares purchased from the Company, the total consideration paid
and the average price per share paid.
SALE OF MINIMUM OFFERING(1)
SHARES PURCHASED TOTAL CONSIDERATION
------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- -------- ------- -------------
Existing Shareholders(2) 900,000 90.0% $ 9,000 1.8% $0.01
New Investors 100,000 10.0 500,000 98.2 5.00
--------- ----- -------- -----
Total 1,000,000 100.0% $509,000 100.0%
--------- ----- -------- -----
--------- ----- -------- -----
________________
(1) Assumes the sale of 100,000 shares.
(2) Excludes 35,000 shares of Common Stock issuable upon the exercise of
currently exercisable stock options. See "Management--Stock Options."
SALE OF MAXIMUM OFFERING(1)
SHARES PURCHASED TOTAL CONSIDERATION
------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
Existing Shareholders(2) 900,000 69.2% $ 9,000 0.4% $0.01
New Investors 400,000 30.8 2,000,000 99.6 5.00
--------- ----- ---------- -----
Total 1,300,000 100.0% $2,009,000 100.0%
--------- ----- ---------- -----
--------- ----- ---------- -----
________________
(1) Assumes the sale of 400,000 shares.
(2) Excludes 35,000 shares of Common Stock issuable upon the exercise of
currently exercisable stock options. See "Management--Stock Options."
15
After giving effect to the sale by the Company of the Minimum Offering and
the Maximum Offering at a purchase price of $5.00 per share as of March 31,
1997, the pro forma net tangible book value of the Company, the increase in net
tangible book value to the existing shareholders and the decrease in net
tangible book value to purchasers of shares in the offering are summarized in
the following table:
MINIMUM MAXIMUM
------- -------
Offering price per share $ 5.00 $ 5.00
Net tangible book value per share at
March 31, 1997(1) $(0.06) $(0.06)
Pro forma net tangible book value per
share after the offering $ 0.37 $ 1.42
Net tangible book value increase to
existing shareholders after the offering $ 0.43 $ 1.48
Net tangible book value decrease (dilution)
to purchasers of shares in the offering $ 4.63 $ 3.58
Percentage dilution to new shareholders 92.60% 71.60%
________________
(1) Calculated based on 900,000 shares outstanding.
16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 on an actual basis and as adjusted to (i) give effect to the
sale of the Minimum Offering and the Maximum Offering at a public offering
price of $5.00 per share, and (ii) the application of the estimated net
proceeds therefrom as described under "Use of Proceeds." This table should
be read in conjunction with "Summary Financial Data" and the Financial
Statements of the Company appearing elsewhere in this Prospectus.
MARCH 31, 1997
--------------------------------
ACTUAL AS ADJUSTED
-------- ---------------------
MINIMUM MAXIMUM
-------- ----------
Current liabilities $58,711 - -
Long-term debt - - -
Preferred Stock, $0.10 par value, 2,000,000 shares
authorized, none issued and outstanding - - -
Common Stock, $0.01 par value, 8,000,000 shares
authorized, 900,000 shares issued and outstanding
actual; 1,000,000 shares issued and outstanding,
as adjusted if the Minimum Offering is sold, and
1,300,000 shares issued and outstanding, as
adjusted if the Maximum Offering is sold $ 9,000 $ 10,000 $ 13,000
Additional paid-in capital 51,725 475,725 1,937,725
Accumulated deficit (79,784) (79,784) (79,784)
-------- -------- ----------
Total stockholders' equity $(19,059) $405,941 $1,870,941
-------- -------- ----------
Total capitalization $39,652 $405,941 $1,870,941
-------- -------- ----------
-------- -------- ----------
17
PLAN OF OPERATION
OVERVIEW
The Company was organized and began operations in October 1996 by
developing its Internet Site called "TheGameMaster.com". The Company is
currently still in the development stage and has generated limited, in-kind
revenues to date from the sponsors of its entertainment programming.
Currently, the Company operates three interactive entertainment programs on
the Site of the six programs that have been developed. One of these programs
is an audience program currently scheduled for only one hour per week. See
"Business--The Programming." No revenue has been generated from the Company's
marketing activity and insignificant catalog sales have been realized.
The Company's Plan of Operation for the next 12 months is dependent upon
whether the Minimum or Maximum Offerings are achieved. Management believes
that the Minimum Offering will be sufficient to sustain the Company until
client revenues are realized.
PLAN OF OPERATION
The Company seeks to expand and maintain its existing Site, with the
objective of building a loyal audience. In the short term, the Company is
focused on developing interactive television-style programs that will attract
and keep the interest of users, thereby increasing the size and value of the
Company's database of demographic information. Constant development is an
integral part of this strategy. Changing the content of the existing Site,
introducing new attractions to the Site, and introducing a variety of prizes
are paramount in attracting a loyal audience.
If the Minimum Offering is closed, the Company will hire the necessary
staff to expand the availability of its scheduled audience programming, to
activate three additional programs that have already been developed, and to
attract additional sponsors. The Company will add additional personnel in
the areas of prize fulfillment and administration. The addition of personnel
in these two areas will allow the Company to increase sales and marketing
efforts. Management of the Company will be obtained on a part-time basis
through an agreement with an affiliate of the Company. See "Certain
Transactions."
If the Maximum Offering is closed, the Company will be engaged in expanded
research and development, which will result in introducing new programs and
improving the on-line catalog. New technologies such as Shockwave and Java
will be included in the research and development efforts, resulting in new
features and enhanced performance of existing programs. Management of the
Company will be obtained by hiring full-time officers and directors of the
Company. See "Management--Executive and Director Compensation."
The Company markets its Site to various Internet Web sites, directories and
listing services. Additionally, the Company has initiated a banner advertising
program across the Internet. The Company plans to market the Site via print
and electronic media. The Company's focus concerning market research will be
on building the Company's member database to a statistically significant size.
To accomplish this task, the Company has developed a marketing strategy that
incorporates promotion and targeted Internet advertising. If the Maximum
Offering is closed, these efforts will be increased, and the Company will also
engage a public relations firm to aid in making the Site a recognized name in
Internet entertainment. The Company does not anticipate significant market
research revenues can be realized until the Company's database has been
significantly increased through the attraction of a large audience to its
programming.
18
BUSINESS
OVERVIEW
The Company is engaged in the creation, design, development and operation
of an interactive entertainment site on the Internet, located at
www.TheGameMaster.com (the "Site"). Internet users may access the Site and
play games for no charge. Before playing a game on the Site, however, each
user must complete a one-time registration process that requires the user to
answer a series of lifestyle and demographic questions. The detailed data
collected from members is maintained by the Company in a database called
DeliveryMaster-TM-. The DeliveryMaster-TM- database is the foundation from
which the Company's revenues are to be generated.
The Company projects three primary sources of revenue: market research
sales, advertising sales and on-line catalog sales. To date, the Company has
had only limited advertising sales (all of which have been in the form of
contributed prizes), insignificant catalog sales and no market research sales.
The Company's long-term objective is to become a leading provider of
demographic, lifestyle and consumer information. Initially, this goal will be
accomplished by attracting members through interactive entertainment
programming on the Internet. In the future, the Company intends to position
itself for the convergence of the computer and other media technologies, such
as television, into a central entertainment access vehicle with direct audience
interaction, applying the Company's data collection model to new communication
technologies as they emerge.
Initially, the Company expects that a significant portion of its revenues
will come from advertising and on-line catalog sales. The advertising will
consist of both general and targeted full-page and banner advertising on game
sites. "General" advertising is not directed at a specific audience and
"targeted" advertising is directed at a specific audience through demographic
and lifestyle filters utilizing the Company's database obtained from its
members. The Company also expects to obtain revenues from on-line sales of
products of the various sponsors. Sales will be made only to individuals who
have registered to play games.
INDUSTRY BACKGROUND
CREATION OF A MASS COMMUNICATION MEDIUM
The Internet is a world wide collection of computer networks made up of
millions of private and public computers linked through the World Wide Web (the
"Web"). The Internet was initially used by academic institutions and
government agencies for quick and efficient communication. The proliferation
of personal computers, along with technological advances and the development of
graphical browsers, have allowed for the commercialization of the Internet.
