================================================================================
As filed with the Securities & Exchange Commission on March 11, 1999
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
TWO DOG NET, INC.
(Name of small business issuer in its charter)
Utah 7375 68-0394802
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Identification No.) Classification Code No.)
---------------------------
337 Preston Court
Livermore, CA 94550
(925) 447-0226 tel.
(Address of principal place of business or intended principal place of business)
Sholeh Hamedani
Two Dog Net, Inc.
337 Preston Court
Livermore, CA 94550
(925) 447-0226 tel.
(Name, address and telephone number of agent for service)
---------------------------
Copies to:
Antoine M. Devine, Esquire
Evers & Hendrickson, LLP
155 Montgomery Street, Suite 1200
San Francisco, CA 94104
(415) 772-8109
Approximate date of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
CALCULATION OF REGISTRATION FEE
- --------------------- --------------- -------------------------- -------------------- ------------------- ------------------
Title of each Amount Proposed maximum Proposed minimum Proposed maximum Amount of
class to be offering price aggregate aggregate registration
of securities to registered per unit offering price offering price fee
be registered
- --------------------- --------------- -------------------------- -------------------- ------------------- ------------------
Common, par value 2,000,000 $10.00 $7,000,000 $20,000,000 $6,000
$0.01
- --------------------- --------------- -------------------------- -------------------- ------------------- ------------------
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Two Dog Net, Inc.
Cross-Reference Sheet pursuant to Item 501(b)
Showing Location in Prospectus of Information
Required by Items of Form SB-2
Registration Statement Item Caption in Prospectus
--------------------------- ---------------------
1. Front of Registration Statement and Facing Page; Cross-Reference Sheet;
Outside Front Cover of Prospectus Prospectus Cover Page
2. Inside Front and Outside Back Cover Prospectus Cover Page; Prospectus
Pages of Prospectus 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 Risk Factors; Shares Eligible For
Future Sale
6. Dilution Dilution
7. Selling Security holders Not Applicable
8. Legal Proceedings Not Applicable
9. Plan of Distribution Plan of Distribution
10. Directors, Executive Officers, Promoters Management; Security Ownership of Certain
Beneficial Owners and Management
11. Security Ownership of Certain Beneficial Security Ownership of Certain Beneficial
Owners and Management Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Interest of Named Experts and
Counsel
14. Disclosure of Commission Position on Description of Securities
Indemnification for Securities Act Liabilities
15. Organization Within One Year Prospectus Summary; Risk Factors; Business;
Certain Transactions
16. Description of Business Business
17. Management's Discussion and Analysis Management's Discussion and
Analysis
18. Description of Property Description of Property
19. Certain Relations and Related Certain Transactions
Transactions
20. Market for Common Equity and Related Outside Front Cover Of Prospectus;
Stockholder Matters Description of Securities; Risk Factors
21. Executive Compensation Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements With Change in Accountants
Accountants on Accounting and Financial
Disclosure
TWO DOG NET, INC.
[ GRAPHIC OMITTED ]
2,000,000 Shares
common stock
All of the 2,000,000 shares of common stock offered by this Prospectus
are being sold directly by Two Dog Net, Inc. ("TDN" or the "Company"). Prior to
this offering, there has been no public market for the Company's common stock;
therefore, the public offering price has been determined by the Company. The
common stock has been submitted for approval on the NASDAQ National Market under
the symbol "DNET." See "SHARES ELIGIBLE FOR FUTURE RESALE."
This offering is being made directly by the Company for not more than
2,000,000 shares (the "maximum" amount). The minimum number of shares to be sold
in this offering is 700,000 shares. This offering will be terminated upon the
earlier of: the sale of the maximum amount, twelve months after the date of this
Prospectus or the date on which the Company decides to close the offering. A
minimum purchase of 100 shares is required. Until the minimum offering amount is
reached, funds will be held in an escrow account. See "PLAN OF DISTRIBUTION."
The common stock offered hereby involves a high degree of risk.
See "RISK FACTORS" beginning on Page 7.
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.
Price to Public Proceeds to
Company (1)
Per Share $10.00 $10.00
Total minimum (700,000 shares) $7,000,000 $7,000,000
Total maximum (2,000,000 shares) $20,000,000 $20,000,000
(1) Before deducting estimated expenses of $186,000 payable by the
Company, including registration fees, escrow agent fees, costs of printing,
copying and postage and other offering costs, in addition to legal and
accounting fees.
The date of this Prospectus is , 1999.
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such information and representations must
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 any of
the securities offered hereby to any person in any jurisdiction in which such
offer or solicitation is unlawful. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information contained herein is correct as of any date subsequent to
the date hereof.
The securities are only being offered to persons in those states where
these securities have been registered or qualified. This does not constitute an
offer to sell securities in any state or jurisdiction in which such registration
or qualification has not been obtained. Such registrations or qualifications do
not constitute endorsement or approval by any state securities commission, nor
has any such commission passed upon the accuracy or completeness of this
offering statement or any other selling literature.
No action has been or will be taken by the Company or the Selling
Shareholders that would permit a public offering of the common stock or
possession or distribution of this Prospectus in any jurisdiction where such
action is required, other than in the United States. Persons into whose
possession this Prospectus comes are required by the Company to inform
themselves about and to observe any restrictions as to the offering of the
common stock and the distribution of this Prospectus
Until, 1999 (90 days after the date of this Prospectus) all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
--------------------------
The Company has registered various Internet domain names, including the
following: www.socksurf.com, www.safesock.com, www.sockwatch.com,
www.twodog.net, www.safezone technology.com, www.children's internet.net & .com.
The Company has applied for registration of various trademarks, including the
following: SafeZone Technology, SafeZone, TwoDogNet(TM) and The Children's
Internet. This Prospectus also includes product names and other trade names and
trademarks of the Company and other organizations.
--------------------------
AVAILABLE INFORMATION
The Company became subject to the informational filing requirements of
the Securities Exchange Act of 1934, as amended ("Exchange Act") for its current
fiscal year. Upon completion of this offering, the Company will register under
the Exchange Act and will file required annual and quarterly reports.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by an independent public accounting firm
after the end of its fiscal year. The Company's fiscal year ends on December 31.
In addition, the Company will send shareholders quarterly reports with unaudited
financial information for the first three quarters of each fiscal year.
This Prospectus is available in an electronic format. Upon appropriate
request from a resident of those states in which this offering may lawfully be
made, the Company will transmit promptly, without charge, a paper copy of this
Prospectus.
The Company's corporate offices are located at 337 Preston Court,
Livermore, CA 94550. The Company's telephone number is (925) 447-0226. The
Company's facsimile number is (925) 447-5567. The Company's E-mail address is
sholeh@twodognet.com, and its Web site is http://www.twodognet.com. A copy of
the Prospectus and Share Purchase Agreement is available at the Company's
Website. Information contained in the Company's Website should not be deemed to
be part of the Prospectus.
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should be read
in conjunction with the more detailed information and Financial Statements,
including Notes, appearing elsewhere in this Prospectus. See "RISK FACTORS" for
a discussion of certain risks associated with an investment in the common stock.
Unless otherwise indicated, the information in this Prospectus gives retroactive
effect to a 1-for-40 reverse stock split of its shares of common stock effected
on March 15, 1996 as part of the Company's reorganization prior to this
offering. See "SHARES ELIGIBLE FOR FUTURE RESALE."
The Company
Two Dog Net, Inc. ("TDN" or the "Company") proposes to provide site
content and navigation tools designed especially for children and families to
access the Internet in a safe environment that emphasizes educating children and
developing their Internet navigation skills. As part of its system development
process, the Company has operated as a local Internet Service Provider ("ISP")
since 1997 under the name "The Socket." This has enabled the Company to develop
and test the user interface for the two primary aspects of the system: the Web
service's content areas that allows users to search a wide range of topics while
teaching Web navigation skills within the proprietary The Children's
Internet(TM) environment, and the search engine ("SafeZone Technology") that
allows users to perform direct searches only to the pre-approved sites on the
Internet. If an individual site is not pre-approved, the site is not accessible
to the user.
The Company's initial primary market will be families with children
ranging from 3 years to 14 years of age. The SafeZone Technology will also
provide users with tools for customizing the scope of Internet access for each
family member as well as tools for safely navigating the Internet. Management
believes the Web service and its related technologies will be the focus of its
future operations and provide the primary source of future revenues and the ISP
segment will have a negligible impact on future financial results.
Strategy
The Company's objective is to become the premier gateway or portal to
the Internet with an emphasis on children's issues. To accomplish this, the
Company's strategy is to offer a unique and engaging on-line experience through
its Web service, named TwoDogNet(TM), which is designed to provide a dynamic
environment focused on educating children through providing entertaining
activities, creating a platform for developing effective Internet navigation
skills and providing the portal from TwoDogNet(TM) to pre-approved Internet
sites.
Provide a Safe Internet Experience
In addition to the content provided by the TwoDogNet(TM) environment,
the user can use the portal to visit pre-approved sites available from the
Internet that will be carefully chosen by an advisory board of educators using
criteria that emphasizes educational and age-appropriate content. However, the
system is not limited to these pre-approved sites. It is also designed to allow
authorized users, e.g. parents, to add sites from the Internet-at-large to the
sites available to his or her family, as well as to remove any of the
pre-approved sites currently accessible through the system. Such modifications
will be user-specific, i.e. no other subscriber will be affected by any other
subscriber's customized changes.
Provide a Rich and Dynamic Environment
The Company's strategy for attracting new subscribers and retaining
existing ones is to provide a dynamic environment that continually enhances the
users experience. A key aspect of this strategy will be to deliver rich content
and search capabilities coupled with fast download times. The Company believes
that all users, and children in particular, will stay interested in the content
matter and search results and therefore spend more time in the environment if
download times are perceived as fast and responsive. The time users spend on the
system will directly impact the value of its "real estate", i.e. the areas of
the environment where sponsors and advertisers are presented.
3
Rich and entertaining content often involves incorporating multi-media
files within Web pages. However, these features typically increase download
times as compared to text pages or simple graphics. To obtain faster download
times, the Company will provide new content to its subscribers on a periodic
basis via CD-ROM. The CD-ROM will interface with the TwoDogNet(TM) Web
environment, enabling users to enjoy an enriched multi-media experience that
includes new original content such as games and instructional content with
audio, video and animation.
Promote Product Awareness
The Company's marketing plan will invest heavily on creating product
awareness in order to build a large user base. In addition to the subscription
revenue generated, the number of users and the growth rate of the user base,
along with the user time spent on the system, are the key elements in
determining the value of the advertising space on the system's Web pages.
Accordingly, the Company plans to pursue an aggressive marketing strategy to
continuously promote awareness of the TwoDogNet(TM) Web environment. See
"BUSINESS" -- "MARKETING AND SALES."
Provide Secure and Dependable Technology Infrastructure
To help insure the dependability of the Company's Web environment to
its users and advertisers, the Company plans to provide a secure hardware
infrastructure with a capacity level to meet the demands of, and accommodate the
growth in, its user base. To accomplish this, the Company intends to install its
system on Digital Equipment Corporation's ("DEC") 8400 clustered system. GST
Telecommunications, Inc. ("GST") will provide the telecommunication connections
to the Internet and Pacific Bell will be available as a backup provider.
Business Development
By offering a high quality Web environment that focuses on children's
safe access to the Internet, TDN initially seeks to generate revenues from three
primary sources. These include annual subscriptions from users, corporate
sponsorships that integrate the sponsor into the user experience on
TwoDogNet(TM), and advertising revenues from the sale of ad placements on
TwoDogNet(TM). In addition, the Company will seek to establish and build its
brand names, and the Company's future plans include the marketing and
merchandising of TwoDogNet(TM) branded products based on its proprietary
characters. In addition, the Company intends to conduct E-commerce on
TwoDogNet(TM) to market and merchandise third party products.
The Company believes that the SafeZone Technology can also be adapted
for use by commercial entities and government agencies concerned about workplace
productivity.
Leveraging Strategic Alliances
The Company has entered into a long term contractual agreement with a
full service advertising agency, Spunky Productions, LLC ("SPL"), which is
working with the Company in providing the creative development of TwoDogNet(TM).
The employees and creative staff of SPL will become employees of the Company in
the 2nd quarter of this year. See, "BUSINESS--MARKETING AND SALES."
4
THE OFFERING
common stock Offered by the Company................. 2,000,000 shares (maximum)
common stock Outstanding Prior to the Offering................14,866,919 shares
Use of Proceeds................................. Proceeds from the sale of the
shares will be used to
purchase capital equipment,
increase staffing for
operation and administration,
implement the Company's
marketing plan, expand its
product development efforts
and provide general operating
capital. See "USE OF PROCEEDS."
5
SUMMARY FINANCIAL DATA
The summary financial data for the years ended December 31, 1996 and
1997 have been derived from the audited Financial Statements of the Company. The
summary financial data for the nine month periods ended September 30, 1997 and
1998 have been derived from unaudited interim financial statements of the
Company contained elsewhere herein and reflect, in management's opinion, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for these periods. Results of
operations for any interim period are not necessarily indicative of results to
be expected for the full fiscal year. The selected financial data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes to the
financial statements, each appearing elsewhere in this Prospectus.
Year Ended Year Ended Nine months Ended
December 31, December 31, September 30,
------------ ------------ -------------
(unaudited)
1996 1997 1997 1998
--------- --------- --------- ---------
Statements of Income Data:
Revenue $ 0 $ 50,406 $ 28,310 $ 139,110
Cost of Revenue 42,977 254,010 202,925 175,906
--------- --------- --------- ---------
Gross profit (loss) (42,977) (203,604) (174,615) (36,796)
Operating Expenses 498,375 707,142 338,313 445,190
--------- --------- --------- ---------
Operating Income (loss) (541,352) (910,746) (512,928) 481,986)
Other Income (Expenses) 5,357 14,904 12,572 29,649
--------- --------- --------- ---------
Net income (loss) $(535,995) $(895,842) $(500,356) $(452,337)
========= ========= ========= =========
Loss per share $ (.31) $ (.06) (.04) (.03)
========= ========= ========= =========
December 31, 1997 September 30, 1998
----------------- ------------------
Balance Sheet Data: (Unaudited)
Working Capital $ 340,889 $ 677,374
Total Assets 855,143 988,217
Stockholders' Equity 644,189 927,664
6
RISK FACTORS
An investment in the shares being offered by this Prospectus involves a
high degree of risk and should only be made by persons who can afford to risk
their entire investment. Prospective investors should consider carefully the
following risk factors, in addition to other information concerning the Company
and its business contained in this Prospectus, before purchasing shares.
Extremely Limited Operating History
The Company began operations as an Internet Service Provider ("ISP") in
1997. Since 1996, the Company has also been developing software and related
system technology to develop and market server and integrated applications to
allow access to the Internet within a safe environment for its subscribers.
Management believes the ISP segment of the Company's business will have a
relatively negligible impact on the Company's future operations and financial
results. Accordingly, the Company has no operating history upon which to
evaluate its future potential. Specifically, the Company's limited operating
history as an ISP does not provide a basis to evaluate its sources of future
revenues from Web-based advertising, user subscriptions and corporate
sponsorships, or its future expenses and capital requirements.
The Company's success is subject to the risks, expenses and
uncertainties frequently encountered by companies in the new and rapidly
changing markets for Internet products and services, including Web-based
advertising. These risks include, but are not limited to, the failure to
complete the initial development of or to extend the TwoDogNet(TM) brands, the
failure to integrate the software and hardware components comprising the overall
system, the failure to develop new revenue generating media properties, the
inability of the company to attract subscribers or to increase levels of user
traffic on the TwoDog.Net properties, the development or acquisition of equal or
superior services or products by competitors, the failure of the market to adopt
the Internet as an advertising medium, the failure to sell a sufficient volume
of Web-based advertising due to an inability to effectively staff and manage an
internal or outsourced sales force, potential reductions in Web-based
advertising due to increased competition from other advertising sources, a
restructuring of the Web-based advertising market, the failure of the Company to
generate sufficient revenues from corporate sponsorships within the
TwoDogNet(TM) properties, the failure of the Company to successfully develop and
offer personalized Web-based services to consumers without errors or
interruptions in service, the inability to expand its internal financial,
administrative and product development systems to accommodate the Company's
potential growth, and the inability to attract, retain and motivate qualified
personnel. There can be no assurance that the Company will be successful in
addressing such risks.
Accumulated Deficit
As of September 30, 1998, the Company had an accumulated deficit of
$2,991,217. The limited operating history of the Company and the uncertain
nature of the markets addressed by the Company make the prediction of future
results of operations difficult or impossible. The Company currently expects to
significantly increase its operating expenses related to expanding its sales and
marketing operations, to continue to develop and extend the TwoDogNet(TM) brand,
to fund greater levels of product development and to develop and commercialize
additional media properties. As a result of these factors, there is no assurance
that the Company will not incur significant losses on a quarterly and annual
basis in the future. Since January 1996 through September 30, 1998, the Company
has funded its operations through a private placement of its common stock, which
has raised approximately $4.4 million. The private placement shall continue
until the filing date of this Prospectus. Recent sales of the Company's stock
through the private placement have been at a price of $3.25 per share. The
Company's independent certified public accountants have included an explanatory
paragraph in their report stating these factors, among others, 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 to the Financial
Statements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," the Financial Statements, the related Notes to the
financial statments and other financial information appearing elsewhere in this
Prospectus.
7
Fluctuations in Quarterly Operating Results; Anticipated Losses
As a result of the Company's limited operating history, the Company
does not have any historical financial data upon which to project future levels
of expenses accurately. The Company expects to derive its revenues from
subscriptions, sponsorships, the sale of advertisements and commissions from the
sale of third party products, which are difficult to forecast accurately.
Accordingly, future quarterly results may differ significantly from management's
projections. The Company's planned expense levels will be based in part on its
expectations concerning future revenue and, to a large extent, depend upon the
success of the Company's marketing efforts to attract subscribers. The Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. In such a case, any significant revenue shortfall
in relation to the Company's expectations would have a material adverse effect
on the Company's business, operating results, and financial condition. In
addition, the Company plans to continue to significantly increase its operating
expenses related to expanding its sales and marketing operations, to continue to
develop and extend the TwoDogNet(TM) brand, to fund greater levels of product
development, and to develop and commercialize additional media properties. To
the extent such expenses precede or are not subsequently followed by increased
revenues, the Company's business, operating results, and financial condition
will be materially and adversely affected. In view of the rapidly evolving
nature of the Company's business and its lack of operating history, the Company
believes that its past operating results are not meaningful and should not be
relied upon as an indication of future performance. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
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, the addition or loss of advertisers, the level
of user traffic on TwoDogNet(TM), the advertising budgeting cycles of individual
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 for
Web-based advertising, the timing of initial set-up, engineering or development
fees that may be paid in connection with larger advertising and distribution
arrangements, technical difficulties with respect to the development or
operation of TwoDogNet(TM), incurrence of costs relating to future acquisitions,
general economic conditions and economic conditions specific to the Internet and
online media. As a strategic response to changes in the competitive environment,
the Company may from time to time make certain pricing, service or marketing
decisions, or business combinations that could have a material adverse effect on
the Company's business, operating results and financial condition. The Company
expects to experience seasonality in its business. Seasonality may affect the
amount of customer advertising dollars placed with the Company in the first and
third calendar quarters as advertisers historically spend less during these
quarters.
Dependence on Continued Growth in the Use of the Internet; Technological Change
The Company's future success is substantially dependent upon continued
growth in the use of the Internet and the Web in order to support the sale of
advertising on the Company's online media properties. There can be no assurance
that communication or commerce over the Internet will become more widespread or
that extensive content will continue to be provided over the Internet. The
Internet may not prove to be a viable commercial marketplace for a number of
reasons, including lack of acceptable security technologies, potentially
inadequate development of the necessary infrastructure, such as a reliable
network backbone, or timely development and commercialization of performance
improvements, including high speed modems. 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 or that the performance or reliability of the Web will not be adversely
affected by this continued growth. 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, operating results, and financial condition
would be materially and adversely affected. 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 expected to introduce
new Internet products and services in the near future. Failure of the Company to
effectively adapt to technological developments could have a material
8
adverse affect the Company's business, operating results, and financial
condition.
Risk of Capacity Constraints and Systems Failures
The Company will be dependent on its ability to effectively serve a
high volume of use of its online media properties. Accordingly, the performance
of the Company's online media properties is critical to the Company's
reputation, its ability to attract advertisers to the Company's Web sites, and
to achieve market acceptance of these products and media properties. Any system
failure that causes an interruption or an increase in response time of the
Company's products and media properties could result in less traffic to the
Company's Web sites and, if sustained or repeated, could reduce the
attractiveness of the Company's products and media properties to advertisers and
subscribers. An increase in the volume of queries conducted through the
Company's products and media properties could strain the capacity of the
software or hardware deployed by the Company, which could lead to slower
response time or system failures, and adversely affect the online exposure
expected by advertisers and thus the Company's advertising revenues. In
addition, as the number of Web pages and users increase, there can be no
assurance that the Company's products and media properties and infrastructure
will be able to scale accordingly. The Company also face technical challenges
associated with higher levels of personalization and localization of content
delivered to users of its services, which adds strain to the Company's
development and operational resources. The Company is also dependent upon Web
browsers and Internet and online service providers for access to its products
and media properties. In particular, private third party providers such as GST
Telecom provide the Company's principal Internet connection. Any disruption in
the Internet access provided by third-party providers or any failure of
third-party providers to handle higher volumes of user traffic could have a
material adverse effect on the Company's business, operating results, and
financial condition. Furthermore, the Company is dependent on hardware suppliers
for prompt delivery, installation, and service of servers and other equipment
used to deliver the Company's products and services. Failure on the part of
these third party providers to timely deliver, install or integrate the
Company's hardware could have a material, adverse effect on the Company's
business, operating results and financial condition.
The Company's operations are susceptible to outages due to fire,
floods, power loss, telecommunications failures, break-ins, and similar events.
In addition, substantially all of the Company's network infrastructure is
located in Northern California, an area susceptible to earthquakes, which also
could cause system outages or failures. The Company does not presently have
multiple site capacity in the event of any such occurrence. Despite the planned
implementation of network security measures by the Company, its servers may be
vulnerable to computer viruses, break-ins, and similar disruptions from
unauthorized tampering with the Company's computer systems. The occurrence of
any of these events could result in interruptions, delays, or cessations in
service to its users, which could have a material adverse effect on the
Company's business, operating results, and financial condition.
Year 2000 Compliance
There are issues associated with the programming code in existing
computer systems as the year 2000 approaches. The "Year 2000 problem" is
pervasive and complex, as virtually every computer operation will be affected in
some way by the rollover of the two digit year value to 00. The issue is whether
computer systems will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Company believes
that its internal ISP software and hardware systems will function properly with
respect to dates in the year 2000, however there can be no assurance in this
regard until such systems are operational in the year 2000 and thereafter. The
Company plans to purchase a significant amount of equipment for its planned Web
environment and management information systems and its policy will require that
all equipment and software to be purchased be Year 2000 compliant.
The Company is in the process of contacting all of its significant
suppliers to determine the extent to which the Company's interface with these
suppliers make it vulnerable to any third party failure to make their own
systems Year 2000 compliant. At this time, the Company can not estimate the
effect, if any, that non-compliant systems at these entities will have on the
Company's business, operating results and financial condition. In the event of a
failure of such non-compliant systems, the Company could incur unanticipated
expenses to remedy any problems, which could have
9
a material adverse effect on the Company's business, operating results and
financial condition. Current users of the Internet with computers that are not
year 2000 compliant, may experience system failures and therefore be unable to
gain access to the Internet in the Year 2000. As a result, the decreased
Internet usage could have a material adverse effect on the Company's advertising
revenues and consequently its business, operating results and financial
condition. In addition, the Company will rely heavily on revenues from
advertisers and sponsors. The purchasing patterns of potential advertisers and
sponsors may be affected by Year 2000 issues as companies expend significant
resources to correct their current systems for Year 2000 compliance. These
expenditures may result in reduced funds available for Internet advertising,
which could have a material adverse effect on the Company's business, operating
results and financial condition. The Company has not made any assessment of the
Year 2000 risks associated with its third party suppliers or potential
advertisers and has not made any contingency plans to address such risks.
Dependence on Key Personnel; Need For Additional Staff
The Company's performance is substantially dependent on the performance
of its senior management and key technical personnel, including Nasser Hamedani,
Sholeh Hamedani, Larry Wheeler and Tyler Wheeler. In particular, the Company's
success depends substantially on the continued efforts of its senior management
team. The Company does not carry key person life insurance on any of its senior
management personnel. The loss of the services of any of its executive officers
or other key employees could have a material adverse effect on the business,
operating results, and financial condition of the Company.
The Company currently has nine employees, and currently utilizes the
services of SPN, whose staff of six will become employees of the Company in the
2nd quarter of this year. Prior to forming TDN, Nasser Hamedani and Sholeh
Hamedani had not run an Internet-based business. Their experience is in sales,
marketing and production. The Company's success will also depend heavily upon
the Internet, marketing and content development experience of SPN's staff. As a
result, the Company's future success will depend heavily on its ability to
immediately attract additional employees to sufficiently staff key functional
areas supporting the business, including but not limited to the areas of
technology and development, customer support, finance and administration and
operations. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in achieving a staffing plan in
all of the key functional areas of the Company within a time frame that is
consistent with its overall business plan. In addition, there is no assurance
that the Company will be able to retain its key managerial and technical
employees or that it will be able to attract and retain additional highly
qualified technical and managerial personnel in the future. The inability to
attract and retain the necessary technical and managerial personnel could have a
material and adverse effect upon the Company's business, operating results, and
financial condition.
Ability to Manage Growth
The Company anticipates that significant expansion of its operations
will continue to be required in order to address potential market opportunities.
The Company expects to increase its personnel significantly in the near future.
The Company's anticipated growth may place a significant strain on its
managerial, operational and financial resources and systems. To manage its
growth, the Company must implement, improve and effectively utilize its
operational, management, marketing and financial systems and train and manage
its employees. Many of the Company's senior management will be new to the
Company. These individuals may have not previously worked together and will have
to transition into integrating as a management team. There can be no assurance
that the Company will be able to manage effectively the expansion of its
operations or that the Company's current or future personnel, systems,
procedures and controls will be adequate to support the Company's operations.
Any failure of management to effectively manage the Company's growth could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL
STAFF."
10
Security Risks
Despite the implementation of security measures, the Company's networks
may be vulnerable to unauthorized access, computer viruses and other disruptive
problems. A party who is able to circumvent security measures could
misappropriate proprietary information or cause interruptions in the Company's
Internet operations. ISPs and Operating System Providers have in the past
experienced, and may in the future experience, interruptions in service as a
result of the accidental or intentional actions of Internet users, current and
former employees or others. The Company may be required to expend significant
capital or other resources to protect against the threat of security breaches or
to alleviate problems caused by such breaches. Although the Company intends to
continue to implement industry-standard security measures, there can be no
assurance that measures implemented by the Company will not be circumvented in
the future. Eliminating computer viruses and alleviating other security problems
may require interruptions, delays or cessation of service to users accessing the
Company's Websites, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
Competition
The market for Internet products and services is highly competitive and
competition is expected to continue to increase significantly. There are no
substantial barriers to entry in these markets, and the Company expects that
competition will continue to intensify. Although the Company currently believes
that the diverse segments of the Internet market will provide opportunities for
more than one supplier of products and services similar to those of the Company,
it is possible that a single supplier may dominate one or more market segments.
The Company will compete with many other providers of security
software, information and community services. Many companies offer competitive
products or services addressing filtering of Web content, including, among
others, Net Nanny (Net Nanny Software, Inc.), Cyber Patrol (The Learning
Company), Cyber Snoop (Pearl Software, Inc.), Cyber Sentinel (Security Software
Systems, Inc.), Cybersitter 97 (Solid Oak Software, Inc.), SurfWatch (SurfWatch
Software, Inc.), WebChaperone (WebCo International, Inc.) EdView Channel Lock
and EdViewsmart Zone (EdView, Inc.) and X-Stop (Log-On Data, Inc.). In addition,
the Company will compete with online services such as Yahooligans! (Yahoo!), a
Web navigator designed for children in grades K-12, America Online ("AOL"),
which offers parental control options for Web access and Disney's Blast Online,
which also offers child-oriented Web navigation. These companies already have an
established market presence, and, because the Company has not introduced its
product, are ahead of the Company in gaining market share.
Also, entities that sponsor or maintain high-traffic Web sites or that
provide an initial point of entry for Internet users, such as the Regional Bell
Operating Companies or Commercial Online Services such as AOL, currently offer
and could further develop, acquire or license Internet search and navigation
functions that could compete with those offered by the Company.
In the event that the Company extends its business internationally, the
Company may also face intense competition in international markets, including
competition from U.S.-based competitors as well as media and online companies
that are already well established in those foreign markets. Many of the
Company's existing competitors, as well as a number of potential new
competitors, have significantly greater financial, technical, marketing and
distribution resources. In addition, providers of Internet tools and services
may be acquired by, receive investments from, or enter into other commercial
relationships with larger, well-established and well-financed companies, such as
Microsoft or AOL. Greater competition resulting from such relationships could
have a material adverse effect on the Company's business, operating results and
financial condition. See, "BUSINESS -- INTERNET SECURITY."
The Company will also compete with online services, other Web site
operators and advertising networks, as well as traditional offline media such as
television, radio and print for a share of advertisers' total advertising
budgets. The Company believes that the number of companies selling Web-based
advertising and the available inventory of advertising space have increased
substantially during recent periods. Accordingly, the Company may face increased
pricing pressure for the sale of advertisements and reductions in the Company's
advertising revenues.
The Company believes that the principal competitive factors in its
anticipated markets are brand recognition,
11
ease of use, comprehensiveness of available content, customization by the
consumer, quality and responsiveness of search results, the availability of
high-quality, focused value added services, required technology to offer access
to end users with fewer interruptions, and, with respect to advertisers and
sponsors, the number of users, duration and frequency of visits and user
demographics. Competition among current and future suppliers of Internet
navigational and informational services, high-traffic Websites and ISPs, as well
as competition with other media for advertising placements, could result in
significant price competition and reductions in advertising revenues. There can
be no assurance that the Company will be able to compete successfully or that
the competitive pressures faced by the Company will not have a material adverse
effect on the Company's business, operating results, and financial condition.
Developing Market; Lack of Proven Acceptance of the Company's Products and Media
Properties
The markets for the Company's products and media properties have only
recently begun to develop, are rapidly evolving, and are characterized by an
increasing number of market entrants who have introduced or developed content
filtering products and child-oriented services for use on the Internet and the
Web. As is typical in the case of a new and rapidly evolving industry, demand
and market acceptance for recently introduced products and services are subject
to a high level of uncertainty and risk. Because the market for the Company's
products and media properties is new and evolving, it is difficult to predict
the future growth rate, if any, and size of this market. There can be no
assurance either that the market for the Company's products and media properties
will continue to develop or that demand for the Company's products or media
properties will be sustainable. If the market develops more slowly than expected
or becomes saturated with competitors, or if the Company's products and media
properties do not sustain market acceptance, the Company's business, operating
results and financial condition will be materially and adversely affected.
Risks Associated With Brand Development
The Company believes that establishing and maintaining the
TwoDogNet(TM) brand is a critical aspect of its efforts to attract and expand
its audience and that the importance of brand recognition will increase due to
the growing number of Internet sites and the relatively low barriers to entry.
Promotion and enhancement of the TwoDogNet(TM) brand will depend largely on the
Company's success in providing high-quality products and services, which success
cannot be assured. In order to attract and retain Internet users and to promote
and maintain the TwoDogNet(TM) brand in response to competitive pressures, the
Company may find it necessary to increase substantially its financial commitment
to creating and maintaining a distinct brand loyalty among consumers. In
addition, the increased availability of greater bandwidth through sources such
as cable systems may negatively impact the advantages offered by the InterROM
CD. If the Company is unable to provide high-quality products and services or
otherwise fails to promote and maintain its brand, or if the Company incurs
excessive expenses in an attempt to improve its products and services or promote
and maintain its brand, the Company's business, operating results, and financial
condition will be materially and adversely affected.
Reliance on Advertising Revenues and Uncertain Adoption of the Web as an
Advertising Medium
The Company will derive the majority of its revenues from the sale of
sponsorships and other forms of advertising on its Web pages. Given the
relatively short time period the Internet has been an accepted advertising
medium, most of the Company's potential advertising customers will have only
limited experience with the Web as an advertising medium, have not devoted a
significant portion of their advertising expenditures to 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. The Company's
ability to generate significant advertising revenues will depend upon, among
other things, advertisers' acceptance of the Web as an effective and sustainable
advertising medium, the development of a large base of users of the Company's
services possessing demographic characteristics attractive to advertisers, and
the ability of the Company to continue to develop and update effective
advertising delivery and measurement systems. No standards have yet been widely
accepted for the measurement of the effectiveness of Web-based advertising, and
there
12
can be no assurance that such standards will develop sufficiently to support
Web-based advertising as a significant advertising medium. In addition, there
can be no assurance that the advertisers will determine that corporate
sponsorships and relationship advertising are effective advertising tools, and
there can be no assurance that the Company will effectively transition to any
other forms of Web-based advertising, should they develop. In addition, there
can be no assurance that the Company's pricing for advertising space and
sponsorships will gain acceptance amongst advertisers.
Certain advertising filter software programs are available that limit
or remove advertising from an Internet user's desktop. Such software, if
generally adopted by users, may have a materially adverse effect upon the
viability of advertising on the Internet.
The Company will track usage on various levels in order to develop and
update its pricing model. The valuations will track the Company's expectations
of the value of sponsorship advertising space on the Website. There also can be
no assurance that the Company's online advertisers will accept the internal and
third-party valuations of its online properties on TwoDogNet(TM). The Company
will rely primarily on the efforts of SPL to sell sponsorships and advertising.
As a result of these factors, there can be no assurance that the Company will
achieve sufficient advertising sales levels or whether the Company will sustain
or increase such advertising sales levels once achieved. Failure to do so will
have a material adverse effect on the Company's business, operating results, and
financial position. See "MARKETING."
Dependence on Continued Personal Computer Sales
The success of the Company is dependent upon the continuing use of PCs, and
especially multimedia PCs, in the consumer and school market. A general decrease
in unit sales of PCs or shift to an alternative means of delivery could
adversely affect the Company's future results of operations.
Trademarks and Proprietary Rights
The Company regards its copyrights, trademarks, trade dress, trade
secrets, and similar intellectual property as critical to its success, and the
Company relies upon trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company pursues the
registration of its trademarks in the United States and internationally, and has
applied for the registration for certain of its trademarks, including
"TwoDogNet(TM)," "SafeZone," "SafeZone Technology," and "The Children's
Internet." The Company has registered the Internet domain names for the various
Web Sites related to its services. Effective trademark, copyright, and trade
secret protection may not be available in every country in which the Company's
products and media properties are distributed or made available through the
Internet. The Company may license elements of its distinctive trademarks, trade
dress, and similar proprietary rights to third parties, including in connection
with branded mirror sites of TwoDogNet(TM), and other media properties and
merchandise that may be controlled operationally by third parties. While the
Company attempts to ensure that the quality of its brand is maintained by such
licensees, no assurances can be given that such licensees will not take actions
that could materially and adversely affect the value of the Company's
proprietary rights or the reputation of its products and media properties,
either of which could have a material adverse effect on the Company's business.
There can be no assurance that the distinctive elements of TwoDogNet(TM) will be
protectible under copyright law or other intellectual property law. Also, there
can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate or that third parties will not infringe or
misappropriate the Company's copyrights, trademarks, trade dress, and similar
proprietary rights. In addition, there can be no assurance that other parties
will not assert infringement claims against the Company.
Many parties are actively developing search, indexing, and related Web
technologies at the present time. The Company believes that such parties have
taken and will continue to take steps to protect these technologies, including
seeking patent protection. As a result, the Company believes that disputes
regarding the ownership of such technologies are likely to arise in the future.
13
Government Regulation & Legal Uncertainties
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, including, but not
limited to, online content, user privacy, taxation, access charges, liability
for third-party activities and jurisdiction. Additionally, it is uncertain as to
how existing laws will be applied by the judiciary to the Internet. The adoption
of new laws or the application of existing laws may decrease the growth in the
use of the Internet, which could in turn decrease the demand for the Company's
services, increase the Company's cost of doing business or otherwise have a
material adverse effect on the Company's business, results of operations and
financial condition. Prohibition and restriction of Internet content could
dampen the growth of Internet use, decrease the acceptance of the Internet asa
communications and commercial medium, expose the Company to liability, and/or
require substantial modification of TwoDogNet(TM), and thereby have a material
adverse effect on the Company's business, results of operations and financial
condition. Internet user privacy has become an issue both in the United States
and abroad. Recently, the Children's Online Privacy Protection Act was signed
into law, which authorizes the Federal Trade Commission (the "FTC") to develop
regulations for the collection of data from children by commercial Web site
operators. The Company is currently undertaking a review of its
information-collection practices. However, the Company cannot predict the exact
form of the regulations that the FTC may adopt. There can be no assurance that
the United States or foreign nations will not adopt additional legislation
purporting to protect such privacy. Any such action could affect the way in
which the Company is allowed to conduct its business, especially those aspects
that involve the collection or use of personal information, and could have a
material adverse effect on the Company's business, results of operations and
financial condition. The tax treatment of the Internet and e-commerce is
currently unsettled. A number of proposals have been made at the federal, state
and local level and by certain foreign governments that could impose taxes on
the sale of goods and services and certain other Internet activities. Recently,
the Internet Tax Information Act was signed into law, placing a three-year
moratorium on new state and local taxes on Internet commerce. However, there can
be no assurance that future laws imposing taxes or other regulations on commerce
over the Internet would not substantially impair the growth of e-commerce and as
a result have a material adverse effect on the Company's business, results of
operations and financial condition. Certain local telephone carriers have
asserted that the growing popularity and use of the Internet has burdened the
existing telecommunications infrastructure, and that many areas with high
Internet use have begun to experience interruptions in telephone service. These
carriers have petitioned the Federal Communications Commission (the "FCC") to
impose access fees on ISPs and OSPs. If such access fees are imposed, the costs
of communicating on the Internet could increase substantially, potentially
slowing the growth in use of the Internet, which could in turn decrease demand
for the Company's services or increase the Company's cost of doing business, and
thus have a material adverse effect on the Company's business, results of
operations and financial condition. Although the Company's server is located in
the State of California, the governments of other states and foreign countries
might attempt to take action against the Company for violations of their laws.
There can be no assurance that violations of such laws will not be alleged or
charged by state or foreign governments and that such laws will not be modified,
or new laws enacted, in the future. Any of the foregoing could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Online content restrictions cover many areas, including but not limited
to, indecent or obscene content and gambling. Several federal and state statutes
prohibit the transmission of certain types of indecent, obscene, or offensive
information and content, including sexually explicit information and content,
over the Internet to certain persons. The constitutionality and the
enforceability of some of these statues is not clear at this time. For example,
in 1997 the Supreme Court of the United States held that selected parts of the
federal Communications Decency Act of 1996 (the "CDA") governing "indecent" and
"patently offensive" content were unconstitutional. Many other provisions of the
CDA, including those relating to "obscenity," however, remain in effect. Prior
to the Supreme Court's decision, a federal district court in New York held that
certain provisions of the New York penal law modeled on the CDA violated the
Constitution. A companion provision of that law, however, was subsequently
upheld. Since the Supreme Court's decision, a federal district court in New
Mexico held that a recently adopted provision of the New Mexico penal law
purporting to make it unlawful to disseminate over the Internet information that
is "harmful to minors" also violated the Constitution. Recently, the Child
Online Protection Act ("COPA")was signed into law, and became effective on
November 20,1998. COPA requires Web sites engaged in the business of the
commercial distribution of material that
14
is deemed to be harmful to minors to restrict their access to such material.