The Internet provides an interactive environment that allows for the exchange
of graphic and textual information to millions of users. Through the
development and acceptance of Web browsers and search engines, the Internet has
become easily accessible.
Rapid growth in the number of Internet users has resulted in the
development of an emerging new mass communications medium. Industry sources
estimate the current number of households in the United States using the
Internet to be 15 million, which is approximately 15% of the 99 million
households in the United States. According to information published by
International Data Corporation, the projected number of Internet users by the
year 1999 is 200 million.
ADVERTISING ON THE INTERNET
According to Jupiter Communications, more than 900 Web sites offer
advertising space. The current advertising model on the Internet involves
banner advertisements that deliver a message to a general audience. The
advertiser is charged for the number of times the banner is viewed
("impressions"). New improvements to the current banner advertising model
include targeted audience delivery of the advertiser's message. Internet
advertising generated approximately $267 million in 1996. Jupiter
Communications projects Internet advertising revenue to reach $5 billion
annually by the year 2000. Of the Internet sites which generated advertising
revenue in 1996, Jupiter Communications reported that the top ten sites in the
third quarter accounted for approximately 64% of all revenue. These sites were
Netscape, Yahoo!, Infoseek, Excite, Lycos, CNET,
19
WebCrawler, ZDNet, Magellan and ESPNet (SportsZone). Web advertisers include
Ford Motor Company, Toyota, Colgate, Proctor and Gamble, Microsoft, Pizza Hut,
ESPN and Levi Strauss. (Source: Jupiter Communications).
Management believes that advertisers desire more responsive and accountable
advertising systems for use on the Internet. General advertising message
delivery to unqualified audiences through "push" advertising is being largely
replaced with targeted message delivery to interested and qualified audiences
through "pull" advertising. "Push" advertisements are aimed at general
audiences and require no interaction with the advertiser. "Pull"
advertisements are aimed at specific audiences of targeted user profiles that
provide the facility for audience interaction.
CATALOG SALES THROUGH THE INTERNET
Forrester Research estimates that approximately $518 million of goods and
services were purchased on-line in 1996. Forrester forecasts on-line sales for
the year 2000 to be over $6 billion. The variety of companies that sell
through the Internet include Amazon.com (books), Music BLVD, 1-800-Music Now,
C.D. World, Video Online Express, J.Crew, J.C. Penny, L.L. Bean, Spiegel, Lands
End, Dell Computers, CyberWarehouse, The Sharper Image, 1-800-Flowers, AOL and
Yahoo.
CONVERGENCE OF THE PERSONAL COMPUTER AND OTHER TECHNOLOGY ACCESS VEHICLES
The computer, the television set and other technology are forecasted to
converge, creating a central entertainment vehicle that can access multiple
entertainment media, including interactive television programming and the
Internet. In December 1996, several companies began selling products that link
the television to the Internet. This movement has the potential to radically
alter the Internet user base through expanded audience size. Access to the
Internet through the television is expected to produce a large audience and
erode traditional advertising revenues. Companies that are currently marketing
products to allow the user to access the Internet via the television include
WEBTV, Magnavox, Sony, Zenith, Akai, Bandai, Diba and Sega.
THE INTERGAMES OPPORTUNITY
The Company believes that successful Internet advertising requires direct
and meaningful interaction between buyers and sellers. The Company's
entertainment programs have been designed to allow for this interaction in a
fun environment. Advertisers will receive data based upon interaction with
consumers and potential customers through one-on-one surveys, and through the
delivery of highly targeted messages. Advertisers will also obtain sales
through the Company's on-line catalog on the Site.
MARKET RESEARCH
The Company currently offers clients two market research models and intends
to develop additional market research models in the event that the Maximum
Offering is consummated. The Company has designed an interactive survey model
in the form of a "slot machine" game that resides on the Site. Consumers
answer survey questions designed by the client and are rewarded with "tokens"
for each question completed. These tokens are then used to "spin" the slot
machine. Slot machine winners receive prizes offered by the client. The slot
machine gathers survey results and demographic information about the registered
members answering the questions. The Company also offers an e-mail survey
model that gives clients the ability to ask questions of individuals in the
DeliveryMaster database through a targeted e-mail program. Clients create
specific queries that the Company e-mails to targeted demographic profiles in
the existing DeliveryMaster database.
ADVERTISING
At present, various mediums exist for advertisers. Until the advent of the
Internet, reaching a preferred demographic profile was often difficult and
expensive. Most advertising vehicles have no mechanism for targeted message
delivery. Only through specialty publications, direct mail and other limited
media can a targeted audience be reached. Even in these situations, only a
small percent of the audience actually meet advertiser's desired profiles. The
Internet offers the ability to ask questions of the audience. By collecting
lifestyle and demographic information, a profile can be created that can be
matched with the desired audience profiles of the advertisers. This process
allows direct one-to-one message delivery to the
20
actual target market. The delivery of this information can be tracked to see
which potential customers were reached, and how many times. The Company
believes that this type of tracking creates the accurate and accountable
measuring systems that advertisers are demanding.
The Company's advertising sales efforts are concentrated on consumer
product companies that desire to reach a highly targeted audience.
Advertisers are offered general market delivery and targeted market delivery.
General market delivery is available to the entire population of the Company's
registered members. Targeted market delivery offers the advertiser the
ability to use "target filters" generated through the lifestyle questions in
the registration process. By choosing multiple filters, an advertiser can
narrow the message delivery to specific audiences.
FULL-PAGE ADVERTISEMENTS. A full-page advertisement is similar to the
advertisement experienced in traditional print media and is offered to the
Company's program sponsors. The member is exposed to a scrollable, full color
advertisement. The full-page advertisement is reinforced with several banner
advertisements on succeeding pages. The prize that is awarded may also be the
sponsor's. Full-page advertisements may be either general or targeted.
Pricing of targeted advertisements is based upon the number of filters utilized
to identify the potential customer.
BANNER ADVERTISEMENTS. Banner advertisements appear on the screen while a
visitor to the Site is viewing other information. Banner advertisements may be
either targeted or general.
CUSTOMIZED ADVERTISING. The Company believes that advertising income can
be enhanced by offering specifically tailored advertising vehicles and game
programs to particular sponsors. These custom packages could involve
customizing the Company's existing advertising products and games or
integrating the Company's games into a customer's Web site. This capability,
coupled with additional target filtering, would create products meeting a
customer's own specifications.
ON-LINE CATALOG SALES
The Company offers advertisers the ability to sell products to its
registered members directly through its on-line catalog, called
PrizeCatalog-TM-. The PrizeCatalog on-line catalog may be accessed directly
at www.PrizeCatalog.com or through the Site. The products and services are
offered for sale only to the Company's registered members, and are bought by
the Company at wholesale and resold at retail or a discounted retail depending
on special promotions being run. Upon receipt of an order, the sale is
fulfilled directly by the sponsor. PrizeCatalog serves as an on-line retailer
of products and services, without a fulfillment center (the Company will keep
no inventory). PrizeCatalog has a shopping cart system and "secure server" for
purchase of any product in the catalog. Visa, MasterCard, Digicash and
CyberCash will be accepted for payment.
Management believes that catalog sales will be driven by the size of the
registered member base, their propensity for mail order and online shopping,
the depth and scope of products offered for sale and product pricing.
Management believes that depth and uniqueness of product offerings will make
PrizeCatalog attractive. In addition, because the products available for sale
will also be given away as prizes through the games, members will have constant
reinforcement of the existence and content of PrizeCatalog. The demographic
profile of the Company's registered database indicates that approximately 55%
of it members shop via mail order or online, thereby demonstrating the
propensity to purchase directly. By offering a variable schedule of discounts
and specials, the Company can create an atmosphere through PrizeCatalog that
encourages shoppers to regularly visit the Site to see what specials are coming
and when. The Company plans to market the catalog via targeted direct mail
advertisements focused on certain demographic profiles of proven mail order
buyers.
DATABASE
The DeliveryMaster-TM- database is the Company's proprietary database of
registered members and their demographic and lifestyle information. Members
must complete a one time registration profile form that asks 22 questions, such
as gender, age group, education, interests, sports, income range, occupation,
family size, marital status, hobbies, music, Internet related information,
computer system information, and personal tastes in mail-order activities.