However, COPA exempts from liability telecommunications carriers, ISPs and
companies involved in the transmission, storage, retrieval, hosting, formatting
or translation of third-party communications where such companies do not select
or alter the third-party material. The constitutionality of COPA is currently
being challenged in a federal district court, and the Company cannot predict the
outcome or the effect of such challenges or the effect that COPA may have on the
Company's business. The passage of constitutional "decency" laws, which may
prohibit or limit the distribution of inappropriate material on the Internet,
could adversely affect the necessity for the Company's products and services.
Furthermore, the manner in which existing domestic and foreign laws
(including Directive 95/46/EC of the European Parliament and of the European
Council on the protection of individuals with regard to the processing of
personal data and on the free movement of such data, to become effective in the
individual member states by October 24, 1998), will or may be applied to online
service and Internet access providers is uncertain, as is the effect on the
Company's business given different possible applications.
Liability For Information Services and Commerce-Related Activities
Because materials may be downloaded by the online or Internet services
operated or facilitated by the Company and may be subsequently distributed to
others, there is a potential that claims will be made against the Company for
defamation, negligence, copyright or trademark infringement, personal injury or
other theories based on the nature and content of such materials. Such claims
have been brought, sometimes successfully, against online service providers in
the past. In addition, the Company could be exposed to liability with respect to
the selection of listings that may be accessible through the Company's
TwoDogNet(TM)-branded products and media properties. Such claims might include,
among others, that by providing hypertext links to Web sites operated by third
parties, the Company is liable for copyright or trademark infringement or other
wrongful actions by such third parties through such Web sites. It is also
possible that if any information provided through the Company's services, such
as TwoDogNet(TM), contain errors, third parties could make claims against the
Company for losses incurred in reliance on such information. Even to the extent
such claims do not result in liability to the Company, the Company expects to
incur significant costs in investigating and defending such claims.
Concentration of Stock Ownership
Immediately prior to this offering, present directors, executive
officers, greater than 5% shareholders and their respective affiliates
beneficially owned approximately 82.5% of the outstanding common stock of the
Company. As a result of their ownership, the directors, executive officers,
greater than 5% shareholders and their respective affiliates collectively are
able to control all matters requiring shareholder approval, including the
election of directors and approval of significant corporate transactions. Even
in the event that all the shares offered are sold, present directors, executive
officers, greater than 5% shareholders and their respective affiliates will
beneficially own approximately 72.7% of the outstanding common stock of the
Company. Such concentration of ownership may also have the effect of delaying or
preventing a change in control of the Company.
No Prior Public Market; Possible Volatility of Stock Price
The trading price of the common stock is likely to be highly volatile
and could be subject to wide fluctuations in response to factors such as actual
or anticipated variations in quarterly operating results, announcements of
technological innovations, new sales formats or new products or services by the
Company or its competitors, changes in financial estimates by securities
analysts, general economic conditions, conditions or trends in the Internet and
online commerce industries, changes in the market valuations of other Internet,
online service or retail companies, announcements by the Company of significant
acquisitions, strategic partnerships, joint ventures or capital commitments,
additions or departures of key personnel, sales of common stock and other events
or factors, many of which are beyond the Company's ability to control. Because
there is no established market for the Company's securities, investors may have
difficulty selling their shares. Although the Company intends to apply for
listing on the Nasdaq National Market System ("Nasdaq NMS"), the Company may not
qualify for listing if only the minimum offering amount is raised. Failure to
obtain a Nasdaq NMS listing will cause investors to experience limited
liquidity.
15
In addition, the stock market in general, and the Nasdaq NMS and the market for
Internet-related and technology companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of such companies. The trading prices of many
technology companies' stocks are at or near historical highs and reflect
multiples of earnings and revenues substantially above historical levels. There
can be no assurance that these trading prices and multiples will be sustained.
These broad market and industry factors may materially and adversely affect the
market price of the Common Stock, regardless of the Company's operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class-action litigation has often been
instituted against such company. Such litigation, if instituted, could result in
substantial costs and a diversion of management's attention and resources, which
would have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
"Penny" Stock Regulation of Broker-Dealer Sales of Company Securities
The Company intends to list its common stock on the Nasdaq NMS upon
meeting the requirements for a Nasdaq NMS listing, if ever. However, upon
completion of the minimum offering, the Company may not meet the requirements
for a Nasdaq NMS listing. Until the Company obtains a listing on Nasdaq NMS, if
ever, the Company's securities may be covered by a Rule 15g-9 under the
Securities Exchange Act of 1934 that imposes additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and institutional accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse).
For transactions covered by the rule, the broker-dealer must furnish to
all investors in penny stocks, a risk disclosure document required by Rule 15g-9
of the Securities Exchange Act of 1934, make a special suitability determination
of the purchaser and have received the purchaser's written agreement to the
transaction prior to the sale. In order to approve a person's account for
transactions in penny stock, the broker or dealer must (i) obtain information
concerning the person's financial situation, investment experience and
investment objectives; (ii) reasonably determine, based on the information
required by paragraph (i) that transactions in penny stock are suitable for the
person and that the person has sufficient knowledge and experience in financial
matters that the person reasonably may be expected to be capable of evaluating
the rights of transactions in penny stock; and (iii) deliver to the person a
written statement setting forth the basis on which the broker or dealer made the
determination required by paragraph (ii) in this section, stating in a
highlighted format that it is unlawful for the broker or dealer to effect a
transaction in a designated security subject to the provisions of paragraph (ii)
of this section unless the broker or dealer has received, prior to the
transaction, a written agreement to the transaction from the person; and stating
in a highlighted format immediately preceding the customer signature line that
the broker or dealer is required to provide the person with the written
statement and the person should not sign and return the written statement to the
broker or dealer if it does not accurately reflect the person's financial
situation, investment experience and investment objectives and obtain from the
person a manually signed and dated copy of the written statement.
A penny stock means any equity security other than a security (i)
registered, or approved for registration upon notice of issuance on a national
securities exchange that makes transaction reports available pursuant to 17 CFR
11Aa3-1 (ii) authorized or approved for authorization upon notice of issuance,
for quotation on the Nasdaq NMS; (iii) that has a price of five dollars or more
or . . . . (iv) whose issuer has net tangible assets in excess of $2,000,000
demonstrated by financial statements dated less than fifteen months previously
that the broker or dealer has reviewed and has a reasonable basis to believe are
true and complete in relation to the date of the transaction with the person.
Consequently, the rule may affect the ability of broker-dealers to sell the
Company's securities and also may affect the ability of purchasers in this
Offering to sell their shares in the secondary market. See "NO PRIOR PUBLIC
MARKET; POSSIBLE VOLATILITY OF STOCK PRICE."
Shares Eligible For Future Sale
Sales of substantial amounts of the Company's common stock in the
public market after this offering could adversely affect prevailing market
prices for the common stock. The 2,000,000 shares of common stock offered
16
hereby will be freely tradeable without restriction in the public market. A
significant number of shares will be freely tradeable when restrictions on
resale under Rule 144 expire. Taking into account restrictions imposed by the
Securities Act of 1933, as amended (the "Securities Act"), rules promulgated by
the Securities and Exchange Commission (the "Commission") thereunder, could
adversely affect prevailing market prices for the common stock or the future
ability of the Company to raise capital through an offering of equity
securities.
In addition, the Company intends to file a registration statement on
Form S-8 under the Securities Act after the effective date of this Prospectus to
register an undetermined number of shares of common stock reserved for issuance
to employees. See "SHARES ELIGIBLE FOR FUTURE SALE."
Dilution
Investors participating in this Offering will incur immediate and
substantial dilution. See "DILUTION."
Arbitrary Offering Price
The price of the common stock has not been determined by any
independent financial evaluation, market mechanism or by the Company's
accountants, Marc Lumer & Company and is therefore, to a large extent,
arbitrary. Marc Lumer & Company has not reviewed management's valuation, and
therefore expresses no opinion as to the fairness of the offering price as
determined by the Company. As a result, the value of the common stock, as
determined by management, may not reflect the value perceived by the market.
There can be no assurance that the shares offered hereby are worth the price for
which they are offered or that they have any market value whatsoever.
Need for Additional Financing; Uncertainty of Additional Financing
The Company currently anticipates that the net proceeds of the
offering, if the maximum amount is raised, will be sufficient to meet its
anticipated needs for working capital and capital expenditures for at least the
next 12 months. If only the minimum amount is raised, the Company may need to
raise additional capital to further fund its marketing efforts, product
development and to provide additional working capital. In the event the net
proceeds from this Offering are significantly less than the maximum proceeds of
$20,000,000 less expenses associated with this Offering, the Company will have
to lower its planned expenditures, e.g. the Company will purchase a server that
will accommodate a lower volume of Internet users, and the timing of such
expenditures which will have a materially adverse effect on its business,
operating results and financial condition. Additionally, the Company may need to
raise additional funds in the future in order to fund more aggressive brand
promotions and more rapid expansion, to develop newer or enhanced services, to
respond to competitive pressures or to acquire complementary technologies or
services. The inability to raise more than the minimum offering amount could
adversely affect the Company's ability to achieve its business plan. If
additional funds are raised through the issuance of equity or convertible debt
securities, the percentage ownership of the stockholders of the Company will be
reduced, stockholders may experience additional dilution and such securities may
have rights, preferences or privileges senior to those of the rights of the
Company's common stock. There can be no assurance that additional financing will
be available on terms favorable to the Company, or at all. If adequate funds are
not available or not available on acceptable terms, the Company may not be able
to fund its expansion, promote its brand names as the Company desires, develop
or enhance services or respond to competitive pressures. Any such inability
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Dividend Policy
The Company has never paid cash dividends on its common stock. The
Company currently anticipates that it will retain all of its future earnings for
use in the expansion and operation of its business and does not anticipate
paying any cash dividends in the foreseeable future.
17
USE OF PROCEEDS
The net proceeds available to the Company from the sale of the shares
in this Offering are estimated to be approximately $7,000,000 if the minimum is
sold, and $20,000,000 if the maximum is sold, before deducting other offering
expenses (estimated to be $186,000). The Company expects to use the net proceeds
for the purposes outlined below. If the Company raises less than the maximum
amount of this Offering, it intends to prioritize expenditures as necessary to
achieve its stated business objectives. For example, if only the minimum
offering amount is raised, the Company will acquire a server from Digital
Equipment Corporation at a cost of approximately $2,000,000, that will
accommodate a lower volume of Internet users.
Minumum Maximum
------- -------
1. Acquisition of server and peripheral hardware $ 2,000,000 28.6% $ 3,000,000 15.0%
2. Marketing and advertising 3,500,000 50.0% 8,540,000 42.7%
3. Software and product development 0 0.0% 2,800,000 14.0%
4. Working capital and general corporate purposes 1,500,000 21.4% 5,660,000 28.3%
----------- ----- ---------- ------
$ 7,000,000 100.0% $20,000,000 100.0%
=========== ===== =========== ======
Management does not anticipate changes in the proposed allocation of
estimated net proceeds of this Offering, but reserves the right to make changes
if management believes those changes are in the best interests of the Company.
Management does not foresee reallocating any significant portion of the proceeds
to working capital and general corporate purposes.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company
on September 30, 1998, and as adjusted on the basis of the receipt of the
minimum and maximum offering amounts.
Actual Minimum Maximum
------ ------- -------
(700,000) (2,000,000)
Stockholders' equity: Common stock,
$.01 par value, 200,000,000 shares
authorized; 14,719,173 at 9/30/98 shares
outstanding
14,719 14,719 14,719
Additional paid-in capital 4,138,393 11,138,393 24,138,393
Note receivable from officer (234,231) (234,231) (234,231)
Accumulated deficit (2,991,217) (2,991,217) (2,991,217)
---------- ---------- -----------
Stockholders' equity 927,664 7,927,664 20,927,664
---------- ---------- -----------
Total capitalization $ 927,664 $ 7,741,664 $ 20,741,664
========== ========== ==========
18
DILUTION
On September 30, 1998, the Company had a net tangible book value of
$913,170, or $.06 per share. The net tangible book value per share is equal to
the Company's total tangible assets, less its total liabilities divided by its
total number of shares of common stock outstanding. After giving effect to the
sale of 700,000 shares, in the case of the minimum offering, and the sale of
2,000,000 shares in the case of the maximum offering, at the public offering
price of $10.00 per share, after deducting the costs associated with the
offering, the pro forma net tangible book value of the Company as of September
30, 1998, would have been $7,727,170 or $.28 per share in the case of the
minimum offering, and $20,727,170 or $1.13 per share in the case of the maximum
offering. This represents an immediate increase in net tangible book value of
$.23 per share if the minimum is sold or an increase of $1.08 per share if the
maximum is sold, to existing shareholders and an immediate dilution of $9.72, if
the minimum is sold, and $8.87 per share, if the maximum is sold, to new
investors purchasing shares in this Offering. The following table illustrates
the per share dilution in net tangible book value to new investors:
Minimum Maximum
---------------- ------------------
(700,000 shares) (2,000,000 shares)
Public offering price per share $10.00 $10.00
Net tangible book value per share
on September 30, 1998 $ .06 $ .06
Increase in net tangible book value per share
attributed to new investors $ .50 $1.08
----- -----
Pro forma net tangible book value per share
As of September 30, 1998, after this Offering $ .50 $1.24
------ -----
Net tangible book value dilution per share
to new investors $ 9.50 $8.76
====== =====
The following table sets forth on a pro forma basis as of September 30,
1998, the difference between existing shareholders and new investors purchasing
shares in this Offering, with respect to the number of shares purchased, the
total consideration paid and the average price paid per share: Minimum Offering:
Shares Purchased Total Consideration Average Price Number Percent Amount Percent
Per Share
Minimum Offering:
Shares Purchased Total Consideration Average Price
------------------------ ------------------------ -------------
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing Shareholders 14,719,173 95.5% $ 4,153,112 37.2% $ .28
New Investors 700,000 4.5% 7,000,000 62.7% 10.00
---------- ------ ---------- ------
Total 15,419,173 100.00% $11,153,112 100.00%
========== ====== ========== ======
Maximum Offering:
Shares Purchased Total Consideration Average Price
------------------------- -------------------------- -------------
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing Shareholders 14,719,173 88.0% $ 4,153,112 17.2% $ .28
New Investors 2,000,000 12.0% 20,000,000 82.8% 10.00
---------- ------ ---------- ------
Total 16,719,173 100% $24,157,112 100%
========== ====== ========== ======
19
BUSINESS
The following Business section contains forward-looking statements
which involve risks and uncertainties. When used in this section, the words
"anticipate", "believe", "estimate", "plans", "expects" and similar expressions
as they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed in "Risk Factors".
Company Overview
Two Dog Net, Inc. ("TDN" or the "Company") was incorporated under the
name Vi-Com, Inc. on July 14, 1983 under the laws of the State of Utah, changed
its name to Quick Stop Photo International, Inc. on October 29, 1984 and to
Asian-American International, Inc. ("AAII") on May 9, 1988. The Company was
inactive from 1990 to July 1995, at which time the Company's current President
obtained majority ownership and changed the Company's name to International
Marketing Dynamics, Inc. The Company changed its name to Two Dog Net, Inc. on
December 30, 1998 to better reflect its business and services. Current
management has no relationship to operations conducted prior the acquisition of
AAII in 1995.
Since 1996, TDN has been developing its Web service technology to
provide site content and navigation tools designed especially for children and
their families. TDN's service is designed to allow children to access the
Internet in a safe environment that emphasizes educating children and developing
their Internet navigation skills. As part of its system development process, the
Company has operated as a local Internet Service Provider ("ISP") since 1997
under the name "The Socket." This has enabled TDN to develop and test the user
interface for the two primary aspects of the system: the Web service's content
areas that allows users to search a wide range of topics while teaching Web
navigation skills and the search engine ("SafeZone Technology"), that allows
users to perform direct searches only to pre-approved sites on the Internet. TDN
intends to have The SafeZone Technology provide users with tools for customizing
the scope of Internet access for each family member.
The Company's initial primary market will be families with children
ranging from 3 years to 14 years of age. The Web environment will provide
specific content areas to target different age groups within the target age
range. The search engine will also be designed to allow access to pre-approved
sites that apply to each group.
Management believes the Web service and its related technologies will
be the focus of its future operations and provide the primary source of future
revenues and the ISP segment will have a minor impact on future financial
results.
Industry Background
The Internet
The Internet is a global Web of inter-connected computer networks,
which enables commercial organizations, educational institutions, government
agencies and individuals to communicate freely, access and share information,
and conduct business remotely. The emergence of the World Wide Web allows
commercial organizations a new medium in which to publish multi-media documents
and other information for public access and to advertise or provide products and
services to users. Many such commercial enterprises have established Web sites
to enhance these new market opportunities. Customer service, electronic
commerce, advertising and market data generation is all being conducted across
the World Wide Web.
The very openness of the Internet means that transmitted information
and data stored in connected hosts are exposed to other users who are able, in
the absence of effective security measures, to gain access to inappropriate
data. This fundamental weakness mandates that organizations and individual weigh
security, productivity and censorship concerns against the perceived commercial
opportunities presented by millions of Internet users. The Company believes that
growth in online commerce will be better served if security issues and ease of
use by children and their families are improved.
20
The Internet is experiencing significant growth. Current projections
forecast that between 30 million to 60 million households in the United States
will have Internet access by the year 2000. This represents a 67% to 233%
increase over the corresponding 1996 level of 18 million households.
Households With Online Access
Comparitive Projections
1995-2000
[ GRAPHIC OMITTED ]
The Internet can be accessed by joining one of several service
providers. Users access the Internet either by Commercial On-line Service (COS)
such as AOL or through Internet Service Providers (ISPs).
The COS offers proprietary interfaces, which make it easier for users
to initially install and explore the Internet. ISPs require the user to install
a browser (Netscape or Microsoft Internet Explorer) as the link to the Internet.
Regardless of which form of service is chosen, the Internet user will have
access to electronic mail (e-mail), chat rooms, and the ability to search the
World Wide Web. A recent survey by CTI indicates that more Americans are
choosing ISP's rather than on-line services (such as AOL).
A June 1998 Nielsen Media Research study found that over 70 million
Americans are now online, nearly 35% of the US population. A 1998 Baruch
College-Harris Poll, that surveyed over 3000 individuals in the United States
found that the Internet population is now 46% female, up from 23% in September
1995. Young American "Net" users outnumber older Americans, but the gap is
closing. Forty nine percent of all Americans between the
21
ages of 18 and 24 are Internet users. For those between 25 and 29 years old,
thirty seven percent are online while over 20% of Americans over 50 use the
Internet. According to Find/SVP, in their report "Children on the Internet",
children under 18 are one of the fastest growing sections of Internet users. The
Find/SVP report projects that 45 million children will be online by the year
2002.
The Internet population is also still skewed toward the affluent: 42%
of Internet and Web users have household incomes of more than $50,000 a year,
while only 18% take in $25,000 or less. But since the lower-income category
probably includes many students, it may overstate Net participation by the
country's poorest households. The race gap in Internet use, one primarily
dominated by whites, has closed to a large extent. In 1998, the percentage of
black and Hispanic Internet users was only 3% lower than that of whites. The use
of the Internet as an e-commerce vehicle continues to grow dramatically.
IntelliQuest's market research indicates that 63% of online users have made a
purchase over the net. The Nielsen study found that on-line purchases are
increasing at an annual rate of over 100%.