Additional information can be gathered through pop-up questions and incentive
programs designed to reward members for providing additional information. This
profile provides a detailed demographic picture of each member. This detailed
demographic information will be used to match
21
appropriate advertisers with appropriate potential buyers, giving advertisers
exposure to a very detailed and targeted market through targeting filters.
THE PROGRAMMING
The Company's primary programming design strategy is to design interactive
entertainment programming that only requires the functions contained in the
"normal" Internet browser software utilizing standard Hyper Text Markup
Language ("HTML") commands. This design strategy allows 93% of the potential
market of Internet users access to the Site. The Company has designed six
programs utilizing proprietary software. In the event the Maximum Offering is
completed, the Company intends to develop entertainment programming taking
advantage of new technology improvements and reduced restrictions on
communication speeds. Special programs will be available to those Internet
users with system capabilities that allow Java, Shockwave, streaming video and
audio and other plug-in technologies. These programs will be versions of the
HTML programs initially presented.
Management believes that the Company's Site is the first interactive
Internet site to provide both passive and moderated game programs in which
participants can win instant prizes. The Company's moderated programs provide
television-style programming in an interactive environment that allows a large
audience to "watch" the programs, with contestants being called from the
audience. In addition to the entertainment value of watching the game as a
television-style experience, there is an incentive to participate as a result
of the possibility of winning a prize. Prizes are awarded both during and at
the conclusion of each program. Below is a description of the six interactive
programs the Company has developed to date.
COMEONDOWN!!-TM- is an audience program currently offered for one hour each
week. Currently, up to 50 people can participate at one time. Management
believes that this game is the Internet's first television-style audience based
program. Contestants are randomly chosen from the audience and called into the
game for their chance to win prizes. After each round at least one new
audience member is asked to participate for his or her chance to win. Members
register for COMEONDOWN!! based on a posted schedule. Audience programming can
be scheduled for either 30 or 60 minute playtime depending on the game.
Members may enter the PLAYERSLOUNGE-TM- chat room while waiting for the next
game to start. Multiple games are involved in COMEONDOWN!! such as
TRIVIALMATTERS-TM-, PENNYWISE-TM-, and TRICTRAX-TM-.
SLOTS-OF-LUCK-TM- is an individual play program currently active on the
Site. Players play SLOTS-OF-LUCK by inserting "tokens." These tokens are
gathered while participating on the Company's Web Site. An account is
automatically kept for each member. Variable numbers of tokens are awarded at
various times for completion (win or lose) of other programs, as consolation
prizes, and for being in the PLAYERSLOUNGE chat room. Each token is good for
one try at SLOTS-OF-LUCK. Tumblers on the slot machine contain graphics of
sponsors' logos, with associated prizes for getting three of the same logos in
a row. Tokens have no monetary value. The sole vehicle for receiving tokens
is game play resulting in an incentive to play games, to receive tokens and to
spin for other prizes.
TRIVIALMATTERS-TM- is an individual play program currently active on the
Site and an audience program on COMEONDOWN!!. Ten questions are posed in a
selected category (i.e., science, geography, sports, history, entertainment).
Players' final scores are added to the prize pool. Each day's high scorer
wins a prize. Daily winners are also eligible for weekly and monthly prizes.
TRICTRAX-TM- is an individual play program and an audience play program for
COMEONDOWN!!. This program is currently inactive because of lack of a sponsor.
After selecting a category (i.e., classical, classic rock, country & western,
pop), participants are given a question and a clue. Players then download
TRICTRAX audio clips in the form of WAV files, listen to the audio clip, and
attempt to answer the question, giving the name of the artist, song name or
both. The final score is added to a TRICTRAX prize pool, from which winners
are named daily, weekly and monthly.
PENNYWISE-TM- is an individual play program and an audience play program
for COMEONDOWN!!. This program is currently inactive because of lack of a
sponsor. The participant receives a credit card and chooses a category (i.e.,
big boy's toys, trendy fashions, appliances or cars). The participant is then
given a description and shown a picture of the product. Participants must
then guess the price of the product to the nearest penny. The difference
between the answer and the exact price will be added to the credit card
account. The lowest total balance each day, week and month will win.
22
SEARCHPARTY-TM- is an individual play program that is not active because of
lack of a sponsor. This Web-wide scavenger hunt requires players to track down
clues and graphics that are hidden all over the Web. Participants are given a
list of clues and riddles that help direct the participant's "surfing" of the
Web for answers to questions. SEARCHPARTY will also be available in a
children's version for educational purposes. Participants must answer the
riddle to win.
The Company currently gives away prizes donated by sponsors that have an
average retail value of $35.00. These prizes include food, clothing, music
(CD's and tapes), electronic items and computer related products. Sponsors
that have participated in TheGameMaster programs include Lisa's Gourmet Snacks,
Mayacamas Foods, Rossi Pasta, System Design Solutions, Antones Records, Olglio
Records, The Spy Exchange, West Indies Connection, Buckeye Beans, The Video
Professor, Off The Wall Magnetics and Glyph Quest.
INTELLECTUAL PROPERTY
The Company has no registered trademarks or copyrights. The Company relies
on a combination of copyright, trademark and trade secret laws and third-party
non-disclosure agreements to protect its intellectual property. A substantial
amount of uncertainty exists concerning the application of copyright laws to
the Internet, and there can be no assurance that existing laws will provide
adequate protection for the Company's original content. In addition, because
copyright laws do not prohibit independent development of similar content,
there can be no assurance that copyright laws will provide any competitive
advantage to the Company.
Management of the Company intends to use a portion of the proceeds of this
offering to register certain trademarks and service marks owned by the Company,
including the "GameMaster" trade name. There can be no assurance that the
Company will be able to secure registration for any of its marks.
The Company intends to file patent applications with respect to certain of
its software systems, methods and related technologies, but there can be no
assurance that such applications will be granted or that any future patents
will not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide a competitive advantage for the Company. In addition,
the Company relies on certain technology licensed from third parties, and may
be required to license additional technology in the future. The Company's
ability to generate revenues from Internet commerce may also depend on data
encryption and authentication technologies that the Company may be required to
license from third parties. There can be no assurance that these third party
technology licenses will be available or will continue to be available to the
Company on acceptable commercial terms or at all. The inability to enter into
and maintain any of these technology licenses could have a material adverse
effect on the Company's business, financial condition or operating results.
Policing unauthorized use of the Company's proprietary technology and other
intellectual property rights could entail significant expense and could be
difficult or impossible, particularly given the global nature of the Internet
and the fact that the laws of other countries may afford the Company little or
no effective protection of its intellectual property. In addition, there can
be no assurance that third parties will not bring claims of copyright or
trademark infringement against the Company or claim that the Company's use of
certain technologies violates a patent. The Company anticipates an increase in
patent infringement claims involving Internet-related technologies as the
number of products and competitors in this market grows and as related patents
are issued. Further, there can be no assurance that third parties will not
claim that the Company has misappropriated their creative ideas or formats or
otherwise infringed upon their proprietary rights in connection with its
Internet content or programming. Any claims of infringement, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management attention, require the Company to enter into costly royalty or
licensing arrangements or prevent the Company from using important technologies
or methods, any of which could have a material adverse effect on the Company's
business, financial condition or operating results.
As a publisher and a distributor of content over the Internet, the Company
also faces potential liability for defamation, negligence, copyright, patent or
trademark infringement and other claims based on the nature and content of the
materials that it publishes or distributes. Such claims have been brought, and
sometimes successfully pressed, against online services. Any imposition of
liability that is not covered by insurance or is in excess of insurance
coverage could have a material adverse effect on the Company's business,
financial condition or operating results.
23
REGULATION AND LICENSES
There are strict federal and state laws regulating prize fulfillment, free
giveaways and sweepstakes. Management of the Company believes that it is in
substantial compliance with all such regulations. From time to time, the
Company's programming or prize structure may be modified to accommodate prize
fulfillment rules.
In addition, a number of legislative initiatives exist domestically and
abroad that seek to regulate the electronic collection of data about persons.
An increasing number of court cases have been brought seeking damages and
injunctive relief for actions allegedly violating so-called "rights of
privacy." The law in this area, both statutory and case law, is highly
unsettled. No assurance can be given, therefore, that the Company will be
allowed to continue to pursue existing or proposed products and services.
As a provider of Internet content, the Company is subject to the provisions
of the recently enacted Communications Decency Act (the "CDA"), which, among
other things, imposes criminal penalties on anyone that distributes "obscene"
or "indecent" material over the Internet. The manner in which the CDA will be
interpreted and enforced and its effect on the Company's operations cannot yet
be fully determined. The CDA could dampen the growth of the Internet generally
and decrease the acceptance of the Internet as an advertising medium, and could
have a material adverse effect on the Company's business, financial condition
or operating results. It is also possible that new laws and regulations will
be adopted covering issues such as privacy, copyright infringement, obscene or
indecent communications and the pricing, characteristics and quality of
Internet products and services. Application to the Internet of existing laws
and regulations governing issues such as property ownership, libel and personal
privacy is also subject to substantial uncertainty.
Other than described above, the Company is not currently subject to direct
regulation by any governmental agency in the United States, other than
regulations applicable to businesses generally.
COMPETITION
The market for Internet products and services is highly competitive and
competition is expected to continue to increase significantly. Management
estimates that there are currently over 800,000 Web sites on the Internet. The
cost of creating an Internet Web site is relatively low, thus increasing the
likelihood that competition for impressions on the Internet will become even
more intense, and that the Internet will become even more cluttered with sites,
making the Company's Site difficult to find.
There is intense competition in the sale of advertising on the Internet
among current and future providers of Web-based advertising, as well as with
other traditional media for advertising placements. According to Jupiter
Communications, more than 900 Web sites offer advertising space. See
"Business--Industry Background--Advertising on the Internet." Many of the
Company's competitors have been in existence for a longer period than the
Company and have significantly greater financial, marketing, personnel and
other resources than the Company.
Overall, the technology-focused market research industry is highly
competitive. The Company will compete directly with significant providers of
(i) analyst-based, technology-focused market research (such as Intelliquest,
Gartner Group, Inc., META Group, Inc. and Forrester Research, Inc.);
(ii) survey-based, general market research (such as A. C. Nielsen Company, NFO
Research, Inc., Information Resources, Inc. and The NPD Group, Inc.); and
(iii) analyst-based general business consulting. Although only a few of these
competitors have to date offered survey-based, technology-focused market
research that competes directly with the Company's products and services, many
of these competitors have substantially greater financial, information
gathering and marketing resources than the Company and could decide to increase
their resource commitments to the Company's market. Moreover, each of these
companies currently competes indirectly, if not directly, for funds available
within aggregate industry-wide market research budgets.
The market for computer entertainment-related products and the consumers
utilizing them is also highly competitive. The Company expects to encounter
intense competition in the computer-game entertainment field, competing with
companies which have been in existence for a longer period than the Company and
have significantly greater financial, marketing, personnel and other resources
than the Company. In addition, it is likely that competition for computer-game
entertainment products will become even more intense with the expansion of
game-related programs developed and marketed by such companies as Sony,
Nintendo and SEGA.
24
EMPLOYEES
The Company currently has no employees. If the Minimum Offering is sold, the
Company intends to initially have three employees, none of whom will be
founders. If the Maximum Offering is sold, the Company intends to initially
hire ten employees, including the founders. See "Management."
PROPERTIES
The Company shares office space in Austin, Texas at no cost with CyberMall
Corporation, Inc. ("CyberMall"), an Internet service provider owned by
Roderick E. Gilchrist and Joshua E. Buettner, both officers, directors and
shareholders of the Company. The Company maintains no other physical premises.
25
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION
Roderick E. Gilchrist 49 Chairman of the Board and Chief Executive Officer
Joshua E. Buettner 32 Chief Operating Officer and a Director
Kathleen S. Sullivan 37 Chief Financial Officer and a Director
Stephen P. Colmar 41 Secretary and a Director
David B. Foreman 37 Director
RODERICK E. GILCHRIST, a founder of the Company, has been a director and
the Chief Executive Officer of the Company since October 1996. Mr. Gilchrist
is also currently President and a shareholder of CyberMall, which he
co-founded in June 1995. From September 1989 to May 1993, Mr. Gilchrist was
founder and President of LapPaq Computer Corporation. From 1987 to 1992, Mr.
Gilchrist was a divisional sales manager of Piiceon, Inc., a subsidiary of
Dynatech. Mr. Gilchrist also co-founded Australasian Memory, P/L in 1987 and
was Executive Vice President and served on the board of directors from 1987
to February 1995. Mr. Gilchrist graduated with an Applied Science Degree from
Delta College in 1972.
JOSHUA E. BUETTNER, a founder of the Company, has been a director and
the Chief Operating Officer of the Company since October 1996. Mr. Buettner
is also currently Executive Vice President and a shareholder of CyberMall,
which he co-founded in June 1995. Prior to 1995, Mr. Buettner was a student.
KATHLEEN S. SULLIVAN has been a director and the Chief Financial Officer
of the Company since October 1996. Ms. Sullivan is also currently the Chief
Financial Officer of Absolute Healthcare, a position she has held since
October 1994. Mrs. Sullivan was employed as a Certified Public Accountant
for Lockart & Associates from October 1989 to October 1994. Ms. Sullivan has
a Bachelors degree in Accounting from the University of Texas at Austin.
STEPHEN P. COLMAR has been a director and the Secretary of the Company
since October 1996. Mr. Colmar is co-founder and a principal in Colmar,
Crawford & Parkhouse, Inc., a position he has held since March 1996. Mr.
Colmar is also co-founder and a principal in Colmar & Crawford, Inc., a
position he has held since November 1993. Both of these companies are
investment banking companies. From 1980 to 1993, Mr. Colmar was President and
Chief Executive Officer of Integrated Risk Incorporated, a private investment
firm that specialized in early stage investments. Mr. Colmar founded
American Information Corp., a data processing company, in 1980 and acted as
its Chairman from 1980 to 1983. Mr. Colmar earned a Graduate degree in
Marketing from the University of Tulsa, Oklahoma School of Business. Mr.
Colmar has served as Director of American Information Corporation, Integrated
Risk Incorporated and their portfolio companies, Used Equipment Inc. and 6th
Street Productions.
DAVID B. FOREMAN has been a director of the Company since April 1997.
Mr. Foreman is also currently Executive Vice President for Lisa's Gourmet
Snacks, Inc., a national snack food company, a position he has held since
June 1996. From August 1989 to June 1995, Mr. Foreman was national marketing
and sales director for Guiltless Gourmet, a national snack food company.
From June 1995 to June 1996, Mr. Foreman was a self-employed consultant in
the snack and specialty food industry.
The following individual serves as an advisory member of the Board of
Directors of the Company:
EUGENE LOWENTHAL, PHD. is currently an independent consultant and is a
partner of Growth Capital Partners of Houston. Mr. Lowenthal has served in
senior management positions with Microelectronics and Computer Technology
Corporation (MCC) and MRI Systems Corporation and was Director of Strategic
Planning for Intel's System Division. Mr. Lowenthal also serves on the Board
of Directors of the American Institute for Learning. Mr. Lowenthal's past
directorships have included Infoglide Corporation, Reliant Data Systems and
General Computer Systems.
26
EXECUTIVE AND DIRECTOR COMPENSATION
The executive officers of the Company currently receive no compensation.
In the event the Minimum Offering is completed, the executive officers will
continue to receive no compensation except for indirect compensation through
a consulting contract. See "Certain Transactions." In the event the Maximum
Offering is completed, Mr. Gilchrist and Mr. Buettner will become employees
of the Company and will initially receive a total annual compensation
package, including a performance bonus, of $90,000 each. Except for the
stock options described below, the Company does not currently compensate its
directors for their services and has no existing plan to do so.
STOCK OPTIONS
On April 13, 1997, the Company granted an option to purchase 20,000
shares of Common Stock to Mr. Foreman and an option to purchase 5,000 shares
of Common Stock to Mr. Lowenthal. The Company also granted an option to
purchase 10,000 shares of Common Stock to a sales agent of the Company who is
to become an employee of the Company upon completion of the offering. These
stock options entitle the holders to purchase the Company's Common Stock at
any time between the date of grant and April 12, 2002 at a price of $4.00 per
share.
The Company does not currently have a stock option plan and has no
current plans to adopt one. However, in order to attract competent employees
to manage future growth of the Company, it may be necessary to adopt benefit
plans that grant substantial equity interests in the Company at prices
significantly below the offering price.