Internet Security for Children
Issues surrounding safety on the Internet, which includes children's
access to offensive material, have received considerable exposure over the last
several years and have generated considerable debate in the public-at-large, and
in particular, amongst those that access sites on the Internet. Safe Internet
access for children has garnered support from family oriented groups, government
agencies and educators.
The Internet provides easy access to a vast array of information
resources and services in addition to enabling communication between people and
organizations around the world. Unfortunately, the Internet's strength also
proves to be its drawback when it comes to children. Left unprotected, children
can access sites that are not appropriate for them and which can, in fact, be
harmful and dangerous. Most parents have serious concerns about their young
children accessing sites that contain pornography, profanity, violence, extreme
political views, racism and information on subjects such as manufacturing
explosives or drugs. Parents are also concerned that their children may enter
unsupervised chat rooms where children can be exposed to objectionable language
or ideas. Such chat rooms are havens for sinister individuals who prey on the
innocence of children and represent a real threat to the safety of the children
to which they are exposed. To protect their children, many parents have chosen
to restrict their children from accessing the Internet at all while others have
attempted to find a solution to safeguarding their children's Internet access by
utilizing security software.
Security software for children is designed to keep them from accessing
undesirable Web sites. Software that is currently available uses either a rating
system or a filter (or a combination of both) to block access to "undesirable"
Web sites. However, these methods are far from foolproof. The rating systems are
not standardized and are only "voluntary," meaning that simply choosing to
conduct searches with the software switched off easily defeats them. The rating
systems include RSACI and Safesurf.
The number of domains on the Internet has increased since 1995 at an
annual compounded growth rate of approximately 84.8%. Each domain represents at
least one Web site, but typically represents multiple web sites. Currently, most
security programs focus on the elimination or filter-out of Web sites. Some of
the larger commercial on-line services provide proprietary software that acts to
guide children in exploring the commercial on-line service's domain, but do not
provide protection when children explore the Internet. Media companies such as
Yahoo! and Disney have created child-oriented Web sites, where information on
topics of interest to children from kindergarten through high school is made
available through search engines that are designed to search for "safe"
information. However, these sites, which utilize some form of filtering/blocking
software, do not provide security from access to other sites on the Internet.
Commercial On-line Services, such as America On-Line, offer parental
control features. These control features are limited and have the same serious
shortcomings as described above. Parents also have the option of purchasing
parental control software. Since the majority of new Internet users are joining
ISPs rather than Commercial On-line Service providers, the security software
market has experienced rapid growth.
The preponderance of security software packages utilize filtering
techniques. Filtering software packages have three major flaws: 1) a poor
security interface, 2) problematic content recognition and 3) a static nature to
their system design.
22
First, the security interface is fairly simple to bypass allowing the
user to "leave" the program at will. For instance, some filtering programs can
be bypassed simply by typing in the URL address of any site on the Internet. In
fact, each of the top packages can be by-passed in some fashion by varying
degrees of effort. Furthermore, there are Web sites that teach users how to
defeat filtering programs.
Second, these programs are not capable of evaluating sites for
appropriate content. Educational sites are sometimes blocked because of a
misinterpretation of content by the software's logic program. For example, a
search for information on Sussex (England) or Middlesex, would routinely be
filtered out since the term "sex" is within the word and hence blocked by the
filtering software.
Third, these programs are incapable of matching the dynamics of the
Internet. Each of these software packages relies on a static database of key
search terms that are stored on the user's system. As Web sites are added to the
Internet or are changed, these databases must be updated. The present rate of
update is only once per month for many programs, which limits their ability to
block new Web sites. Also, these products are incapable of evaluating
photographic content.
Another security flaw is that most files are stored on the user's
computer, which allows the possibility for tampering or removal of files in an
effort to bypass the security program. Such tampering can cause the system to
malfunction. The user can also modify activity logs, thus eliminating evidence
of sites visited.
Finally, each of the filtering software competitors requires parental
supervision or interaction to counter the problems with their products. Since
most consumers have demonstrated considerable interest in products which allow
children to search the Internet unattended, these programs do not provide the
level of security which most parents desire.
The primary companies offering filtering or blocking products are Cyber
Patrol, Surf Watch, Net Nanny, Smart Filter, Webco International (Web Chaperone)
and Guardian Agent.
The software for security programs can catch many undesirable Web
sites, but a perfect filter/block has not yet been designed. Furthermore, the
task of designing increasingly effective software is made more difficult since
WebPages are being specifically designed to slip through the security/filter
blocks. As a result, currently available security software is only 80%-90%
effective in screening undesirable content.
In spite of the significant limitations of currently available security
software products as outlined above, the market demand is extremely strong. The
Company estimates the total number of units sold in 1997 exceeded 14 million.
Two Dog Net, Inc.
Today's children have the most to gain from using the Internet.
Unfortunately, they also have the most to lose. The increasing amount of content
devoted to harmful and unwholesome subjects can keep children from taking
advantage of this exciting, resource filled technology. Two Dog Net offers the
first system that gives children a rich and dynamic Web environment that is safe
and secure, yet provides unrestricted access to millions of useful, informative
and entertaining Web pages. Two Dog Net has developed a comprehensive online
community, The Children's Internet(TM), and a proprietary gateway and search
engine, TwoDogNet(TM), specifically focused on, and designed for, children and
their families to access the Internet with ease in a protected environment --
The Web Without a Worry. The Company's initial market will be families with
children ranging from 3 to 14 years of age. Two Dog Net has recognized the vast
opportunity in providing a revolutionary on-line service for this otherwise
neglected, but lucrative market.
The Company's objective is to become the premier online service that
addresses the needs of children for content, community, and commerce. To
accomplish this, the Company's strategy is to offer a unique and engaging
on-line experience through its portal and search engine TwoDogNet(TM), and its
Web service, The Children's Internet(TM). The Company has developed extensive
original content which is designed to provide a dynamic environment focused on
educating children by providing entertaining activities, creating a platform for
developing effective Internet navigation skills and supplying the gateway to
millions of pre-approved Internet pages.
23
Provide a Rich and Dynamic Environment
The Company's strategy for attracting new subscribers and retaining
existing ones is to provide a dynamic environment that continually enhances the
users' experience. A key aspect of this strategy will be to deliver rich content
and search capabilities coupled with fast download times. The Company believes
that all users, and children in particular, will stay interested in the content
matter and search results and therefore spend more time in the Web environment
if download times are fast and responsive. The time users spend on the system
will directly impact the value of its "real estate", i.e. the areas of the
environment where sponsors and advertisers are presented.
Rich and entertaining content often involves incorporating multi-media
files within Web pages. However, these features typically increase download
times as compared to text pages or simple graphics. To obtain fast download
times, the Company will provide new content to its subscribers on a periodic
basis via CD-ROM. The CD-Rom will interface with the TwoDogNet(TM) Web site to
create a multimedia and interactive Web environment, enabling users to enjoy an
enriched multi-media experience that includes new original content such as games
and instructional content with audio, video, and animation. The system that
enables this is the Company's patent pending technology of InterRom(TM).
Provide a Safe Internet Experience
In addition to the content provided by the TwoDogNet(TM) environment,
the user can use the portal to visit pre-approved sites available from the
Internet that will be carefully chosen by an advisory board of educators using
criteria that emphasizes educational and age-appropriate content. However, the
system is not limited to these pre-approved sites. It is also designed to allow
authorized users, e.g. parents, to add sites from the Internet-at-large to the
sites available to his or her family, as well as to remove any of the
pre-approved sites currently accessible through the system. Such modifications
will be user-specific, i.e. no other subscriber will be affected by any other
subscriber's customized changes.
Promote Product Awareness
The Company's marketing plan will invest heavily in mass media and
public relations to create product awareness in order to build a large user
base. In addition to the subscription revenue generated, the number of users and
the growth rate of the user base, along with the user time spent on the system,
are the key elements in determining the value of the advertising space on the
system's Web pages. Accordingly, the Company plans to pursue an aggressive
marketing strategy to continuously promote awareness of the TwoDogNet(TM) Web
environment.
Provide Secure and Dependable Technology Infrastructure
To help insure the dependability of the Company's Web environment to
its users and advertisers, the Company plans to provide a secure hardware
infrastructure with a capacity level to meet the demands of, and accommodate the
growth in, its user base. To accomplish this, the Company intends to install its
system of Digital Equipment Corporation's ("DEC") 8400 clustered system. GST
Telecommunications, Inc. ("GST"), a worldwide provider of data and
communications services, will provide the telecommunication connections to the
Internet and Pacific Bell will be available as a backup provider.
Business Development
By offering a high quality Web environment that focuses on children's
safe access to the Internet, the Company initially seeks to generate revenues
from four primary sources. These include selling annual subscriptions to its
Internet service, corporate sponsorships that integrate the sponsor into the
user experience on
24
TwoDogNet(TM), advertising revenues from the sale of ad placements on
TwoDogNet(TM) and commissions from E-Commerce; the sale of third party products
including books, toys, videos, sporting goods, clothing, computer games and
educational videos, products and services.
Build High Brand Equity
The Company is dedicated to establishing and building its brand names,
and the Company's future plans include the marketing and merchandising of
TwoDogNet(TM) branded products based on its proprietary characters. The Company
believes that high brand recognition will be an effective springboard for new
products, services, and acquisitions. With increased high brand recognition the
Company intends to conduct E-commerce on TwoDogNet(TM) to market and merchandise
products.
In addition to the TwoDogNet(TM) and The Children's Internet(TM), the
Company believes that the SafeZone Technology(TM) can be adapted for use by, and
licensed to, commercial entities and government agencies that wish to limit
employee Internet access to only those Internet sites which are necessary to
enhance or improve workplace productivity.
Products and Services
TwoDogNet(TM) was developed to meet the needs of parents who desire
that their children take advantage of the vast educational resources of the
Internet in a safe and friendly environment. TwoDogNet(TM) has been designed to
provide a safe and dynamic environment focused on children and their families.
TwoDogNet(TM) has original Web content that will educate and entertain users,
teach children Internet navigation skills and provide the world's easiest to use
Web browser designed specifically for children.
The Web pages are designed to offer unique and different visual content
specifically for the following age groups: 3 to 5 years, 6 to 8 years, 9 to 11
years, and 12 to 14 years. Appearing throughout the TwoDogNet(TM) environment
will be the Company's proprietary cartoon characters that the Company believes
will enhance the user's experience by providing a familiar companion to the
child throughout the environment as the child explores areas of interest. In
addition, TwoDogNet(TM) characters are designed to "grow" with the user as he or
she progresses to the next age group within the TwoDogNet(TM) Web environment.
The Company intends to establish and build its brand name into a strong consumer
franchise. The Company's future plans include marketing and merchandising
branded products based on the Company's proprietary characters.
The Company will launch the TwoDogNet(TM) software for Netscape and
Microsoft Internet browsers on the Windows 95, 98 and NT platforms. The Company
will consider developing software to run on Windows 3.1, OS/2, and Macintosh
operating systems.
The Company will offer a number of products and services aimed at the
Company's target audience; children ages 3 to 14 and their families. The
Company's initial product will be the TwoDogNet(TM) Web site and portal to The
Children's Internet(TM). This site will offer exciting, entertaining and
educational original children's content, a secure and safe Web environment and
an easy to navigate children's search engine, made possible by the Company's
proprietary SafeZone Technology(TM). Other exciting features will include secure
children's e-mail, secure chat rooms, educational content and information
resources for parents, children's product offerings and a children's Web
magazine. The TwoDogNet(TM) Web site and secure children's search engine have a
number of unique and compelling features which will appeal to a wide spectrum of
customers. The key features include:
Personalized and Age Specific
TwoDogNet(TM) and The Children's Internet(TM) are the first children's
Internet services to provide original content that is both personalized and age
specific. The Company has clustered its content and graphical interfaces into
four different age groups, 3-5 year olds, 6-8 year olds, 9-11 year olds and
12-14 year olds. Each age group
25
offers fun and innovative themes from which to choose. And the personalization
features allow kids to design The Children's Internet(TM) to fit their
individual personalities. In accordance with FTC guidance and the Company's own
privacy policy, the Company guarantees that no individual information about
children will ever be revealed to outsiders.
Development of Entertaining, Fun, Educational Content
In addition to the original content that already exists within the
TwoDogNet(TM) environment, the Company will produce its own original content for
TwoDogNet(TM) Web sites, Websites that will be free to everyone on the Internet.
The Company will draw upon the experience of its creative team in producing
educational and entertaining content that children love. The Company will apply
its educational and entertainment development standards to all aspects of the
content development process. The Company employs a variety of methods to create
its original content: 1) the TwoDogNet(TM) in-house development team will create
original content, 2) the Company will hire outside children's "writer-producers"
to develop content under the TwoDogNet(TM) brand name, and 3) the Company will
obtain licenses for existing children's content to be repackaged under the
TwoDogNet(TM) label. The Company will continually update and add new content to
keep the site exciting and stimulating for its customers. New content, games and
educational programs will be sent to subscribers on CD-ROM on a periodic basis.
The ever changing and expanding content will also offer continually expanding
opportunities for sponsorships, merchandising programs, joint marketing
ventures, and advertising revenues.
Easy to Use, Easy to Navigate the Internet
One of the reasons management believes TwoDogNet(TM) and The Children's
Internet(TM) will become an industry standard for children's Internet services
is that the search engine is designed to make Internet navigation focused, easy
to use, and fun for kids. The Company utilized its interactive team's years of
experience in developing Internet sites for children, along with guidance from
advisors in the education field, to make the search engine intuitive and simple
to navigate for children. In addition, the search engine has the added benefit
of significantly reducing the difficulty and search time for desired information
retrieval over the Internet -- Access without the frustration of wading through
thousands of pages of irrelevant and inappropriate material.
SafeZone and InterRom Technology
The Company's SafeZone Technology(TM) is employed to create a
"protective bubble" around The Children's Internet(TM). When children use the
TwoDogNet(TM) search engine, or just surf the net, the SafeZone Technology(TM)
ensures that they cannot venture beyond the "protective bubble" of The
Children's Internet(TM). The Company's InterRom(TM) technology minimizes
download times for children because many of the graphics, sound and video on The
Children's Internet(TM) are uploaded from a CD-ROM provided by Two Dog Net.
Children load the CD-ROM into their computer, and then surf the net with
lightening speed!
Multilingual
The TwoDogNet(TM) search engine, original content and graphical
interfaces will be translated into several languages, including Spanish,
Portuguese and French. The Children's InternetTM will be a place where children
can learn other languages and experience cultures by visiting the thousands of
age specific, safe Internet sites.
Technology
The Company has developed a number of proprietary technologies that
insures that TwoDogNet(TM) will be safe, secure and reliable.
26
SafeZone Technology(TM)
The Technology behind the TwoDogNet(TM) security system is called "Safe
Zone Technology(TM)." It's a revolutionary new way to provide Internet access
and organize information. Developed and solely owned by Two Dog Net, Inc.,
SafeZone Technology(TM) provides controlled access that excludes literally all
objectionable material while maintaining the quality and diversity of the
information on the Internet. It allows children to explore the arts, research
ancient civilizations, understand other cultures and discover new worlds without
parents worrying that their children are being influenced by offensive material.
This patent pending technology allows unencumbered access to
pre-determined Web sites as specified by a defined policy and user customized
profiles while, in real-time, parsing away offensive material that does not
conform to The Children's Internet(TM)'s criteria. SafeZone Technology(TM)
conforms to existing rating systems and guidelines as established by national
organizations such as the National PTA (Parent and Teacher's Association), RSACi
(Recreational Software Advisory Council on the Internet), and American Library
Association. The technology also independently evaluates the large number of
sites not as yet rated by these organizations for appropriate content. Unlike
"filtering software", SafeZone Technology(TM) does not prevent access to adults
for serious research on sensitive issues. For example, if information on drug or
gang prevention is needed, filtering programs are so unsophisticated that they
would block access to this data.
Unlike "security programs", SafeZone Technology(TM) does not use static
filtering or blocking techniques because those approaches are easily broached.
SafeZone Technology(TM) is an active, dynamic system, with technology that's
perfectly suited to manage the complexity of the Internet. No technology is
infallible, but rigorous testing has proven that the SafeZone Technology(TM) can
not be bypassed, fooled or thwarted by even the most sophisticated computer user
attempting to bypass the system. Because TwoDogNet(TM) is a service, not just
software, it provides round the clock monitoring and ensures that newly launched
sites are reviewed and comply with TwoDogNet(TM)'s criteria before being added
to the pre-determined site list.
The SafeZone Technology(TM) is made up of three components.
* SafeSock(R) - This browser plugin module will control Web sites that can
be accessed. Access is granted via "positive" authorization, which is
determined by querying lists of "pre-approved" Web sites. If an individual
site is not pre-approved by SafeSock personnel, it is not accessible. The
SafeSock "positive" approach differs from competing systems. These
competing systems use a "negative" authorization that lists "BAD" sites --
sites that are not considered to be appropriate. Any sites that are not on
the reviewed "BAD" list are assumed to be accessible. This "BAD" site
scenario does not account for inappropriate new sites that come up on a
regular basis on the Internet. These new sites are viewable, and remain as
such until the authorizing authority is able to review the site, and make a
BAD determination. If SafeSock pre-approves a Web site, then the user of
the program/service is assured that it has been reviewed and meets the
SafeSock published standards. With non-SafeSock products, the user of the
related program only knows that the Web browser won't go to KNOWN bad
sites. Any new sites are accessible, and will be accessible until the
competing product is able to review the site and determine its
appropriateness.
* The user may modify (from the client side) the list of SockSafe(R)
authorized Web sites. A user will be able to indicate that a site SafeSock
says is "pre-approved," is not "pre-approved" for them. The user will also
be able to add additional sites that are deemed appropriate for their own
purposes. This process involves the client-side browser software interface
to communicate directly with the server-site SockSurf software, allowing
the program user to store his or her authorized Web site authorizations, on
the server. These modifications will be reflected back to the Web browser
when it is used in "Secure" mode, causing the Web sites that are "visited"
to be checked against the personal modifications.
* The SafeSock plug-ins will initially support Netscape and Microsoft
browsers on the Windows 95 Windows 98 and Windows NT platforms. Support for
Windows 3.11, OS/2 and Macintosh is under consideration.
27
* SockWatch(R) - When "Secure" mode is enabled, SockWatch runs unobserved on
a client computer, and "watches" the sites that are being browsed, other
general Internet activity, and logs what it sees to a disk file. Persons
with appropriate authority can view the logged information at a later time.
Logged information will be able to provide authorized persons the ability
to "recreate" Web-browsing sessions that occurred while "security" was
enabled in the browser. This module will have moderate complexity in that
it needs to be aware of low level operating system functions, and has to
have some sophisticated built-in methodologies to determine if there is any
hacking going on. The SafeSock module by itself does not prevent a hacker
from installing some "other" Web browser on a given machine and using it to
traverse the Internet at will. However, SockWatch will report this in its
log files, alerting the software administrator appropriately. SockWatch has
to be "hack proof" so that the purchasers of the SafeSock program/service
know that any "fooling around" will be observable, and herein lies its
complexity.
The SockWatch plug-in will initially allow users to maintain activity logs
on their home computer. The Company is also developing a system to provide
users with the option of maintaining a log at the Company's server.
* SockSurf(R) - This module is a low-level TCP/IP socket interface to
programs that have been written to run on the SafeSock Internet server. It
mainly involves the User Interface programs (on the browser client-side)
and the related Internet communications protocol that will convey user
entered information to the SockSafe server. It also involves the
communications between the client and server that allows the browser to
verify Web sites that are appropriate for an individual user of the
SafeSock service. The interface between the server-resident SockSurf
programs and the client-side browser plugin will be written to utilize the
TCP/IP socket protocol for communications.