EMPLOYMENT AGREEMENTS
The Company has no employment agreements with any of its employees.
CERTAIN TRANSACTIONS
In October 1996, the Company entered into an agreement with CyberMall to
design, produce and maintain the Company's Site. CyberMall has been paid
$45,645 of fees and expenses pursuant to this agreement through April 15,
1997. In the event the Maximum Offering is completed, this agreement will
terminate. In the event the Minimum Offering is completed, CyberMall will be
paid $72,000 annually for administrative services, in addition to certain
other fees and expenses. CyberMall is owned by Roderick E. Gilchrist,
Chairman of the Board and Chief Executive Officer of the Company, and Joshua
E. Buettner, Chief Operating Officer and a director of the Company.
FSF, Inc., the majority shareholder of the Company, is the holder of the
Bridge Note. The Bridge Note, which is payable upon demand and has an
outstanding principal balance as of April 15, 1997 of $62,928, will be fully
repaid with the proceeds of this offering and bears interest at 10%.
On October 1, 1996, the Company issued a total of 462,800 shares of
Common Stock to the promoters of the Company. Set forth below is the name of
each promoter, position of each such promoter with the Company, the number of
shares of Common Stock originally issued to each promoter and the
consideration received by the Company from each promoter for the shares
issued to such promoter. Other than the shares of Common Stock shown below,
and except as otherwise described in this Prospectus, no promoter has
received anything of value from the Company. The persons listed in the table
below are the only promoters of the Company.
Promoter Position Shares Consideration
- -------- -------- ------ -------------
Roderick E. Gilchrist Chairman of the Board 178,000 $1,780
and Chief Executive Officer
Joshua E. Buettner Chief Operating Officer 178,000 $1,780
and a Director
Kathleen S. Sullivan Chief Financial Officer 53,400 $ 534
and a Director
Stephen P. Colmar Secretary and a Director 53,400 $ 534
27
PRINCIPAL SHAREHOLDERS
The following table sets forth as of the date of this Prospectus certain
information with respect to the beneficial ownership of the Common Stock by
(i) each person who is known by the Company to be the beneficial owner of
more than 5% of the outstanding shares of Common Stock of the Company, (ii)
each of the Company's directors, and (iii) all directors and executive
officers of the Company as a group. Unless otherwise indicated, each of the
shareholders listed below has sole voting and investment power with respect
to the shares of Common Stock beneficially owned.
PERCENTAGE OF PERCENTAGE OF
SHARES PERCENTAGE OF COMMON SHARES COMMON SHARES
BENEFICIALLY COMMON SHARES HELD IF HELD IF
OWNED BEFORE HELD BEFORE MINIMUM MAXIMUM
NAME AND ADDRESS OFFERING OFFERING OFFERING IS SOLD OFFERING IS SOLD
- ---------------- -------- -------- ---------------- ----------------
FSF, Inc. (1) 427,200 47.5% 42.7% 32.9%
Joshua E. Buettner (2) 160,200 17.8% 16.0% 12.3%
Roderick E. Gilchrist (2)(3) 132,307 14.7% 13.2% 10.2%
Kathleen S. Sullivan (2)(4) 480,600 53.4% 48.1% 37.0%
Stephen P. Colmar (2)(5) 53,400 5.9% 5.3% 4.1%
Jodi Lynn Gilchrist (6) 45,693 5.1% 4.6% 3.5%
David B. Foreman (7) 20,000 2.2% 2.0% 1.5%
All executive officers and
directors as a group (5 persons)
(3)(4)(5)(7) 846,507 92.0% 83.0% 64.1%
- ----------------------
(1) The address of FSF, Inc. is 2525 Wallingwood, Suite 1-B, Austin, Texas
78746.
(2) The address of the officers of the Company is 3321 Westlake Drive,
Austin, Texas 78746.
(3) Includes 96,120 shares owned by Mr. Gilchrist's spouse, but does not
include 45,693 shares owned by Mr. Gilchrist's adult daughter, as to
which shares Mr. Gilchrist disclaims beneficial ownership.
(4) Includes 427,200 shares which Ms. Sullivan may be deemed to
beneficially own by virtue of her ownership of the only outstanding
voting shares of common stock of FSF, Inc. and her position as the
sole director, President, Secretary and Treasurer of FSF, Inc. Also
includes 10,000 shares owned by each of her children.
(5) Includes 13,350 shares owned by Mr. Colmar's spouse and 6,675 shares
owned by each of his children.
(6) Ms. Gilchrist is Roderick E. Gilchrist's daughter. Her address is
5141 Ganymede Drive, Austin, Texas 78727.
(7) Includes 20,000 shares underlying a currently exercisable option to
purchase Common Stock.
DESCRIPTION OF SECURITIES
AUTHORIZED SHARES
The authorized capital stock of the Company consists of 8,000,000 shares
of Common Stock and 2,000,000 shares of preferred stock.
COMMON STOCK
As of the date of the Prospectus, there were 900,000 shares of Common
Stock outstanding and held of record by 18 shareholders. All of these shares
were offered and sold in private transactions in reliance on an exemption
from registration under the Securities Act. Accordingly, such shares are
"restricted securities" as defined by Rule 144 under the Securities Act and
cannot be resold without registration except in reliance on Rule 144 or
another applicable exemption from registration. Each share of Common Stock
entitles the holder to one vote on all matters submitted to a vote of the
stockholders. Since the holders of Common Stock do not have cumulative voting
rights, holders of more than 50% of the
28
outstanding shares can elect all of the directors of the Company, and holders
of the remaining shares by themselves cannot elect any directors. Holders of
Common Stock will be entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of the Company,
holders of the Common Stock have the right to a ratable portion of the assets
remaining after payment of liabilities. All shares of Common Stock
outstanding and to be outstanding upon completion of this offering are and
will be fully paid and non-assessable.
PREFERRED STOCK
The Company is authorized to issue up to 2,000,000 shares of preferred
stock, par value of $0.10 per share, in one or more series, with such voting
powers, or without voting powers, and with such designations, preferences and
relative participating optional or other special rights, qualifications,
limitations or restrictions, as shall be set forth in resolutions providing
for the issue thereof adopted by the Board of Directors. No preferred stock
is currently outstanding.
TRANSFER AGENT AND ANNUAL REPORT
The Company will serve as its own transfer agent for its Common Stock.
Each year, the Company will prepare and distribute to shareholders an annual
report which describes the nature and scope of the Company's business and
operations for the prior year and contains a copy of the Company's audited
financial statements for its most recent fiscal year. Because of the
development stage of the Company, however, there will be no annual report
issued until after December 31, 1997, the Company's first full year of
operations.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 1,000,000 shares
of Common Stock outstanding if the Minimum Offering is sold, and 1,300,000
shares of Common Stock outstanding if the Maximum Offering is sold. Of these
shares, 100,000 shares (assuming the Minimum Offering is sold) and 400,000
shares (assuming the Maximum Offering is sold) will be freely tradeable
without restriction or further registration under the Securities Act, except
for shares purchased by "affiliates" of the Company, which will be subject to
the resale limitations of Rule 144 under the Securities Act. As defined in
Rule 144, an affiliate of an issuer is a person who directly, or indirectly
through one or more intermediaries, controls, is controlled by or is under
common control with, such issuer, and generally includes members of the Board
of Directors and senior management.
The remaining outstanding shares (the "Restricted Shares") are deemed
"restricted securities" under Rule 144 in that they were originally issued
and sold by the Company in private transactions in reliance upon an exemption
under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) is entitled to sell within any three-month
period Restricted Shares that were acquired from the Company or an
"affiliate" of the Company not less than one year before the sale, in an
amount that does not exceed the greater of 1% of the then outstanding shares
of Common Stock (13,000 shares based on the number of shares to be
outstanding after the offering, if the Maximum Offering is sold) or the
average weekly trading volume in the public market during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner and notice of sale and the availability of
public information concerning the Company. A person (or persons whose shares
are aggregated) who is not an "affiliate" of the Company at the time of sale
and has not been such an "affiliate" at any time during the three months
preceding such sale, and whose Restricted Shares were acquired from the
Company or an affiliate of the Company at least two years before the sale
would be entitled to sell such shares under Rule 144 without regard to the
volume limitations, manner-of-sale provisions, notice or public information
requirements described above. Rule 144A under the Securities Act permits the
immediate sale by the current holders of Restricted Shares of all or a
portion of their shares to certain qualified institutional buyers as defined
in Rule 144A.
As of the date of this Prospectus, options to purchase 35,000 shares of
the Company's Common Stock are outstanding, all of which are currently
exercisable. See "Management--Stock Options." Shares of Common Stock issued
29
upon exercise of such options will be restricted securities under Rule 144,
and must be sold in accordance with the provisions thereof.
No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
shares in the public market could adversely affect market prices of the
shares and make it more difficult for the Company to sell equity securities
in the future at a time and price which it deems appropriate.
PLAN OF DISTRIBUTION
The Company is offering to sell, on a best efforts basis, a minimum of
100,000 shares and a maximum of 400,000 shares of its Common Stock at an
initial public offering price of $5.00 per share. The offering will begin on
the date of this Prospectus and continue until either the Maximum Offering
has been sold or the Company terminates the offering, unless the Minimum
Offering is not sold within 60 days from the date of this Prospectus (which
period may be extended, at the Company's discretion, for up to three
additional 30-day periods), in which case the offering will immediately
terminate.
The Company plans to offer and sell the shares directly to investors who
reside in selected states and has not retained any underwriters, brokers or
placement agents in connection with the offering. The Company reserves the
right, however, to use brokers or placement agents and could pay commissions
equal to as much as 5% of the gross proceeds. The Company intends to contact
prospective investors by publicizing the offering through a posting on the
Company's Site. The Company also intends to publicize the offering through
newspaper advertisements, trade shows and through private meetings. The
Company also intends to contact additional potential investors by direct
e-mail and regular mail solicitation. Clifford L. Haigler, Assistant
Secretary of the Company, will conduct the offering on behalf of the Company.
Shares may be purchased by completing and delivering the Company's
Subscription Agreement along with the purchase price by check to the Company.
A copy of the Subscription Agreement is attached at the end of this
Prospectus at page x-1. Within 10 days of its receipt of a Subscription
Agreement accompanied by a check for the purchase price, the Company will
send by electronic mail or first class mail a written confirmation to notify
the subscriber of the extent, if any, to which such subscription has been
accepted by the Company.
All subscription proceeds will be deposited by the Company into the
Escrow Account. If the Initial Closing does not occur, all proceeds held in
the Escrow Account will be returned by the Company to the investors without
interest. Upon consummation of the Initial Closing, investors will be sent
stock certificates representing the number of shares they have purchased.
After the Initial Closing, proceeds of additional subscriptions will be
deposited into the Escrow Account pending Subsequent Closings. All of the
proceeds held in the Escrow Account, including interest thereon, will be
disbursed after each closing to the Company's general account. Subsequent
Closings will occur from time to time until the Maximum Offering has occurred
or the Company has elected to terminate the offering. In either of such
events, any subscriptions not accepted by the Company will be returned to the
subscriber without interest. See "Use of Proceeds."
The offering price of the shares was determined arbitrarily by the
Company, and should not be considered as an indication of the actual value of
the Company. In determining the offering price, the Company considered,
among other things, the Company's lack of operating history, its limited
financial resources, its growth and profit potential, the amount of dilution
to investors in the offering and the risk of investing in the Company.
There is no public trading market for the Company's Common Stock and
there can be no assurance that an active public market will develop in the
near future as a result of this offering. The Company's long-term plan for
providing liquidity to its shareholders is to develop a public market for its
Common Stock by developing a mechanism on the Internet for trading of its
Common Stock. The Company has not solicited any securities brokers to become
market-makers of the shares, nor does the Company have current plans to do so.
30
LEGAL MATTERS
The validity of the issuance of the shares offered hereby will be passed
upon for the Company by Winstead Sechrest & Minick P.C., Austin, Texas.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report (which contain an explanatory paragraph regarding the Company's
ability to continue as a going concern) appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.
31
INTERGAMES, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F - 2
Balance Sheets F - 3
Statements of Loss During the Development Stage F - 4
Statements of Stockholders' Deficit F - 5
Statements of Cash Flows F - 6
Summary of Significant Accounting Policies F - 7
Notes to Financial Statements F - 9
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
InterGames, Inc.
Austin, Texas
We have audited the accompanying balance sheet of InterGames, Inc. as of
December 31, 1996, and the related statements of loss during the development
stage, stockholders' deficit, and cash flows for the period from inception
(October 1, 1996) through December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InterGames, Inc. at
December 31, 1996 and the results of its operations and its cash flows for the
period from inception (October 1, 1996) through December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in the development stage, has not achieved
its planned level of operations or realized significant revenues and has
incurred losses. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Austin, Texas
March 18, 1997
F-2
INTERGAMES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
December 31, March 31,
1996 1997
------------ -----------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 554 $ 562
Computer equipment, less accumulated depreciation
of $59 and $237 3,470 3,292
Computer software, less accumulated amortization
of $837 and $3,347 (Note 2) 29,308 35,798
-------- --------
Total assets $ 33,332 $ 39,652
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Stockholder loan (Note 2) $ 33,928 $ 56,928
Accrued expenses 1,508 1,783
-------- --------
Total current liabilities 35,436 58,711
-------- --------
Long-term debt -
Contingency (Note 1)
Stockholders' deficit:
Preferred stock, $0.10 par value; 2,000,000
shares authorized; none issued -
Common stock, $0.01 par value; 8,000,000 shares
authorized 9,000 9,000
Additional paid-in capital (Note 4) 25,875 51,725
Deficit accumulated during the development stage (36,979) (79,784)
-------- --------
Total stockholders' deficit (2,104) (19,059)
-------- --------
Total liabilities and stockholders' deficit $ 33,332 $ 39,652
-------- --------
-------- --------
See accompanying summary of significant accounting
policies and notes to financial statements.
F-3
INTERGAMES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF LOSS DURING THE DEVELOPMENT STAGE
For the period
from inception Three months
(October 1, 1996) to ended Since
December 31, 1996 March 31, 1997 Inception
-------------------- -------------- ----------
(UNAUDITED) (UNAUDITED)
REVENUES:
Advertising fees $ - $ - $ -
Advertiser contributed prizes 5,635 25,200 30,835
-------- -------- --------
Total Revenue $ 5,635 $ 25,200 $ 30,835
-------- -------- --------
EXPENSES:
Prize fulfillment 6,635 28,700 35,335
Professional services 8,000 7,250 15,250
Depreciation and amortization 896 2,688 3,584
General and administrative (Note 4) 25,875 25,850 51,725
Interest expense and other 1,208 3,517 4,725
-------- -------- --------
Total Expenses $ 42,614 $ 68,005 $110,619
-------- -------- --------
Net loss during the development stage $(36,979) $(42,805) $(79,784)
-------- -------- --------
-------- -------- --------
Loss per common share $ (0.04) $ (0.05)
-------- --------
-------- --------
Weighted average number of common
shares outstanding 907,000 907,000
-------- --------
-------- --------
See accompanying summary of significant accounting
policies and notes to financial statements.
F-4
INTERGAMES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
Deficit
Accumulated
Common Stock Additional During the
------------------ Paid-In Development
Shares Amount Capital Stage Total
------- ------ ---------- ----------- --------
Issuance of common stock at
inception (October 1, 1996) 900,000 $9,000 $ - $ - $ 9,000
Services contributed by stockholders
(Note 4) - - 25,875 - 25,875
Net loss during the development
stage - - - (36,979) (36,979)
------- ------ ------- -------- --------
Balance at December 31, 1996 900,000 $9,000 $25,875 $(36,979) $ (2,104)
Service contributed by stockholders
(unaudited) - - 25,850 - 25,850
Net loss during the development
stage (unaudited) - - - (42,805) (42,805)
------- ------ ------- -------- --------
Balance at March 31, 1996
(unaudited) 900,000 $9,000 $51,725 $(79,784) $(19,059)
------- ------ ------- -------- --------
------- ------ ------- -------- --------
See accompanying summary of significant accounting
policies and notes to financial statements.