Upon accessing the Internet through the users' ISP (Internet Service
Provider), the SafeZone Technology(TM) will automatically deliver subscribers to
the TwoDogNet(TM) Web site. This mechanism enables The Children's InternetTM to
"lock in" a captive audience. Once inside the TwoDogNet(TM) Web Site, children
can only visit other Web sites which have been pre-approved as part of The
Children's Internet(TM). Here the child has the ability to access the extensive
fun, entertaining and educational original content of the The TwoDogNet(TM) or
link to or search other pre-approved Web sites. Parents can exit the
TwoDogNet(TM) Web Site to enter the Internet at large but children remain within
the TwoDogNet(TM) "protective bubble." In addition to providing for children's
security, "locking in" the child user enables the Company to take advantage of
the extended time that users spend on the site to attract sponsor advertising
which will be incorporated directly into the content of the site.
Every time a user logs onto the system, the server will track the
movements of the user. The Company will take advantage of the information in the
user profile coupled with the data that is gathered on users' activity to
provide advertiser-focused demographics and audiences.
28
THe InterRom(TM) CD
A key aspect of the TwoDogNet(TM) Web environment is its ability to
deliver rich content and search capabilities coupled with fast downloads times.
The Company believes that users, and children in particular, will stay
interested in the content and search results and will, therefore, spend more
time on line if downloads are perceived to be fast and responsive. The time
users spend on the system will directly impact the value of the Company's "real
estate," i.e. the areas of the environment where sponsors and advertisers are
presented.
Two Dog Net's patent pending InterRom(TM) CD technology provides a
method for graphics and audio to be stored on a CD, while simultaneously being
coordinated with the real time interactivity of an Internet site. The advantage
of this technology is that it significantly reduces the download time for highly
visual and interactive sites compared to normal Internet sites. Anyone who has
waited for the graphics to download from an Internet site is familiar with this
problem, particularly significant when it comes to the attention span of
children. The InterRom(TM) CD Technology will be an integral part of the
TwoDogNet(TM) service, providing exciting content with rapid uploads speeds. New
CD's will be sent to subscribers on a periodic basis with new content, games and
promotional information.
When a new user subscribes to TwoDogNet(TM) , an installer CD-ROM will
be sent to that subscriber to install the service onto their home, school or
organization computer. This installer CD is customizable by each user and is
designed for optimal "plug and play" setup. Each new customer obtains a unique
user ID that is established when the user first downloads the software and fills
in the user profile. The user profile data is returned to the TwoDogNet(TM)
server and stored in its database.
Hardware and Infrastructure
The key criteria for the system hardware are; 1) "seamless"
expandability; i.e. the ability to upgrade the system without having to take the
system offline for any period of time, 2) a high degree of security to guard
against unauthorized entry and 3) the ability of the hardware to accommodate the
unique requirements of the SafeZone Technology(TM) , i.e. the need to restrict
or "lock down" the interface between the user and the Internet.
Digital Equipment Corp. (DEC) has been a technology provider to the
Company's ISP operation and the Company believes that the Digital AlphaServer
8400 meets its criteria for the hardware component of the TwoDogNet(TM)
environment. In particular, DEC's clustered system design and multiple servers
will enable the Company to upgrade the systems memory, storage and
communications capacity without having to take the system offline. The Digital
AlphaServer 8400 is one of the most advanced computer systems used in the
Internet industry. Both Netscape and Lycos use the 64-bit Alpha computer system.
The AlphaServer 8400 supports up to 28 gigabits of memory, 39 terabits of disk
storage and I/O bandwidth of 1.2 gigabits per second. Of course, the technology
is scaleable and Two Dog Net intends to purchase the AlphaServer 8400 in the
following configuration: two 400 MHz processors with 2 gigabits of memory. With
this configuration, the system can handle approximately 30 million transactions
per day.
The Company's Internet connections will also be capable of expanding to
meet the growth in the user base. GST Telecommunications provides the Company's
communication service and will be able to respond to upgrade requests within 24
hours. The Company intends to have an initial capacity level for Internet
traffic of 10 million bits per second ("mbps") and GST has the ability to
upgrade that to a maximum of 645 mbps. The GST fiber network is also designed
with multiple network access points to provide continuous service to its clients
even when segments of its network fail. To further insure a continuous
telecommunications link, the Company will secure backup service from Pacific
Bell.
29
TwoDogNet(TM)
The Chikldren's Internet(TM)
[ GRAPHIC OMITTED ]
30
Marketing and Sales
By offering a high quality Web environment that focuses on children's
safe access to the Internet, the Company initially seeks to generate revenues
from four primary sources. These include selling annual subscriptions to its
Internet service, corporate sponsorships that integrate the sponsor into the
user experience on TwoDogNet(TM), advertising revenues from the sale of ad
placements on TwoDogNet(TM) and commissions from the sale of third party
products.
The Company is dedicated to establishing and building its brand names,
and the Company's future plans include the marketing and merchandising of
TwoDogNet(TM) branded products based on its proprietary characters. The Company
believes that high brand recognition will be an effective springboard for new
products, services, and acquisitions. With increased high brand recognition the
Company intends to conduct E-commerce on TwoDogNet(TM) to market and merchandise
products.
Consumer Marketing and Sales
To reach the 20 million US children's households, the Company will
primarily invest heavily in television supported by radio and print advertising
as well as public relations activities to generate a high level of product
awareness and trial.
The Company's user base will be comprised of children, parents, schools
and other organizations that have a need to provide safe access to the Internet
for children. The population of children (under 14) is projected to grow from 38
million in 1997, to 41 million by 2001 (Find/SVP Research, "The Kids Market,"
March 1997). With an average of two children per household, the Company has a
target market of approximately 20 million households. The education market is
also growing. From 1985 to 1995, the K-12 school population has grown by 6
million students. Kindergarten attendance is up an amazing 22% over the same
period of time. Furthermore, the increase in students requires that school
districts add more facilities and teachers. Public school funding has grown from
$165 billion in 1980 to $425 billion in 1993.
Children are the single fastest growing segment of Internet users
today. Children Internet users grew 444% from 1995 to 1997 ("Children on the
Internet," Find/SVP Research, October 1997). The number of children online is
expected to grow from 4 million in 1996 to 45 million in 2002 ("Children on the
Internet," Find/SVP Research, October 1997). Today, AOL Kids reaches 2.1 million
households, and over 50% of those households employ parental control mechanisms.
The Company's experience has shown that adding multiple forms of media
to an advertising campaign raises total response. A combination of different
media increases results because different people respond to different stimuli,
and because this "synergistic marketing" reinforces the advertisers' messages.
Synergistic marketing, the Company's unique, knowledge-based marketing
philosophy, has proven to be a successful and cost effective strategy.
In the 1980s, Nasser Hamedani, the Company's Chairman and founder,
embarked on a revolutionary marketing venture, SyberVision, which came to be the
national leader in Expert Learning Technology. Today, by building on and
perfecting Nasser's proven marketing techniques, Two Dog Net has the ability,
leadership and experience to obtain outstanding results from its multi-tier
synergistic marketing strategy.
The Company's sales plan will be based upon the layout of
TwoDogNet(TM). The online areas for TwoDogNet(TM) will be divided into
subscription-only areas and free areas. The subscription-only areas will contain
all the age-specific interfaces, the personalization area and the secure search
engine. The free areas will contain original content sites that focus on either
the educational or kids' entertainment market. All free areas will contain a
link to a Web page where users can sign up for a trial subscription to the
product. This strategy will increase the number of Web site "hits" which will,
in turn, grow advertising revenue while encouraging trial of the Company's
subscription service. All of the Company's marketing efforts, regardless of the
medium, will integrate references to the TwoDogNet(TM) Web site. Integration of
the Web site in all marketing will encourage prospective users to test the
product, and eventually to order the product online.
The Company will begin the marketing campaign with a vigorous public
relations blitz and a marketing effort directed at parents for home use as well
as towards school districts, educators, and libraries with the intent of
installing
31
TwoDogNet(TM) as those organizations' Internet security solution.
Currently, thirty nine percent of US primary and secondary schools providing
access to the Internet use security software. One of the primary reasons cited
for not using security software was a lack of satisfaction in the software
currently on the market (according to a study conducted by the market research
company Quality Education Data). Use of TwoDogNet(TM) at school will increase
children's trial of the product and encourage them to "lobby" for purchase of
this familiar and fun product for home use. This will result in millions of
TwoDogNet(TM) page views and will accentuate the other marketing strategies. The
campaign will continue with other forms of media, to include a 30-minute
"edutainment" TV program, TV commercials, inter-commercials, (Internet + TV
commercial), online marketing, print media, radio, direct mail and trade shows.
Potential users may call to subscribe to the service, or they may visit the
TwoDogNet(TM) Web site to test and order online.
The Company will integrate a School Fund-Raising Sales Program into the
marketing plan. Schools and youth organizations will sell subscriptions to
TwoDogNet(TM), and receive payment in the form of a commission. This program
will both build the brand equity and popularity of TwoDogNet(TM), as well as
serve as a tool that provides for quick distribution of TwoDogNet(TM)
subscriptions to thousands of households.
In the 1980s with SyberVision, Nasser Hamedani established himself as the
"father of the billion dollar infomercial industry." Today, Nasser has assembled
a marketing team with experience in creating both TV programs and commercials
that cross-promote products with related Internet sites. The Company will
leverage this collective experience to obtain the optimal marketing mix to
generate sales and brand loyalty for TwoDogNet(TM) and The Children's
Internet(TM).
The Company forecasts that this combination of marketing methods, or
"synergistic marketing," will result in a return rate of 1% on the 20 million US
households in the market, resulting in 200,000 subscribers in the first year.
The Company forecasts that The Children's Internet(TM) will have 2 million
subscribers within three years. Thereafter, the Company projects that the number
of subscribers will grow at the same rate as the growth rate of Internet use.
Corporate Marketing and Sales
A major portion of the Company's revenues will be derived through corporate
relationships. Early on, the Company will generate revenues from sponsorships
and advertising fees and commissions from third party product sales. In
addition, the Company believes that significant revenue generating opportunities
exist though joint venture relationships which may include children's television
programming, branded product offerings, educational programs and Internet-mass
media cross marketing ventures.
Sponsorship Sales
The Company's ability to generate revenues from advertising is enhanced by
the rapid growth of online advertising. Online advertising spending more than
doubled from 1997 to 1998 to $2 billion. Online advertising spending is
projected to explode to over $16 billion by 2002 according to the Veronis,
Suhler & Associates 12th Annual Communications Industry Forecast. The Company
believes that "sponsorships" are the best vehicle to take advantage of this
expanding revenue opportunity. The general sponsor sales methodology is to align
sponsor's specific target markets with groups of TwoDogNet(TM) users attracted
to specific content. Sponsors will be able to target both children and their
parents because the Company will provide attractive and useful product offerings
for both of these user groups. The Company will present sponsorship
opportunities to large consumer driven companies with branding interests that
focus on the specific demographic markets of children and/or their families.
Sponsor specific content will be incorporated into users' primary age-specific
Web pages or on other high traffic areas of TwoDogNet(TM). The Company will
provide each sponsor with a targeted audience, and value-added marketing tools
to increase both sales and brand equity.
The Company will identify a base of companies who are spending a
significant portion of their advertising budget on online advertising. Of these
companies, the Company will identify specific companies that are currently
targeting children and parents. The Company will also focus on companies that
have an interest in targeting children and parents but are not currently
spending money on online marketing.
32
As advertisers turn to the Internet to build brand equity, content
sponsorship has become an important part of the online marketing mix.
Sponsorships account for over one-third of total online advertising revenue, and
that figure is growing (Coopers & Lybrand /IAB Report, April 1998).
TwoDogNet(TM) sponsors get the benefits of the TwoDogNet(TM) large and loyal
user base within the sponsors' target market. This can eliminate the need for
sponsor companies to develop content site for their brands. Sponsorship programs
offer advertisers several benefits over traditional on-line banner campaigns:
o A more integrated brand presence
o Greater impact than a standard banner campaign
o Increased interaction with site users
o "Ownership" of site content or functionality
With Two Dog Net's InterRom(TM) technology, premier sponsors on
TwoDogNet(TM) have unique benefits over traditional sponsorships. Sponsors will
be able run multimedia, TV-like "intermercials" (Internet + commercial) between
topic areas. Further, the quick loading times from the CD-ROM will allow ad
placements embedded in the page to integrate music and much more animation. One
survey found that consumers exposed to a single intermercial are 64 percent more
likely to recall an ad for a specific brand, compared to an average 30 percent
increase seen in traditional banner advertising. (Berkeley Systems Study on
Interstitial Use, July 21-31, 1997). Thus, the InterRom(TM) technology allows
Premier Sponsors to multiply the emotional effect of their ads.
The sales team will develop numerous model sponsorship ideas to integrate
site content and the sponsors' names and logos. For example, the Company might
produce The Recording Studio for an online music retailer, or the Extreme Sports
Arena for a sporting goods retailer.
The Premier Sponsorship programs will provide great relationship marketing
opportunities for sponsors. In many large, consumer driven companies,
relationships with consumers are often the companies' greatest assets. The
sponsorship programs on TwoDogNet(TM) provide for greater interaction between
the sponsor and the individual, as opposed to the sponsor and the general
market. This allows the sponsor to build consumer value with the user over a
long period of information exchange between the user and the sponsor. Examples
of relationship-building interaction are the Email Newsletters that sponsors
distribute and users help "publish," votes, by users, for the Top Ten Lists of
the best toys, music and movies, and user Book Reviews.
The Company's model for assessing user traffic is different than most
Internet Company models. The Company will employ a user hour model, calculating
the exact number of minutes children spend on the Company's system, and how
children allocate their time within the system. Advertisers will pay to sponsor
different sections of the site according to the user hours of these specific
sections, which is in contrast to the common "cost per thousand page views"
model ("CPM model").
The Company will offer incentives to users and other mechanisms to keep
children online longer, resulting in increased value to sponsors. The integrated
content that the Company provides to our sponsors also increases the value of
our sponsorships compared to the competition. Furthermore, sponsors get the
benefits of any national advertising that the Company conducts. These unique
aspects of the Company's system and sponsorship model will enable the Company to
price sponsorships in the $500,000 to $1,000,000 range. The projected user base
of 2 million within three years will enable the Company to exploit numerous
revenue generating opportunities including sponsorships, advertising, product
sales, mechanizing, and joint ventures.
33
Advertising Banner Sales
While the Company's primary sales effort will be to develop sponsorship
relationships, the Company will not ignore the significant revenue opportunity
from traditional Internet site ad banner advertising. The Company will offer ad
banner space companies that wish to take advantage of the millions of "hits"
that the TwoDogNet(TM) site will generate each year. Because of the unique
nature of the TwoDogNet(TM) service in which children are automatically directed
to and locked into the "protective bubble," advertisers are guaranteed higher
traffic volume of their target audience than other potential advertising sites.
The Company believes that this will result in considerable competition for
TwoDogNet(TM) banner space and therefore generate premium banner revenues.
Product Sales
In the past year, the Internet has become a generally accepted medium for
the sale of products and services. Products and services ranging from books and
CD's to airline and event tickets are commonly sold over the net. According to
research undertaken by IntelliQuest, eighty one percent of Internet users intend
to shop online in 1999. This widespread acceptance of the Internet as a shopping
venue for the public at large opens great opportunities for Two Dog Net. The
Company will search out companies that wish to establish a presence on the
Internet for the sale of their products to our target audience or wish to expand
their presence by taking advantage of TwoDogNet(TM)'s large and very focused
user base. Two Dog Net has the advantage of being able to design content sites
targeted at the specific user for specific categories of product sales. For
example, the Company may design a Music Store in which kids can listen to new
CD's and purchase the CD on-line. Or the Company may create a toy store in which
kids view new toys, try them out and drag icons of specific toys they want to
their own holiday wish list. Parents will be able to view this list and purchase
on-line the exact toys their child has requested. Categories of products which
the Company anticipates selling on TwoDogNet(TM) includes toys, music CD's,
books, clothing, games, computer equipment, educational products and services,
consumer electronics, and sporting equipment. The Company has already
established affiliate relationships with major product suppliers that will
enable the Company to offer products for sale on a commission basis. It is not
the Company's intent to warehouse, distribute or sell products directly. The
Company will take orders and pass the orders to the affiliate for product
fulfillment.
Joint Ventures
Joint venture opportunities represent a longer term revenue opportunity but
one which offers tremendous potential for the Company. The Company is currently
exploring relationships that could yield joint ventures for the production of
children's television programming utilizing TwoDogNet(TM) characters and
concepts. The Company is also in discussions regarding the production and
marketing of branded products based on TwoDogNet(TM) characters. The Company
believes that many other joint venture opportunities will be available as a
result of the Company's strong branding and Internet leadership position.
Research and Development
The Company's current development efforts have been focused on the
completion of its Web environment products. The Company believes that the
development of the InterROM CD, the search engine utilizing TwoDogNet(TM) is
substantially completed. To date, the Company has been using its ISP operation's
hardware to develop and test the various software components of the overall Web
environment and the InterROM CD technology. The remaining development of these
products and the ability to test the system integration is dependent upon the
acquisition of the system hardware. The TwoDogNet(TM) content pages have been
under development since July 1998, and the initial Web environment's pages have
been completed. The Company will continue to expand and upgrade the content to
maintain consumer interest. Future product development efforts will focus on
product enhancements and adapting existing products to additional operating
systems.
Product development expenses were $260,601 and $160,960 for the years ended
December 31, 1996 and 1997, and $79,480 and $49,467, for the nine months ended
September 30, 1997 and 1998, respectively. To date, all software development
costs have been expensed as incurred. The Company believes that additional
investment in product
34
development is required to complete its system and ongoing investment is
required to remain competitive. Accordingly, the Company intends to increase the
amount of its product development in the future. See "USE OF PROCEEDS".
Competition
The market for Internet products and services is highly competitive and
competition is expected to continue to increase significantly. There are no
substantial barriers to entry in these markets, and the Company expects that
competition will continue to intensify. Although the Company currently believes
that the diverse segments of the Internet market will provide opportunities for
more than one supplier of products and services similar to those of the Company,
it is possible that a single supplier may dominate one or more market segments.
The Company believes that the principal competitive factors in its
anticipated markets are brand recognition, ease of use, comprehensiveness of
available content, customization by the consumer, quality and responsiveness of
search results, the availability of high-quality, focused value added services,
required technology to offer access to end users with fewer interruptions, and
with respect to advertisers and sponsors, the number of users, duration and
frequency of visits and user demographics. Competition among current and future
suppliers of Internet navigational and informational services, high-traffic
Websites and ISPs, as well as competition with other media for advertising
placements, could result in significant price competition and reductions in
advertising revenues. There can be no assurance that the Company will be able to
compete successfully or that the competitive pressures faced by the Company will
not have a material adverse effect on the Company's business, operating results,
and financial condition.
The Company will also compete with online services, other Web site
operators and advertising networks, as well as traditional offline media such as
television, radio and print for a share of advertisers' total advertising
budgets. The Company believes that the number of companies selling Web-based
advertising and the availability of advertising space have increased
substantially during recent periods. Accordingly, the Company may face increased
pricing pressure for the sale of advertisements and reductions in the Company's
advertising revenues.
The Company will compete with many other providers of security software,
information and community services. Many companies offer competitive products or
services addressing filtering of Web content, including, among others, Net Nanny
(Net Nanny Software, Inc.), Cyber Patrol (The Learning Company), Cyber Snoop
(Pearl Software, Inc.), Cyber Sentinel (Security Software Systems, Inc.),
Cybersitter 97 (Solid Oak Software, Inc.), SurfWatch (SurfWatch Software, Inc.),
WebChaperone (WebCo International, Inc.) EdView Channel Lock and EdViewsmart
Zone (EdView, Inc.) and X-Stop (Log-On Data, Inc.). In addition, the Company
will compete with online services such as Yahooligans! (Yahoo!), a Web navigator
designed for children in grades K-12, America Online (America Online, Inc.),
which offers parental control options for Web access and Disney's Blast Online,
which also offers child-oriented Web navigation. These companies already have
an established market presence, and, because the Company has not introduced its
product, are ahead of the Company in gaining market share. Also, entities that
sponsor or maintain high-traffic Websites or that provide an initial point of
entry for Internet users, such as the Regional Bell Operating Companies or
Commercial Online Services such as MSN and AOL, currently offer and could
further develop, acquire or license Internet search and navigation functions
that could compete with those offered by the Company.
Many of the Company's existing competitors, as well as a number of
potential new competitors, have significantly greater financial, technical,
marketing and distribution resources. In addition, providers of Internet tools
and services may be acquired by, receive investments from, or enter into other
commercial relationships with larger, well-established and well-financed
companies, such as Microsoft or AOL. Greater competition resulting from such
relationships could have a material adverse effect on the Company's business,
operating results and financial condition. In the event that the Company extends
its business internationally, the Company may also face intense competition in
international markets, including competition from U.S.-based competitors as well
as media and online companies that are already well established in those foreign
markets. See, "BUSINESS -- INTERNET SECURITY."
Employees
The Company currently employs eight individuals. As of September 30, 1998,
the Company's user interface development and ISP operations were managed by
Integrative Systems, LLC ("Integrative"). The management and staff of
35
Interactive were hired by the Company in February, 1999. Two of Integrative's
former employees are now officers of the Company. The employees and creative
staff of SPL will become employees of the Company in the 2nd quarter of this
year.
Patents, Trademarks, Licenses & Royalties
The Company's success is dependent in part on its proprietary technology.
TDN relies on a combination of patent, trade secret, copyright and trademark
laws, non-disclosure agreements and contractual provisions to establish and
protect its proprietary rights. The Company has received no patents to date and
has one pending domestic patent application on its InterROM and SafeZone
Technology. The Company has not selected any particular foreign countries in
which to file patent applications. The Company uses a printed "shrink-wrap"
license for users of its products in order to protect certain of its copyrights
and trade secrets. The Company attempts to protect its trade secrets and other
proprietary information through agreements with suppliers and non-disclosure
agreements with employees and consultants and other security measures.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, such piracy can be expected to be a persistent problem, particularly in
international markets and as a result of the growing use of the Internet. Some
courts have held that shrink-wrap licenses, because they are not signed by the
licensee, are not enforceable. In addition, there can be no assurance that
patent applications filed by the Company will result in patents being issued or
that its existing patent, and any patents that may be issued to it in the
future, will afford protection against competitors with similar technology; nor
can there be any assurance that patents issued to the Company will not be
infringed upon or designed around by others or that others will not obtain
patents that the Company would need to license or design around. For additional
information see "RISK FACTORS -- TRADEMARKS AND PROPRIETARY RIGHTS."
Litigation
The Company is not engaged in any legal proceedings and is not aware of any
pending or threatened litigation that could have a material adverse effect on
the Company's business, financial condition or results of operations.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following section contains forward-looking statements which involve
risks and uncertainties. When used in this section, the words "anticipate,"
"believe," "estimate," "plans," "expects" and similar expressions as they relate
to the Company or its management are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors". This section should be read in
conjunction with the financial statements and notes to the financial statements,
each appearing elsewhere in this Prospectus.
Overview
Two Dog Net, Inc. has been developing its Web service technology to provide
site content and navigation tools designed especially for children and families
to access the Internet in a safe environment that emphasizes educating children
and developing their Internet navigation skills. As part of its system
development process, the Company has operated as a local Internet Service
Provider ("ISP") under the name "The Socket." This has enabled it to develop and
test the user interface for the two primary aspects of the system: the Web
service's content areas that allows users to search a wide range of topics while
teaching Web navigation skills, and the search engine ("SafeZone Technology"),
that allows users to perform direct searches only to the pre-approved sites on
the Internet.
Management believes the Web service and its related technologies will be
the focus of its future operations and provide the primary source of future
revenues and the ISP segment will have a negligible impact on future financial
results.
The Company's objective is to become the premier gateway or portal to The
Children's Internet environment. To accomplish this, the Company's strategy is
to offer a unique and engaging on-line experience through its Web service, named
TwoDogNet(TM). Following the completion of its Web environment, TDN initially
seeks to generate revenues from three primary sources. These include annual
subscriptions from users, corporate sponsorships that integrate the sponsor into
the user experience on TwoDogNet(TM), commissions from the sale of third party
products and advertising revenues from the sale of ad placements on
TwoDogNet(TM). A majority of the Company's stock was purchased in July 1995 by
its current President. The Company had no revenues and incurred an immaterial
amount of expense during the period July through December 1995. The Company has
generated no revenues from its Web environment and limited revenues from its ISP
operations. Accordingly, the Company has no operating history as a Web
environment company and extremely limited operating history as an ISP.
The lack of an operating history regarding the Company's future business
plan provides no basis for evaluating the Company's prospects. The Company's
prospects must be considered in light of the Company's plans regarding the
TwoDogNet(TM) Web environment, and the risks, expenses and obstacles frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets and environments such as the
Internet. To address these risks, the Company must, among other things, respond
to competitive developments, attract, retain and motivate qualified persons and
continue to upgrade its technologies and commercialize products and services
incorporating such technologies. There can be no assurance that the Company will
be successful in addressing such risks.
The Company's revenues to date have been primarily Internet service
provider fees, which are earned ratably over the period of service. The
Company's future success is substantially dependent upon continued growth in the
use of the Internet in order to support the sale of advertising and the adoption
of the Company's services by subscribers on the Company's Web environment. There
can be no assurance that communication or commerce over the Internet will
continue to grow or that advertisers will continue to perceive the Internet as
an effective and sustainable advertising medium. If the Internet does not
continue to expand its commercial potential or if companies do not continue to
view the Internet as a viable advertising medium or if the Company's Web
environment does not attain market acceptance amongst users and advertisers, the
Company's business, operating results and financial condition will be materially
adversely affected.
The Company currently has limited infrastructure, resources and personnel
in the areas of operations, product and system development, marketing and sales,
customer service, finance and administration. The Company expects to increase
its expenses significantly in these areas out of the proceeds of this Offering.
Due the lack of historical financial data on which to base planned operating
expenses, the planned expense levels are based primarily on expectations as to
future
37
revenues, and to a large extent, will be fixed. To the extent that such expenses
precede or are not subsequently followed by increased revenues, the Company's
business, operating results and financial condition will be materially adversely
affected. In addition, there can be no assurance that the Company will raise
sufficient funding as the result of this Offering to enable it to acquire the
resources and personnel that the Company believes is needed to achieve its
plans. Even if the Company does raise a sufficient level of funds, there can be
no assurance that the Company will be able to develop the infrastructure, hire a
sufficient number of qualified persons and integrate the Company's
infrastructure and personnel in a timely and effective manner. Failure to do so
would have a material adverse effect on the Company's business, operating
results and financial condition.
In June 1996, the Company entered into a joint product development and
management agreement with Integrative Systems LLC ("IS LLC") which provides IS
LLC with the exclusive right to develop and manage the Company's ISP and
Internet-related products in exchange for specified payments by the Company for
services rendered, royalties to be paid to the Company on related product sales
and 250,000 shares of the Company's common stock. The Company will receive all
rights of ownership for products developed under this agreement. Product
development costs of $260,601 and $160,960 for the years ended December 31, 1996
and 1997, respectively, were paid to IS LLC including $125,000 related to the
issuance of the above noted common shares in 1996. Product development costs
paid to IS LLC in the nine months ended September 30, 1997 and 1998 were $76,500
and $128,947, respectively. Amounts paid to IS LLC that are included in cost of
revenue for the year ended December 31, 1997 and the nine months ended September
30, 1997 and 1998 were $168,096, $156,778 and $109,785, respectively. The
operations of IS LLC have been integrated into the operations of the Company,
and its employees have become employees of the Company effective February 1,
1999.
To date, the Company has expensed all of its software development costs and
amortized purchased intangibles (certain video masters) over their estimated
useful life of five years on a straight line basis.
The Company has incurred net losses since inception and expects to continue
to operate at a loss for the foreseeable future. Given the risks discussed in
this section as well as in the "Risk Factors" that are associated with the
Company's plans, there can be no assurance that the Company will achieve or
sustain profitability. As of September 30, 1998, the Company had an accumulated
deficit of $2,991,217.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Revenue. Revenue consists of Internet service fees charged to users of the
Company's ISP, which began operations in January 1997. Revenue increased
$110,800, or 391% to $139,110 in the nine months ended September 30, 1998 from
$28,310 in the same period in 1997. The increase was due primarily to an
increase in ISP subscribers from approximately 200 as of September 30, 1997 to
approximately 800 as of September 30, 1998. The Company's monthly service fees
remained unchanged over both nine month periods.
Cost of Revenue. Cost of revenue consists primarily of depreciation and
amortization, telecommunication services provided by companies such as Pacific
Bell and direct labor charged by IS LLC for technical support, Web page
production and maintenance and ISP software installation services, which are
offered to businesses and individuals on an as-needed basis. Cost of revenue
decreased $27,019, or 13% to $175,906 in the nine months ended September 30,
1998 from $202,925 in the same period in 1997. The decrease in cost of revenue
was due primarily to a $28,000 decrease in direct labor expense resulting from a
reduction in IS LLC's ISP staff in 1998. This was the result of the ISP
operation requiring less staff than what was needed during the start-up phase in
1997. The decrease was partially offset by an increase in telecommunications
expense due to the installation of additional phone lines to cover a wider
service area and an increase in depreciation. As a percentage of revenue, cost
of revenue decreased to 126% in the nine months ended September 30, 1998 from
717%, in the same period in 1997. This percentage decrease is due primarily to
the impact of lower cost of sales and increasing sales. The Company expects that
cost of revenue will increase significantly in the future as the result of the
distribution of its Web environment software and Inter-ROM CD.
Product Development Expense. Product development expense consists of consulting
fees charged by IS LLC for software development of the ISP's client browser
interface and TwoDog.Net and related software modules. This relationship has
ceased with the integration of IS LLC in to the Company. Product development
expense increased $52,447, or 69%, to $128,947 in the nine months ended
September 30, 1998 from $76,500 in the same period in 1997. The decrease was due
38
primarily to a decrease in IS LLC's staffing of software development projects in
the 1998 period as compared to those worked on in 1997. To date, the Company has
expensed all of its software development costs. The Company believes that
significant investments in product development are required to remain
competitive. Accordingly, the Company intends to increase the absolute amount of
its product development expenditures in the future.
Selling, general and administrative. Selling, general and administrative
expenses consist primarily of advertising and promotional expenses, financial
and marketing consultants, investor relations, legal and accounting, facilities
and office expense. Selling, general and administrative expenses increased
$54,430, or 21%, to $316,243 in the nine months ended September 30, 1998 from
$261,813 in the same period in 1997. As the result of the launch of the ISP
operation in January 1997, advertising and promotion, travel and telemarketing
expenses were approximately $74,500 higher in the nine months ended September
30, 1997 as compared to the same period in 1998 and an increase in salaries in
the nine months ended September 30, 1998 due to the hiring of a sales manager in
July 1997, an increase in consulting fees, facilities and office expense. The
Company intends to increase expenditures in the areas of sales, operations and
administration.
Income Taxes. As of September 30, 1998, the Company had federal and state net
operating loss carry forwards of approximately $1,500,000 and $1,300,000,
respectively. The majority of such carry forwards expire from 2001 through 2012.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Revenue. The Company had no Internet service fee revenue in 1996. The Company
began its ISP operation in January 1997. For the year ended December 31, 1997,
the Company generated revenue of $50,406 from Internet service fees. There were
approximately 550 users as of December 31, 1997. The Company's monthly service
fees remained unchanged during the year.
Cost of Revenue. Cost of revenue increased $211,033, or 491% to $254,010 in the
year ended December 31, 1997 from $42,977 in 1996. The increase in cost of
revenue was due primarily to direct labor of $61,007 paid to IS LLC and
telecommunication charges of $107,089 relating to ISP operations. The Company
did not incur any of these charges in 1996. The remaining increase was a result
of additional depreciation of $42,787 from assets purchased late in 1996 and
throughout 1997. The Company expects that cost of revenue will increase
significantly in the future as the result of the distribution of its Web
environment software and Inter-ROM CD.
Product Development Expense. Product development expense decreased $99,641, or
38%, to $160,960 in the year ended December 31, 1997 from $260,601 in 1996. In
June 1996, the Company entered into a joint product development and management
agreement with IS LLC which provides IS LLC with the exclusive right to develop
and manage the Company's ISP and Internet related products in exchange for
specified payments by the Company for services rendered, royalties paid to IS
LLC on related product sales and 250,000 shares of the Company's common stock.
Included in product development costs was $125,000 related to the issuance of
the above noted common shares in 1996. The decrease was partially offset by an
increase in additional IS LLC's staffing for software development projects in
1997 as compared to those worked on in 1996. To date, the Company has expensed
all of its software development costs. The Company believes that significant
investments in product development are required to remain competitive.
Accordingly, the Company intends to increase the absolute amount of its product
development expenditures in the future.
Selling, general and administrative. Selling, general and administrative
expenses increased $308,408, or 130%, to $546,182 in the year ended December 31,
1997 from $234,774 in 1996. This increase was primarily due to the increase in
advertising and promotions, salaries, travel and marketing consultants relating
to the launch of the ISP operation in January 1997. The increase in these
expenses contributed approximately $278,000 to the overall increase in selling,
general and administrative expenses and included $50,000 in stock issued to
consultants. The remainder of the increase was due to increased fees for
professional services, consultants (which included warrants valued at $13,262
that are issuable at December 31, 1997), investor development and facilities.
The Company intends to increase expenditures in the areas of revenue, operations
and administration.
39
Other Income. Other income increased $9,547, or 178%, to $14,904 in the year
ended December 31, 1997 from $5,357 in 1996. The increase is due primarily to
higher interest earning cash balances and a higher average loan balance during
1997, offset by sub-lease income earned in 1996.
Income Taxes. As of December 31, 1997, the Company had federal and state net
operating loss carry forwards of approximately $1,200,000 and $1,000,000,
respectively. The majority of such carry forwards expire from 2001 through 2012.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
Liquidity and Capital Resources
The Company has financed its operations primarily through private sales of
equity securities. For the nine months ended September 30, 1998, the Company
raised $635,154 in cash from a private placement of its common stock and issued
an additional $8,500 in common stock in exchange for services rendered to the
Company and $50,000 in common stock in payment of a liability for services
previously rendered to the Company. For the year ended December 31, 1997 and
1996, the Company raised $1,317,233 and $749,008, respectively, in cash from
private placements of its common stock. The Company also made available for
issue warrants valued at $13,262 for consulting services rendered to the Company
in the year ended December 31, 1997, and issued $235,523 in common stock in
exchange for property contributed and services rendered to the Company in the
year ended December 31, 1996.
At September 30, 1998, the Company's principal source of liquidity was
approximately $677,000 in cash and cash equivalents. The Company currently does
not have a credit facility which it can use to satisfy short or long term
borrowing requirements. At September 30, 1998 the Company had no long term debt
or material long term commitments.
In the nine months ended September 30, 1998, cash used by operations was
$448,670, due primarily to a net loss for the period and a decrease in accounts
payable. The Company had an accumulated deficit of $2,991,217 at September 30,
1998 and expects to operate at a loss for the foreseeable future. The Company's
independent certified public accountants have included an explanatory paragraph
in their audit report stating that the Company's financial statements have been
prepared assuming that the Company will continue as a going concern, however the
Company's cumulative net loss since inception and its planned operating expenses
raise substantial doubt as to the Company's ability to continue as a going
concern. The Company is dependent upon the proceeds of the Offering or other
financing in order to continue as a going concern.
The Company currently has limited infrastructure, resources and personnel
in the areas of operations, product and system development, marketing and sales,
customer service, finance and administration. The Company expects to increase
its expenses significantly in these areas out of the proceeds of this Offering.
In addition, the Company plans to significantly increase its capital equipment
purchases in the next year primarily to increase the capacity of the Company's
client server hardware as well as to significantly upgrade its communications,
computer and management information systems. The Company believes that the net
proceeds from the sale of the maximum number of shares in this Offering will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next twelve months. There can be no assurance that
the Company will be able to sell the maximum number of shares in this Offering.
In the event the net proceeds from this Offering are significantly less than the
maximum proceeds of $20,000,000 less expenses associated with this Offering, the
Company will have to lower its planned expenditures and the timing of such
expenditures which will have a materially adverse effect on its business,
operating results and financial condition. Additionally, the Company will need
to raise additional capital to satisfy its working capital and capital
expenditure requirements. If additional funds are raised through the issuance of
equity or convertible debt securities, the percentage ownership of the
stockholders of the Company will be reduced, stockholders may experience
additional dilution and such securities may have rights, preferences or
privileges senior to those of the rights of the Company's common stock. There
can be no assurance that additional financing will be available at terms
favorable to the Company, or at all. If adequate funds are not available or not
available on acceptable terms, the Company will not be able to adequately fund
its planned operations and expansion, which will have a material adverse effect
on the Company's business, operating results and financial condition.
40
Impact of the Year 2000 Issue
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates where the date has
been stored as just two digits, e.g. 97 for 1997. On January 1, 2000, any clock
or date recording mechanism including date sensitive software which uses only
two digits to represent the year, may recognize a date using 00 as 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruption of operations, including among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
The Company believes that its internal ISP software and hardware systems
will function properly with respect to dates in the year 2000, however there can
be no assurance in this regard until such systems are operational in the year
2000 and thereafter. The Company plans to purchase a significant amount of
equipment for its planned Web environment and management information systems and
its policy will require that all equipment and software to be purchased be Year
2000 compliant.
The Company is in the process of contacting all of its significant
suppliers to determine the extent to which the Company's interface with these
suppliers make it vulnerable to any third party failure to make their own
systems Year 2000 compliant. At this time, the Company can not estimate the
effect, if any, that non-compliant systems at these entities will have on the
Company's business, operating results and financial condition. In the event of a
failure of such non-compliant systems, the Company could incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, operating results and financial condition. Current users
of the Internet with computers that are not year 2000 compliant, may experience
system failures and therefore be unable to gain access to he Internet in the
Year 2000. As a result, the decreased Internet usage could have a material
adverse effect on the Company's advertising revenues and consequently its
business, operating results and financial condition. In addition, the Company
will rely heavily on revenues from advertisers and sponsors. The purchasing
patterns of potential advertisers and sponsors may be affected by Year 2000
issues as companies expend significant resources to correct their current
systems for Year 2000 compliance. These expenditures may result in reduced funds
available for Internet advertising, which could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company has not made any assessment of the Year 2000 risks associated with its
third party suppliers or potential advertisers and has not made any contingency
plans to address such risks.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires an enterprise to report, by
major components and as a single total, the change in net assets during the
period from nonowner sources. Adoption of this statement will not impact the
Company's financial position, results of operations or cash flows. This
statement is effective for fiscal years beginning after December 15, 1997, with
earlier application permitted.
41
MANAGEMENT
Name Age Position
---- --- --------
Nasser Hamedani 60 Director; Chief Executive Officer
Sholeh Hamedani 30 Director, Treasurer and President
Larry Wheeler 55 Chief Technology Officer
Tim Turner 51 Chief Financial Officer
Roger Campos 52 Director
Jamshid Ghosseiri 59 Director
Tyler Wheeler 27 Vice President, Technology
Nasser Hamedani , 60, is a Director, Chairman of the Board and Chief
Executive Officer of the Company. Mr. Hamedani founded SyberVision of San
Francisco, California in 1978. SyberVision was purchased by CML Group, Inc.