F-5
INTERGAMES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
For the period
from inception Three months
(October 1, 1996) to ended Since
December 31, 1996 March 31, 1997 Inception
-------------------- -------------- ----------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net loss during the development stage $(36,979) $(42,805) $(79,784)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 896 2,688 3,584
Services contributed by stockholders
(Note 4) 25,875 25,850 51,725
Changes in assets and liabilities:
Accrued expenses 1,508 275 1,783
-------- -------- --------
Net cash used in operating activities $ (8,700) $(13,992) $(22,692)
-------- -------- --------
INVESTING ACTIVITIES:
Purchase of computer equipment (3,529) - (3,529)
Computer software (30,145) (9,000) (39,145)
-------- -------- --------
Net cash used in investing activities $(33,674) $ (9,000) $(42,674)
-------- -------- --------
FINANCING ACTIVITIES:
Issuance of common stock 9,000 - 9,000
Proceeds from stockholder loan 33,928 23,000 56,928
-------- -------- --------
Net cash provided by financing activities 42,928 23,000 65,928
-------- -------- --------
Net increase in cash 554 8 562
Cash beginning of period - 554 -
-------- -------- --------
Cash, end of period $ 554 $ 562 $ 562
-------- -------- --------
-------- -------- --------
See accompanying summary of significant accounting
policies and notes to financial statements.
F-6
INTERGAMES, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
InterGames, Inc. (the "Company") was incorporated on October 1, 1996 in
the state of Texas. The Company is engaged in the creation, design,
development and operation of an interactive entertainment site on the Internet.
The content of this entertainment site is used as a vehicle to carry consumers
through an interactive demographic and lifestyle data collection model,
developed by the Company, which offers advertisers the ability to both target
their message to the desired audience, obtain marketing information, and make
product sales directly via an online catalogue.
The Company operates an Internet interactive entertainment web site from
its headquarters in Austin, Texas. The web site can be accessed on the
Internet at www.TheGameMaster.com. At the web site, users may play a variety
of video type games at no charge. The Company awards prizes to players based
on their performance. Prizes are contributed by various advertisers.
The Company generates revenues from fees for advertising, marketing
research and retail sales through the prize catalog. While anyone in the world
with access to the Internet may play, most users are located in the United
States and Canada.
To date, substantially all of the Company's efforts have been devoted to
marketing, research and software development. The Company is in the
development stage and has not achieved its planned level of operations or
realized significant revenues.
BASIS OF PRESENTATION
The accompanying balance sheet as of March 31, 1997 and the statements of
operations and cash flows for the three months ended have not been audited.
However, in the opinion of management, they include all adjustments necessary
for a fair presentation of the financial position and the results of operations
for the period presented. The results of operations for the three months ended
March 31, 1997 are not necessarily indicative of results to be expected for any
future period.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues from services are recognized as services are rendered.
COMPUTER EQUIPMENT
Equipment is stated at cost. Depreciation is computed on the straight-
line method over the estimated useful lives of the assets (5 years).
Expenditures that increase the value or extend the life of an asset are
capitalized, while
F-7
costs of maintenance and repairs are expensed as incurred. Gains or losses on
disposals of assets are recognized upon disposition.
COMPUTER SOFTWARE
Internally developed game software is stated at cost. Amortization is
computed on the straight-line method over the estimated useful life of the
software (3 years). Game software is periodically assessed for impairment of
value and any loss is recognized upon impairment.
INCOME TAXES
The Company follows the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR
INCOME TAXES. This method provides deferred income taxes based on enacted
income tax rates in effect on the dates on which temporary differences between
the financial reporting and tax bases of assets and liabilities are expected to
reverse. The effect on deferred tax assets and liabilities of a change in
income tax rates is recognized in the period in which the change is determined.
ADVERTISER CONTRIBUTED PRIZES
The Company awards prizes to players based on their performance. The non-
cash prizes are contributed to the Company by various advertisers in exchange
for advertising time on the web site. Prizes are booked as revenue at the
advertisers' respective cost when they are awarded to the players. The prizes
are simultaneously expensed at cost. As of December 31, 1996 there were no
prizes in inventory.
NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), issued by the FASB is effective for financial statements for
fiscal years beginning after December 15, 1997. This pronouncement provides a
different method of calculating earnings per share than is currently used in
accordance with APB 15, "Earnings per Share." SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity. Management does not
anticipate a significant impact on earnings per share as a result of
implementing SFAS 128.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing net loss by the weighted
average number of common shares and common share equivalents outstanding (if
dilutive) during each period. Stock options granted on April 13, 1997, at a
price less than the expected initial public offering price, are treated as
outstanding for all periods presented
F-8
INTERGAMES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(1) GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLANS
The Company's financial statements have been presented on the basis that
it is a going concern which contemplates the realization of assets and the
satisfaction of liabilities in the usual course of business. The Company is in
the development stage and has not achieved its planned level of operations or
realized significant revenues and has incurred significant losses.
The Company's continued existence is dependent upon its ability to obtain
additional financing as contemplated by the proposed offering of its common
stock, and ultimately profitable operations.
Although it cannot be assured that the Company will be able to continue as
a going concern, management believes the Company's proposed stock offering and
its plans to achieve profitability should enable the Company to meet its
obligations and sustain its operations. If the Company's proposed stock
offering should prove to be unsuccessful, the Company would renegotiate
existing lending arrangements and reduce its expenditures on promotion and
administration to preserve cash liquidity.
(2) RELATED PARTY TRANSACTIONS
GAME SOFTWARE AND OFFICE SPACE
The Company developed the Internet site and the associated game software
at a cost of $30,145 pursuant to an agreement with a corporation which is
controlled by two of the Company's officers. The Company also shares
office space in Austin, Texas at no cost with this related corporation
(see Note 4).
STOCKHOLDER LOAN
On October 1, 1996, the Company received an unsecured loan from a
stockholder. Subsequent to December 31, 1996, the loan was assigned by
the stockholder to a corporation controlled by an officer of the Company.
The balance of this loan was $33,928 at December 31, 1996. The stated
annual interest rate is 10% and the loan is due on demand. Accrued
interest as of December 31, 1996 was $508.
(3) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The tax effects of significant items comprising the Company's net deferred
tax assets are as follows:
December 31, 1996 March 31, 1997
----------------- --------------
(UNAUDITED)
Deferred tax assets (liabilities):
Net operating loss carryforward $ 12,613 $ 27,220
Fixed assets (40) (94)
-------- --------
$ 12,573 $ 27,126
Valuation allowance (12,573) (27,126)
-------- --------
Total $ - $ -
-------- --------
-------- --------
F-9
INTERGAMES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
At December 31, 1996 the Company had available for federal income tax
purposes approximately $32,000 of net operating loss carryforwards. This
potential future tax benefit will expire in the year 2011. Under the Tax
Reform Act of 1986, as amended, an annual limitation will be placed on the
amount of net operating loss carryforwards which may be utilized if there are
substantial changes in the ownership of the Company.
In accordance with the provisions of SFAS No. 109 "Accounting for Income
Taxes", management has elected to record a valuation allowance to offset
deferred tax assets generated by the net operating loss carryforward.
(4) SERVICES CONTRIBUTED BY STOCKHOLDERS
During 1996, certain stockholders of the Company performed services for
the Company at no cost. The estimated fair value of the contributed services
through December 31, 1996 was $25,875. In order to reflect the use of these
services in the financial statements, the Company recognized an expense of
$25,875, and a related increase to additional paid-in capital.
(5) SUBSEQUENT EVENTS
Subsequent to December 31, 1996, a principal stockholder assigned 427,200
common shares (par value $0.01 per share) to a corporation which is controlled
by an officer of the Company. This principal shareholder did, however, retain
beneficial ownership of the shares.
In March 1997, the stockholder loan discussed in Note 2 was assigned to a
corporation which is controlled by an officer of the Company.
On April 13, 1997, the Company granted an option to purchase 25,000 shares
of common stock in the aggregate to two executives of the Company. The Company
also granted an option to purchase 10,000 shares of common stock to a sales
agent. These stock options entitle the holders to purchase the Company's
common stock at any time between the date of grant and April 12, 2002 at a
price of $4.00 per share.
(6) RISKS AND UNCERTAINTIES
The Company's future success is substantially dependent upon continued
growth in the use of the Internet and the Web. The market for Internet
products and services is highly competitive and competition is expected to
continue to increase significantly. Because the Company expects to derive a
substantial portion of its revenues from advertising, the future success of the
Company is highly dependent on the development of the Internet as an
advertising medium.
F-10
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
No dealer, salesman or any other 400,000 SHARES
person is authorized to give any
information or to make any
representations not contained in
this Prospectus in connection with
the offering covered by this
Prospectus. If given or made, such
information or representations must INTERGAMES, INC.
not be relied upon as having been
authorized by the Company. This
Prospectus does not constitute an
offer to sell, or a solicitation of
an offer to buy, the Shares where,
or to any person to whom, it is COMMON STOCK
unlawful to make such offer or
solicitation. Neither the delivery
of this Prospectus nor any sale
made hereunder shall, under any
circumstances, create an
implication that there has not been
any change in the facts set forth
in this Prospectus or in the
affairs of the Company since the
date hereof.
Until ____________, 1997 (25
calendar days after the date of
this Prospectus), all dealers
effecting transactions in the
Shares, whether or not
participating in this distribution,
may be required to deliver a
Prospectus.
_______________
TABLE OF CONTENTS
PAGE
Available Information 2
Prospectus Summary 3 _______________
Risk Factors 7
Determination of Offering Price 13 PROSPECTUS
Limited State Registration 13 _______________
Use of Proceeds 14
Dividend Policy 14
Dilution 15
Capitalization 17
Plan of Operation 18
Business 19
Management 26
Certain Transactions 27
Principal Shareholders 28 ____________, 1997
Description of Securities 28
Shares Eligible for Future Sale 29
Plan of Distribution 30
Legal Matters 31
Experts 31
Index to Financial Statements F-1
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Texas Business Corporation Act ("TBCA") provides that a corporation may
indemnify any of its directors and officers against liability in connection
with a proceeding if (i) the director or officer acted in good faith; (ii) in
the case of conducting an official capacity, the director or officer reasonably
believed that his or her conduct was in the corporation's best interest;
(iii) in all other cases, the director or officer reasonably believed that his
or her conduct was not opposed to the corporation's best interests; and (iv) in
connection with any criminal proceeding, the director or officer had no
reasonable cause to believe his or her conduct was unlawful. However, the TBCA
provides that no indemnification may be made if the director or officer was
(i) found liable on the basis that personal benefit was improperly received by
him or her, whether or not the benefit resulted from an action taken in the
person's official capacity or (ii) was found liable to the corporation. No
indemnification may be made in respect of any proceeding in which the director
or officer was found liable for willful or intentional misconduct on the
performance of his or her duty to the corporation. In cases where the director
or officer is wholly successful, on the merits or otherwise, in the defense of
any proceeding instigated because of his or her status as an officer or
director of a corporation, the TBCA mandates that the corporation indemnify the
director or officer against reasonable expenses incurred by him or her in the
proceeding. Notwithstanding the foregoing, the TBCA provides that a court of
competent jurisdiction, upon application, may order that an officer or director
be indemnified for reasonable expenses actually incurred, if, in consideration
of all relevant circumstances, the court determines that such individual is
fairly and reasonably entitled to indemnification, notwithstanding the fact
that (i) he or she was adjudged liable to the corporation or (ii) he or she was
adjudged liable on the basis that personal benefit was improperly received by
him or her.
The Company's Articles of Incorporation provides that to the fullest extent
permitted by Texas law, no director shall be personally liable to the Company
or its shareholders for monetary damages for acts or omissions that occur in
the directors' capacity as directors, except for acts or omissions for (i) a
breach of the duty of loyalty to the Company or its shareholders; (ii) a bad
faith breach of a director's duty to the Company, intentional misconduct, or a
knowing violation of the law; or (iii) transactions from which a director
received an improper benefit, whether or not the benefit resulted from an
action taken within the scope of the director's office. Under the TBCA this
provision on the Articles of Incorporation relieves the Company's directors
from personal liability to the Company or its shareholders for monetary damages
for breach of fiduciary duty as a director, except for liability arising from a
judgment or other final adjudication establishing (i) any breach of the
directors duty of loyalty; (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; or
(iii) transactions in which the director received an improper benefit. In
addition, subject to the same provisions set forth above, the Company's Bylaws
provide that persons employed by or agents of the Company may be indemnified to
the same extent as directors of the Company.
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ITEM 25. 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 hereby. All amounts
are estimated except the Commission registration fee.
Minimum Maximum
------- --------
SEC registration fee $ 606 $ 606
Blue Sky fees and expenses 5,000 8,000
Accounting fees and expenses 10,000 15,000
Legal fees and expenses 43,000 60,000
Printing and engraving expenses 5,000 5,000
Registrar and transfer agent's fees N/A N/A
Miscellaneous fees and expenses 11,394 21,394
------- --------
Total $75,000 $110,000
------- --------
------- --------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On October 1, 1996, the Company issued 900,000 shares of its Common Stock
to the current shareholders of the Company for $9,000 cash, pursuant to the
organization of the Company. Such issuance was made under the exemption
provided for in Section 4(a) of the Securities Act of 1933, as the sale was
not made in a public or underwritten offering.
On April 13, 1997, the Company granted immediately exercisable options to
purchase 35,000 shares of the Company's Common Stock. The options, 20,000 of
which were issued to Mr. David Foreman, a director of the Company, 10,000 of
which were issued to Mr. Steve Cox, a sales consultant to the Company, and
5,000 of which were issued to Mr. Eugene Lowenthal, an advisory director to
the Company, entitle the holders to purchase the underlying shares of Common
Stock at any time before April 12, 2002 at a price of $4.00 per share.
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ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1(1) Articles of Incorporation of InterGames, Inc.
(the "Company")
3.2(1) Bylaws of the Company
4.1(2) Form of Certificate evidencing Common Stock
5(2) Opinion of Winstead Sechrest & Minick P.C.
10.1(2) Development and Maintenance Agreement by and
between the Company and CyberMall Corporation, Inc.,
dated October 15, 1996.
10.2(1) Form of Stock Option Agreement
23.1(2) Consent of BDO Seidman, LLP
23.2(2) Consent of Winstead Sechrest & Minick P.C.
24(1) Power of Attorney
27(2) Financial Data Schedule
- -------------
(1) Filed herewith
(2) To be filed by amendment
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officer and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Company
pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
(ii) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new
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registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Austin, State of Texas, on May 2, 1997.
INTERGAMES, INC.
By: /s/ Roderick E. Gilchrist
------------------------------
Roderick E. Gilchrist
Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, each person whose signature appears below
hereby constitutes and appoints Roderick E. Gilchrist and Kathleen S. Sullivan
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this
Registration Statement, and to file the same, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
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:
SIGNATURE TITLE DATE
--------- ----- ----
/s/Roderick E. Gilchrist Chairman of the Board and May 2, 1997
- --------------------------- Chief Executive Officer
Roderick E. Gilchrist
/s/Joshua E. Buettner Director, Chief Operating Officer May 2, 1997
- ---------------------------
Joshua E. Buettner
/s/Kathleen S. Sullivan Director, Chief Financial Officer May 2, 1997
- ---------------------------
Kathleen S. Sullivan
/s/Stephen P. Colmar Director, Secretary May 2, 1997
- ---------------------------
Stephen P. Colmar
/s/David B. Foreman Director May 2, 1997
- ---------------------------
David B. Foreman
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CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Intergames, Inc.
Austin, Texas
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 18, 1997, relating to the
financial statements of Intergames, Inc., which is contained in that
Prospectus. Our report contains an explanatory paragraph regarding the
Company's ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
(Signed Manually)
BDO SEIDMAN, LLP
Austin, Texas
May 1, 1997
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1(1) Articles of Incorporation of InterGames, Inc.
(the "Company")
3.2(1) Bylaws of the Company
4.1(2) Form of Certificate evidencing Common Stock
5(2) Opinion of Winstead Sechrest & Minick P.C.
10.1(2) Development and Maintenance Agreement by and
between the Company and CyberMall Corporation, Inc.,
dated October 15, 1996.
10.2(1) Form of Stock Option Agreement
23.1(2) Consent of BDO Seidman, LLP
23.2(2) Consent of Winstead Sechrest & Minick P.C.
24(1) Power of Attorney
27(2) Financial Data Schedule
- -------------
(1) Filed herewith
(2) To be filed by amendment
II-6