(NYSE Symbol: CML) in 1985, and is now a privately-owned company. When
SyberVision became a subsidiary of CML, Mr. Hamedani joined CML, and served as
Chairman of SyberVision until 1989. Prior to acquiring Asian-American
International, Inc. in 1995, Mr. Hamedani pursued personal interests. He
received a BA degree from California College of Arts & Crafts in 1967 and a
Master's Degree in Fine Arts/Advertising and Marketing from University of Tehran
in 1971.
Sholeh Hamedani, 30, is a Director, Treasurer and President of the Company.
From 1991 to 1994, Ms. Hamedani served as an advisor to Global Vision. From 1989
to 1991, she was President of NutraEra, Inc., a company she founded, which
developed proprietary nutritional supplements and educational products. In 1991,
NutraEra, Inc. was acquired by Global Vision, a national network marketing
company. From 1985 to 1989, Ms. Hamedani was an employee with SyberVision
Systems in the Production and TV Media Department.
Larry Wheeler, 55, is Chief Technology Officer. Since 1993, Mr. Wheeler has
served as President of Integrated Systems, LLC. Mr. Wheeler has spent most of
his professional career in the computer industry. From 1966 to 1972, he was a
Manufacturing Specialist for IBM, and from 1972 to 1979 served as a consultant
to IBM in software development and application installation.
During that time he was on the development team for the first floppy disk
(IBM warm boot diskette for the 370), and the development team for the IBM
System 38/AS400. During his tenure at IBM he was awarded 7 Symposiums (IBM's
Honor Society) and was once voted IBM Systems Engineer of the Year. He received
a BS degree from the California State University San Jose in 1972 and spent two
years in the IBM advance studies education system.
Tim Turner, 51, is Chief Financial Officer. Prior to joining Two Dog Net,
Inc. in 1998, Mr. Turner held the position of CFO for California Orchards, a
specialty retail chain, from 1996 to 1998. Mr. Turner was hired to lead the
turnaround of California Orchards and developed the strategy that took the
company into and successfully out of Chapter 11 in less than one year. In 1991,
Mr. Turner co-founded Spatialight Inc., a world leader in high-resolution small
format active matrix liquid crystal displays. Mr. Turner was a Director of the
company and held the position of CFO until the founders sold the company in
1995. Mr. Turner continued as a Director of Spatialight until 1997. Mr. Turner
has also held the positions of CFO for Almaden Vineyards, ISC Wines, and Gold
Disk, a consumer software publisher and controller for Heublein Wines, the
nations second largest wine producer and marketer. Mr. Turner holds a BS degree
in Engineering from San Jose State University, 1973.
Tyler Wheeler, 27, is Vice-President, Technology. From 1989 to 1994, Mr.
Wheeler was a Vice-President of Micro Tech Systems, a computer consulting
company based in Fresno, California. Since 1993, he has also served as a
Vice-President of Integrative Systems, Inc., a network design company. Mr.
Wheeler completed a BA in Finance and Business Law at California State
University in Fresno in 1995.
Roger Campos, 52, is a Director of the Company. Since 1998, Mr. Campos has
been Vice President of Governmental Relations for over 200 colleges and
universities represented by the Hispanic Association of Colleges and
Universities in Washington, D.C. Prior thereto, Mr. Campos served as CEO of a
governmental relations and business
42
consulting firm located in Washington, D.C., working with Fortune 500 firms,
medium and small businesses throughout the country. He has 20 years experience
in legal and high level management positions with five federal U.S. agencies
including the White House's Office of Management and Budget during the Nixon,
Ford, and Reagan administrations. Mr. Campos is a graduate of the University of
California Santa Barbara and earned his law degree at the United States
International University school of Law (California Western Campus) of San Diego,
California.
Dr. Jamshid Ghosseiri, 59, is a Director of the Company. He is currently
the Chief of the Microbiology Department at Mt. Diablo Medical Center and has
over 28 years of experience in the field of clinical microbiology and research
in infectious diseases at both San Jose State University and Stanford
University.
Additional Management
Karl Kronenberger, 30, will become Vice President of Sales & Marketing. Mr.
Kronenberger brings both interactive media and general legal counsel experience
to the Two Dog Net. Mr. Kronenberger has structured multiparty agreements for
several multimedia and Internet projects. He co-founded Spunky Productions in
1998, which specializes in producing and marketing original content Internet
sites, and in developing and marketing children's television programming that
cross-promotes with Internet sites. Mr. Kronenberger also has a strong legal
background, having counseled clients in numerous areas of the law, to include
intellectual property and Internet law. He will direct business development
efforts and develop strategic partnerships to bring content, as well as revenue,
to Two Dog Net. Mr. Kronenberger received his Bachelor of Arts degree from the
University of Notre Dame in 1990, and his law degree from the University of
Cincinnati College of Law in 1993. He is licensed to practice law in Ohio, in
Georgia and in federal court in Washington.
Craig Kronenberger, 27, will become Vice of President Creative and Content
Development. Mr. Kronenberger has produced and designed numerous interactive
media programs, including structural package designs, as well as Internet and
multimedia applications. Starting in 1994 as Manager of Interactive Media for
Pollak, Levitt & Nel Advertising (PLN), in Atlanta, Georgia, Mr. Kronenberger
was instrumental in building the second largest advertising agency interactive
group in the Southeast. His accounts include Kimberly-Clark Professional
Healthcare, MacGregor Golf, Alcoa, National Vision, SAP Software, Target One,
Service Merchandise, GSM Alliance, Hill ROM, First USA Bank, Georgia Power and
Prudential Securities. He also developed in Claus.Com in 1994, which grew to be
the largest Santa Claus Website, receiving 80 million hits and 14 million page
views in December 1997, and almost double that figure in 1998. While at PLN,
Craig's Division won two Gold Amy Awards (American Marketing Association's
Online Awards) for their work on Claus.com (1996, 1997). Mr. Kronenberger also
co-founded Spunky Productions in 1998, which specializes in producing original
content Internet sites and in developing children's television programming that
cross-promote with Internet sites. He is responsible for day-to-day operations
and production in the Creative Division. Mr. Kronenberger provides the daily
creative leadership for all the artists, designers and writers in his division.
Mr. Kronenberger received his Bachelor of Fine Arts in Electronic Media from the
University of Cincinnati in 1993. He also completed an independent study in the
evolution of communication delivery, storage and playback systems, including
cable and satellite distribution in 1993. Mr. Kronenberger has taught
college-level classes on developing interactive media projects and online
marketing in 1995 and 1996.
Advisory Board
Dr. Marilyn Lane, Ph.D.: Ms. Lane is the spokesperson on all educational
matters from kindergarten to post graduate for Two Dog Net. She coordinates all
educational programs and brings the necessary resources for our educational
offerings. Ms. Lane has the skills to develop curriculum, provide staff
development, as well as be a presenter. She is an internationally known educator
and expert on self-esteem. She has worked in Russia and Trinidad-Tobago with the
educators to change their educational systems. Her specific educational areas of
expertise are Gifted and Talented Education, Early Childhood Education, and
parent education and involvement. She is the President of the California Center
for Self-Esteem and is Vice President of the National Association for
Self-Esteem.
Dr. Bradley Winch, Ph.D., JD: Dr. Winch is a noted International Scholar,
Scientist, Lawyer, Lecturer, Educator and Publisher. Academically, he has been
affiliated with Wayne State University of Karlsruhe (Germany), the University of
Moscow (through the Soviet Academy of Sciences) and Pepperdine University. His
business experience includes; Director of New Ventures for General Mills, Inc.,
Director of Educational Products for Mattel, Inc., and he is a licensed
attorney. In 1971, Dr. Winch formed B.L. Winch & Assoc., a company that has been
a leader in developing, publishing, and distributing educational curriculum and
materials for K-12, and to the books in the areas of Positive Self-Esteem,
Stress Management
43
and Whole Brain Learning for the general public. Dr. Winch is dedicated to
empowering children (and adults) worldwide to develop their maximum potential.
Mr. Howard Moore: Mr. Moore has over 50 years experience in marketing,
licensing, merchandising and packaging in the toy industry. After starting his
career in a family toy business, Mr. Moore founded Toy Barn Stores in 1957. Mr.
Moore sold Toy Barn Stores in 1966 and founded Toy Town, USA where he was
President and CEO. Mr. Moore sold the company to Lionel Corporation in 1978
where he remained as Senior Vice President of Purchasing until he joined Toys
"R" Us in 1980. At Toys "R" Us, Mr. Moore progressed from Senior Vice President
of Purchasing to Executive Vice President, General Merchandising Manager, to
Member of the Executive Committee to a Director of the Company. Mr. Moore
retired from Toys "R" Us in 1990 but continues as a member of the company's
Board of Directors. After retiring from Toys "R" Us, Mr. Moore founded Howard
Moore Associates, a consulting group to the toy industry in the areas of
marketing, product development, licensing, merchandising and packaging. Howard
Moore Associates has provided consulting services to a number of start-up
companies, product developers, toy inventors and has recently brokered the sale
of four toy companies. Mr. Moore brings a wealth of business experience in
development and marketing of products for children.
EXECUTIVE COMPENSATION
Effective upon completion of the minimum offering, the Company anticipates
that it will, pursuant to employment agreements, pay the following estimated
annual salaries to it's executive staff. The Company believes the persons named
below will be its most highly compensated executive officers.
Annual Summary Compensation Table (Estimated):
- ----------------------------------------------
Name and Position Salary
- ----------------- ------
Nasser V. Hamedani 200,000
Chairman of the Board of Directors
Chief Executive Officer
Sholeh A. Hamedani 135,000
President
Larry Wheeler 135,000
Chief Technical Officer
Tim Turner 125,000
Chief Financial Officer
Tyler Wheeler 125,000
Vice President,
Technical Development
Since inception, Mr. Hamedani has received no compensation from the
Company. The Company has committed to loan Mr. Hamedani up to $500,000. In the
event of the completion of a public offering, the commitment will be terminated
and no additional amounts will be loaned to the Company's chairman. As of
September 30, 1998, amounts outstanding under this loan commitment was $241,404
(which includes $9,841 of accrued interest). See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's common stock immediately prior to this
offering, as adjusted to reflect the sale of common stock offered hereby for (i)
each person or entity who is known by the Company to beneficially own more than
5% of the outstanding 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. The Company believes that the beneficial owners of the Common Stock
listed below, based upon information furnished by them, have sole investment and
voting power with respect to their shares, subject to community property laws
where applicable.
Directors, Officers Shares Beneficially Percentage of Common
Shares and 5% Stockholders Owned(1) Outstanding
- -------------------------- ------------------- --------------------
Before Offering Minimum Maximum
--------------- ------- -------
(14,866,919) (15,266,919) (16,866,919)
Nasser Hamedani(2) 950,000 6.4% 6.2% 5.6%
Sholeh Hamedani(2) 2,047,334 13.8% 13.4% 12.1%
Nasser Hamedani & Andrea
Hamedani(2) 4,000,000 26.9% 26.2% 23.7%
Larry Wheeler 250,000 1.7% 1.6% 1.5%
Jamshid Ghosseiri 10,000 .07% .07% .06%
SANDHRS LTD. PARTNERSHIP(5) 5,000,000 33.6% 32.7% 29.6%
1570 Rancho Del Hambre
Lafayette, CA 04549
All directors and officers 12,267,334 82.5% 80.3% 72.7%
as a group (5 persons)
<FN>
------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting and investment
power with respect to shares. Shares of Common Stock subject to options
currently exercisable or exercisable within 60 days after September 30,
1998 are deemed outstanding for computing the percentage ownership of the
person holding such options, but are not deemed outstanding for computing
the percentage of any other person.
(2) The address of Mr. Hamedani, Ms. Hamedani, Larry Wheeler and Mr.
Ghosseiri is: c/o International Marketing Dynamics, 337 Preston Court,
Livermore, CA 94550.
(3) The General Partner of SANDHRS LTD. PARTNERSHIP is Nasser Hamedani.
------------------------
</FN>
45
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1997, the Company entered into a variety of agreements with the founder
of the Company, who also currently serves as the Chairman and Chief Executive
Officer (the "Chairman"), related to his founding contribution. In conjunction
with these agreements, 10,000,000 common shares were issued to the Chairman. In
June 1998, these agreements were rescinded and a new agreement was entered into
which stated that the 10,000,000 shares issued to he chairman were issued for
his initial contribution of intellectual property rights to the Company. These
shares have been valued at the founder's historical cost basis in such assets,
which was nil at the date of contribution. In addition, the Company has
committed to loan the Chairman up to $500,000. As of December 31, 1997 and 1996,
amounts outstanding under this loan commitment totaled $241,404 (including
$9,841 of accrued interest currently due) and $113,676, respectively. In the
event of the completion of a public offering this loan will no longer be drawn
against. The unpaid principle bears interest at 8.5% due quarterly commencing
September 1997, and are partially secured by investments owned by the Chairman.
The principal is due on June 21, 2000.
In March 1995, Global Management systems, Inc. ("GMS"), an organization
owned by the President of the Company (who is also related to the Chairman),
obtained a 20 year exclusive license from a non-related party for all rights
related to certain educational video masters in exchange for $20,000 cash and a
$780,000 payable pursuant to a royalty license agreement, with royalties payable
due to the extent sales of the related products are made at a rate of 5% of net
sales. Payments totaling $25,523 were paid by GMS through February 1996 on the
loan payable. In March 1996, GMS transferred all rights to these video masters
to the Company in exchange for the issuance of 2,000,000 shares of the Company's
common stock to the Company's President. GMS and the Company's president
retained the remaining $754,477 liability under the loan payable. These video
masters were recorded at GMS's cost basis as of March 1996 ($65,786) and will be
amortized over a five year period. Remaining license expense totaling $754,477
will be recorded by the Company as sales of the product are made. Through
September 30, 1998, there have been no sales made by the Company of products
subject to the royalty agreement.
During 1997, the Company had one employee. Included in selling, general and
administrative expenses is $14,343 and $7,000 in consulting fees and other
expenses paid to the President and certain other family members for the years
ended December 31, 1997 and 1996, respectively. Corresponding amounts for the
nine months ended September 30, 1997 and 1998 were $7,401 and $9,088,
respectively.
In June 1996, the Company entered into a joint product development and
management agreement with Integrative Systems, LLC ("IS LLC"), which granted IS
LLC the exclusive right to develop and manage the Company's ISP and
Internet-related products in exchange for specified payments by the Company for
services rendered, royalties paid to IS LLC on related product sales and 250,000
shares of the Company's common stock. The Company will receive all rights of
ownership for products developed under this agreement. This relationship has
ceased with the integration of IS LLC into the Company and this agreement has
been terminated. Product development costs of $160,960 and $260,601 in 1997 and
1996, respectively, were paid to IS LLC, including $125,000 related to the
issuance of the above-mentioned common shares in 1996. Product development costs
paid to IS LLC in the nine months ended September 30, 1997 and 1998 were $76,500
and $128,947, respectively. Amounts paid to IS LLC that are included in cost of
revenue for the year ended December 31, 1997 and the nine months ended September
30, 1997 and 1998 were $168,096, $156,778 and $109,785, respectively. Accounts
Payable-Related Party are due to IS LLC. In addition, included in current
Related Party Receivables at December 31, 1997 is $27,310 due from IS LLC
related to its management of the Company's ISP.
DESCRIPTION OF SECURITIES
The Company has authorized 200,000,000 shares of common stock, par value
$.001. Immediately prior to this offering, there were 14,866,919 shares of
Common Stock outstanding and held of record by 543 shareholders. Owners of
Common Stock are entitled to one vote for each share held of record on all
matters to be voted on by shareholders. The owners of common stock are entitled
to receive dividends when, as and if declared by the board of directors out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of the Company, the common stock shareholders are entitled to share
ratably in all assets remaining which are available for distribution to them
after payment of
46
liabilities and after provision has been made for each class of stock, if any,
having preference over the common stock. common stock shareholders, as such,
have no conversion, preemptive or other subscription rights, and there are no
redemption provisions applicable to the common stock. All of the outstanding
shares of Common Stock are, and the shares of Common Stock offered by this
Registration Statement, when issued for the consideration set forth in this
Registration Statement, will be fully paid and non-assessable.
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities
The Utah Revised Business Corporation Act, as amended, authorizes the
Company to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceedings, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Company if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. The Company's Articles of Incorporation provides for the
indemnification of directors and officers to the full extent permitted by Utah
law.
The Company may also purchase and maintain insurance for the benefit of any
director or officer which may cover claims for which the Company could not
indemnify such person.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore unenforceable.
Registration Rights
There are no agreements between current shareholders and the Company with
respect to the registration of such shares under the Securities Act.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is
Interwest Transfer Company, Salt Lake City, Utah.
NASDAQ National Market Listing
Application will be made to have the common stock listed for quotation on
the NASDAQ National Market under the symbol "DNET."
SHARES ELIGIBLE FOR FUTURE RESALE
Prior to this Offering, there has been no public market for the Common
Stock and there can be no assurance that a significant public market for the
common stock will be developed or be sustained after this Offering. Sales of
substantial amounts of common stock in the public market after this Offering, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for the common stock or the future ability of the Company to raise
capital through an offering of equity securities.
Upon completion of this Offering, the Company will have 15,266,919 shares
outstanding if the minimum amount is sold, and 16,866,919 shares outstanding if
the maximum amount is sold. The shares sold in this Offering will be freely
tradeable without restriction or further registration under the Securities Act
unless purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act ("Rule 144") described below. Sales of outstanding
shares to residents of certain states or jurisdictions may only be effected
pursuant to a registration in or applicable exemption from the registration
provisions of the securities laws of those states or jurisdictions.
The remaining 14,866,919 shares of common stock outstanding upon completion
of this Offering, which are held of record by shareholders prior to this
Offering are "restricted securities" and may not be sold in a public
distribution except in compliance with the registration requirements of the
Securities Act or an applicable exemption under the Securities Act, including an
exemption pursuant to Rule 144. In general, under Rule 144 as in effect at the
closing of this offering,
47
beginning 90 days after the date of this Prospectus, a person (or persons whose
shares of the Company are aggregated) who has beneficially owned Restricted
Shares for at least one year (including the holding period of any prior owner
who is not an affiliate of the Company) would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of Common Stock (approximately
168,669 shares immediately after this Offering assuming the maximum is sold) or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner who is not an affiliate of the
Company) is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
A substantial number of shares currently restricted from resale under Rule
144 will become freely tradeable upon the effective date of this Prospectus. The
Company is unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for the Common Stock of the
Company, the personal circumstances of the sellers and other factors. Sales of
substantial amounts of shares in the public market could adversely affect
prevailing market prices and could impair the Company's future ability to raise
capital through an Offering of its equity securities.
PLAN OF DISTRIBUTION
The Company proposes to offer and sell the shares directly to members of
the public. Announcements of this Offering, in the form prescribed by Rule 134
of the Securities Act, will be communicated in general publications and on the
Internet. A copy of this Prospectus will be delivered to those who request it,
together with the Subscription Agreement. All shares will be sold at the public
Offering price of $10.00 per share and a minimum purchase of 100 shares is
required. The Company reserves the right to reject any subscription or share
purchase agreement in full or in part.
The Company will effect offers and sales of shares through printed copies
of this Prospectus delivered by mail and electronically. Any voice or other
communications will be conducted in certain states through its executive
officers, and in other states through a designated sales agent, licensed in
those states. Under Rule 3a4-1 of the Exchange Act, none of these employees of
the Company will be deemed a "broker," as defined in the Exchange Act, solely by
reason of participation in this Offering, because (1) none is subject to any of
the statutory disqualifications in Section 3(a)(39) of the Exchange Act, (2) in
connection with the sale of the shares hereby offered, none will receive,
directly or indirectly, any commissions or other remuneration based either
directly or indirectly on transactions in securities, (3) none is an associated
person (partner, officer, director or employee) of a broker or dealer and (4)
each meets all of the following conditions: (A) primarily performs substantial
duties for the issuer otherwise than in connection with transactions in
securities; (b) was not a broker or dealer, or an associated person of a broker
or dealer, within the preceding 12 months; and (C) will not participate in
selling an Offering of securities for any issuer more than once every 12 months.
Until the minimum number of Shares is sold and gross proceeds of no less
than $7,000,000 are received, all funds received for the purchase of Shares will
be held in an escrow with U.S. Bank Trust, N.A. (the "Escrow Agent"). Upon the
receipt of subscriptions for the minimum Offering amount, the Escrow Agent will
release the funds held in escrow to the Company and certificates for the
purchase of Shares will be issued to subscribers. If the minimum number of
Shares is not sold by the scheduled termination date of the Offering or by such
earlier date as the Company determines to terminate this Offering, all funds
held in escrow will be returned to the subscribers. with any interest which
accrue on those funds. In the event that the minimum Offering amount is not
raised, interest will not be returned to investors.
The Company does not intend to use broker-dealers in the sale of securities
in the Offering. However, if the Company subsequently determines that it will
use a broker-dealer for the purpose of selling the securities, the Company will
amend the registration statement by post-effective amendment to identify a
selected broker-dealer at such time as such broker-dealer sells 5% or more of
the Offering. In the view of the Commission's Division of Corporation Finance,
any selected broker-dealer that sells securities in this type of an Offering
would be deemed an underwriter as defined in Section 2(11) of the Securities
Act. Prior to the involvement of any broker-dealer in the Offering, the Company
must obtain a no objection position from the NASD regarding the contemplated
underwriting compensation and arrangements.
48
DESCRIPTION OF PROPERTY
The Company's headquarters is located in Livermore, California where it
leases 4,166 square feet of office space. All marketing, production, and
accounting functions are performed at this location. The Company also leases
office space in Fresno, California, where it leases 1,917 square feet. Future
sales locations will be leased by the Company from unrelated third parties. The
Company outsources all of the manufacturing and distribution of its CD ROM
products. The Company's capital equipment consists of furniture and computer
equipment.
INTEREST OF NAMED EXPERTS AND COUNSEL
No person named in this Prospectus as an expert or as counsel to the
Company was hired on a contingent basis or was or is a promoter, underwriter,
voting trustee, director, officer or employee of the Company.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for the
Company by Evers & Hendrickson, L.L.P., San Francisco, CA.
CHANGE IN ACCOUNTANTS
In September 1998, the Company appointed Marc Lumer & Company to replace
the former accountants as its principal accountants. There were no disagreements
with the former accountants during their term from April 1, 1997 to September
22, 1998 on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements, if
not resolved to the former accountants' satisfaction, would have caused them to
make reference to the subject matter of the disagreement in connection with
their reports. The former accountants issued a qualified opinion on the
financial statements as of and for the years ended December 31, 1996 and 1997
due to omission by the Company of inception to date information as required for
development stage enterprises. In addition, their report included an explanatory
paragraph referring to the substantial doubt of the Company's ability to
continue as a going concern. The Company did not consult with Marc Lumer &
Company on any accounting or financial reporting matters in the periods prior to
their appointment. The change in accountants was approved by the Board of
Directors.
EXPERTS
The financial statements of Two Dog Net, Inc. as of December 31, 1996 and
1997, and for the years ended December 31, 1996 and 1997, appearing in this
Prospectus and Registration Statement have been audited by Marc Lumer & Company,
independent auditor, as stated in their report, which expresses a qualified
opinion related to the omission from the financial statements or certain
required development stage company disclosures, and includes an explanation
referring to the substantial doubt of the Companys' ability to continue as a
going concern. Such report appears herein and in the Registration Statement, and
has been included herein in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2, including amendments thereto, relating
to the shares offered hereby has been filed with the Securities and Exchange
Commission, Office of Small Business Policy, Washington, D.C. This
49
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the shares
offered hereby, reference is made to such Registration Statement, exhibits and
schedules. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office located at 450 Fifth Street,
N.W., Washington, D.C. 20549, the Northeast Regional Office located at 7 World
Trade Center, 13th Floor, New York, New York, 10048 and copies of all or any
part thereof may be obtained from the Public Reference Branch of the Commission
upon the payment of certain fees prescribed by the Commission. In addition the
Commission maintains a World Wide Web site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements and other documents
filed electronically with the Commission, including the Registration Statement.
The Company intends to furnish its shareholders with annual reports containing
financial statements audited by its independent public accountants and quarterly
reports containing unaudited financial information for the first three quarters
of each fiscal year.
50
Appendix A 2,000,000 Shares
Two Dog Net, Inc.
Share Purchase Agreement
To Two Dog Net, Inc.:
Please issue shares of your common stock in the amounts and name(s) shown below.
My signature acknowledges that I have read the Prospectus dated ___________,
1999, and am aware of the risk factors contained therein. I represent that I
have relied solely upon the contents of the Prospectus in making an investment
decision with regard to the shares offered thereby, and I have not relied on any
other statements made by or with regard to the Company in connection with its
anticipated operations or financial performance.
______________________________ ______________________________
(Signature) (Date)
______________________________ ______________________________
(Signature) (Date)
Enclosed is payment for ________ shares at $________;
Total: $________
Register the shares in the following name(s) and amount(s):
(Please Print)
Name(s):_________________________________________________________
Number of share(s): ________________
As (check one) [ ] Individual [ ] Joint Tenancy [ ] Husband & Wife as community
property[ ] Tenants in Common [ ] Corporation [ ] Trust [ ] Other:
For the person(s) who will be registered shareowners:
Mailing Address:_________________________________________________
City, State, Zip:________________________________________________
Telephone:_______________________________________________________
Social Security or Taxpayer ID Number(s):________________________
Note: Please attach any instructions for mailing the certificates or shareowner
communications other than to the registered shareowner at this address.
No Subscription Is Effective Until Acceptance.
Subscription Accepted by Two Dog Net, Inc.:
__________________________
Sholeh Hamedani, President
Date _____________________
INTERNATIONAL MARKETING DYNAMICS, INC.
(A Development Stage Company)
FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1997
and the Nine Months Ended September 30,
1997 (Unaudited), 1998 (Unaudited)
Two Dog Net, Inc.
Index to Financial Statements
Report of Independent Auditors...............................................F-2
Balance Sheets...............................................................F-3
Statements of Operations.....................................................F-4
Statements of Shareholders' Equity.....................................F-5; F-14
Statements of Cash Flows.....................................................F-6
Notes to Financial Statements................................................F-8
F-1
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
International Marketing Dynamics, Inc.
I have audited the accompanying balance sheets of International Marketing
Dynamics, Inc. (the "Company") (a development stage company) as of December 31,
1997 and 1996, and the related statements of operations, stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audits provide a reasonable basis for my opinion.
The financial statements do not include disclosures of cumulative activity from
inception of the Company as required by generally accepted accounting principles
for development stage companies.
In my opinion, except for the omission from the financial statements of the
disclosures described in the preceding paragraph, such financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended 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 A to such
financial statements, there are matters that raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans concerning
these matters are also described in Note A. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
San Francisco, California
October 21, 1998
F-2
INTERNATIONAL MARKETING DYNAMICS, INC. (A Development Stage Company)
BALANCE SHEETS
December 31, September 30,
1996 1997 1998
----------- ----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 67,691 $506,203 $676,968
Related party receivables -- 33,310 25,559
Prepaid expenses and other 11,330 12,270 35,400
----------- ----------- -----------
TOTAL CURRENT ASSETS 79,021 551,783 737,927
PROPERTY AND EQUIPMENT - Net 265,806 243,064 189,863
VIDEO MASTERS 58,958 45,802 45,933
PATENT COSTS - Net 5,924 14,494 14,494
----------- ----------- -----------
TOTAL ASSETS $409,709 $855,143 $988,217
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 24,701 $ 54,994 $ 23,051
Accounts payable - related party 25,205 45,841 --
Deferred revenue -- 9,127 10,590
Other current liabilities -- 89,953 14,291
Loans payable, related party - current portion 12,000 11,039 12,621
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 61,906 210,954 60,553
Loans payable, related party - non current portion 10,539 -- --
----------- ----------- -----------
TOTAL LIABILITIES 72,445 210,954 60,553
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
common stock, par value $.001 per share; authorized
200,000,000 shares, issued and outstanding 3,428,536
shares at December 31, 1996, 14,304,667 shares at
December 31, 1997 and 14,719,173 share
at September 30, 1998 (unaudited) 3,429 14,305 14,719
Additional paid-in capital 2,090,549 3,410,168 4,138,393
Note receivable from officer (113,676) (241,404) (234,231)
Deficit accumulated during the development stage (1,643,038) (2,538,880) (2,991,217)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 337,264 644,189 927,664
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 409,709 $ 855,143 $ 988,217
=========== =========== ===========
<FN>
See accompanying notes.
</FN>
F-3
INTERNATIONAL MARKETING DYNAMICS, INC. (A Development Stage Company)
STATEMENTS OF OPERATIONS
Nine Months Ended
Years Ended December 31, September 30,
--------------------------------- ---------------------------------
1996 1997 1997 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
REVENUES $ -- $ 50,406 $ 28,310 $ 139,110
COST OF REVENUES 42,977 254,010 202,925 175,906
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) (42,977) (203,604) (174,615) (36,796)
------------ ------------ ------------ ------------
OPERATING EXPENSES
Product development 260,601 160,960 76,500 128,947
Selling, general and administrative 237,774 546,182 261,813 316,243
------------ ------------ ------------ ------------
TOTAL OPERATING
EXPENSES 498,375 707,142 338,313 445,190
------------ ------------ ------------ ------------
OPERATING LOSS (541,352) (910,746) (512,928) (481,986)
OTHER INCOME 5,357 14,904 12,572 29,649
------------ ------------ ------------ ------------
NET LOSS ($ 535,995) ($ 895,842) ($ 500,356) ($ 452,337)
============ ============ ============ ============
LOSS PER SHARE ($ .31) ($ .06) ($ .04) ($ .03)
============ ============ ============ ============
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING $ 1,735,000 $ 13,785,000 $ 13,700,000 $ 14,439,000
============ ============ ============ ============
<FN>
See accompanying notes.
</FN>
F-4
INTERNATIONAL MARKETING DYNAMICS, INC. (a Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1996, 1997 AND SEPTEMBER 30, 1998 (Unaudited)
(SEE LAST PAGE of f/s)
F-5
INTERNATIONAL MARKETING DYNAMICS, INC. (A Development Stage Company)
STATEMENTS OF CASH FLOWS
Nine Months Ended
Years Ended December 31, September 30
------------------------ -----------------------
1996 1997 1997 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss $ (535,995) $ (895,842) $ (500,356) $ (452,337)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 42,977 85,764 56,014 66,121
Interest earned on related party note -- (9,841) (10,129) --
Warrants issued for services -- 13,262 -- --
Common stock issued for services 190,000 -- -- 43,485
Effect of changes in:
Accounts receivable - related parties -- (27,310) (21,544) 17,592
Prepaid expenses and other (11,330) 4,460 505 (23,130)
Accounts payable 49,956 50,929 (49,906) (77,784)
Deferred revenue -- 9,127 1,501 1,463
Other current liabilities -- 89,953 1,878 (24,080)
----------- ----------- ----------- -----------
NET CASH USED BY
OPERATING ACTIVITIES (264,392) (679,498) (522,037) (448,670)
----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of property and equipment (300,058) (49,866) (52,945) (3,052)
Development of Video Masters (20,263) -- -- (9,999)
Loaned to related parties (113,676) (123,887) (84,725) (2,668)
Loaned to other -- (5,400) -- --
Patent costs (5,924) (8,570) (4,670) --
----------- ----------- ----------- -----------
NET CASH USED BY
INVESTING ACTIVITIES (439,921) (187,723) (142,340) (15,719)
----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from issuance of
common stock - net 749,008 1,317,233 816,557 635,154
Borrowings on long-term
loans payable 28,838 -- -- --
Repayments on long-term
loans payable (6,300) (11,500) (8,578) --
----------- ----------- ----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 771,546 1,305,733 807,979 635,154
----------- ----------- ----------- -----------
F-6
INTERNATIONAL MARKETING DYNAMICS, INC. (A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
Nine Months Ended
Years Ended December 31, September 30
----------------------- -------------------
1996 1997 1997 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
NET INCREASE IN CASH AND
CASH EQUIVALENTS 67,233 438,512 143,602 170,765
CASH AND CASH EQUIVALENTS
Beginning of period 458 67,691 67,691 506,203
-------- -------- --------- --------
CASH AND CASH EQUIVALENTS
End of period $ 67,691 $506,203 $ 211,293 $676,968
======== ======== ========= ========
SUPPLEMENTAL DISCLOSURE
Cash payment of interest $ 2,453 $ 1,242 $ -- $ --
======== ======== ========= ========
SUPPLEMENTAL SCHEDULE OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES
Common stock issued
for Video Master $ 45,523 $ -- $ -- $ --
======== ======== ========= ========
WARRANTS ISSUED
FOR SERVICES $ -- $ 13,262 $ -- $ --
======== ======== ========= ========
COMMON STOCK ISSUED
FOR SERVICES $190,000 $ -- $ -- $ 43,485
======== ======== ========= ========
<FN>
See accompanying notes.
</FN>
F-7
INTERNATIONAL MARKETING DYNAMICS, INC. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
(INFORMATION AT SEPTEMBER 30, 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
NOTE A ORGANIZATION AND ACCOUNTING BASIS
Organization
International Marketing Dynamics, Inc. (A Development Stage Company) (the
"Company") was incorporated under the name ViCom, Inc. on July 14, 1983 under
the laws of the State of Utah, changed its name to Quick Stop Photo
International, Inc. on October 29, 1984 and to Asian-American International,
Inc. on May 9, 1988. The Company was inactive from 1990 to July 1995, at which
time the Company's current President obtained majority ownership and changed the
Company's name to International Marketing Dynamics. The Company is in the
development stage and its current business strategy is to develop and market
server and integrated application software to allow the execution of secure
transactions through the internet within "safe zones". These safe zones are to
be content specific areas provided by the Company or custom designed by the
user. In addition, the Company is an internet service provider ("ISP") in the
Fresno, California area (see Note F).
Going Concern Accounting Basis
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and settlement of liabilities
and commitments in the normal course of business. The Company incurred a net
loss of $895,842 and $535,995 and used cash in operating activities of $679,498
and $264,392 in the years ended December 31, 1997 and 1996, respectively. The
Company expects that it will continue to incur substantial expenses related to
its research and development efforts and sales and marketing activities and that
as a result will incur losses for the foreseeable future. These factors, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments relating
to the recoverability and classifications of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Management's plans include several alternatives for securing funds, including
private placements (See Note G) and an initial public offering of equity which
would raise funds to continue the Company's developmental and marketing efforts.
However, no assurances can be given that the Company will be successful in
raising additional capital. Further, there can be no assurance, assuming the
Company successfully raises additional funds, that the Company will achieve
profitability or positive cash flow.
F-8
INTERNATIONAL MARKETING DYNAMICS, INC. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
(INFORMATION AT SEPTEMBER 30, 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
NOTE B SIGNIFICANT ACCOUNTING POLICIES
Financial Statement 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.
Cash and cash equivalents
The Company considers cash investments with maturity of three months or less at
the time of purchase to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed on a
straight-line basis over estimated useful lives of five years to seven years.
Software Development Costs
Costs for the development of new software products and substantial enhancements
to existing software products are expensed as incurred until technological
feasibility has been established, at which time any additional costs to complete
the products or enhancements would be capitalized. Because the Company believes
its current process for developing software is essentially completed
concurrently with the establishment of technological feasibility, no costs have
been capitalized to date.
Video Masters
Video Masters are stated at cost (predecessor cost for masters contributed by
the president - See Note C) and amortized upon completion over their estimated
useful life of five years under the straight-line method. Accumulated
amortization totaled $6,828, $19,985 and $29,852 (unaudited) at December 31,
1996 and 1997 and September 30, 1998, respectively.
Patent
Costs represent capitalized legal fees related to one patent application which
the Company currently has on file. Such costs will be amortized over the shorter
of the estimated life of technology or the remaining life of the patent when
granted.
F-9
INTERNATIONAL MARKETING DYNAMICS, INC. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
(INFORMATION AT SEPTEMBER 30, 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
NOTE B (Continued)
Revenue Recognition
Revenues currently earned as an ISP are recognized ratably over the period of
service.
Income Taxes
The Company accounts for income taxes under an asset and liability approach to
financial accounting and reporting for income taxes. A valuation allowance is
provided when necessary to reduce deferred tax assets to the amount expected to
be realized.
Interim Financial Information (Unaudited)
The accompanying unaudited financial statements as of September 30, 1998 and for
the nine months ended September 30, 1997 and 1998 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. In the opinion of management, all adjustments (consisting only of
normal, recurring adjustments) necessary for a fair presentation have been
included. Results for the interim periods are not necessarily indicative of the
results to be expected for a full year.
Concentration of Credit Risk and Significant Risks and Uncertainties
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of related party receivables and receivables in
conjunction with the Company's ISP operations. Credit risk is affected by the
individual creditworthiness of the Company's related parties (See Notes C and F)
and, in conjunction with Company's ISP operations, conditions, or occurrences
with the local economy and the high technology industry.
The Company participates in a dynamic high technology industry and believes that
changes in any of the following areas could have a material adverse effect on
the Company's future financial position or results of operations: advances and
trends in new technologies and industry standards; competitive pressures in the
form of new products or price reductions on current products; changes in certain
strategic partnerships or customer relationships; risk associated with changes
in domestic and international economic and/or political conditions or
regulations; availability of necessary components; risks associated with Year
2000 compliance; and the Company's ability to attract and retain employees
necessary to support its growth.
F-10
INTERNATIONAL MARKETING DYNAMICS, INC. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
(INFORMATION AT SEPTEMBER 30, 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
Recently Issued Accounting Standard
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires an enterprise to report, by
major components and as a single total, the change in net assets during the
period from nonowner sources. Adoption of this statement will not impact the
Company's financial position, results of operations or cash flows. This
statement is effective for fiscal years beginning after December 15, 1997, with
earlier application permitted.
NOTE C RELATED PARTY TRANSACTIONS
In 1997, the Company entered into a variety of agreements with the founder of
the Company, who also currently serves as the Chairman and Chief Executive
Officer (the "Chairman"), related to his founding contribution. In conjunction
with these agreements 10,000,000 common shares were issued to the Chairman. In
June 1998, these agreements were rescinded and a new agreement was entered into
which stated that the 10,000,000 shares issued to the chairman were issued for
his initial contribution of intellectual property rights to the Company. These
shares have been valued at the founder's historical cost basis in such assets
which was nil at the date of contribution. In addition, the Company has
committed to loan the Chairman up to $500,000. As of December 31, 1996 and 1997,
amounts outstanding under this loan commitment totaled $113,676 and $241,404
(including $9,841 of accrued interest currently due), respectively. As of
September 30, 1998 (unaudited), amounts outstanding under this loan commitment
totaled $234,231. These receivables bear interest at 8.5% due quarterly
commencing September 1997 and are partially secured by investments owned by the
Chairman. The principal is due on June 21, 2000.
In March 1995, Global Management Systems, Inc. (GMS), a company owned by the
President of the Company who is also related to the Chairman, obtained a 20 year
exclusive license for all rights related to certain educational video masters in
exchange for $20,000 cash and $780,000 non-interest bearing license payable due
to the extent sales of the related products are made at a rate of 5% of net
sales. Payments totaling $25,523 were paid by GMS through February 1996 on the
license payable. In March 1996, GMS transferred all rights to these video
masters to the Company in exchange for the issuance of 2,000,000 shares of
common stock to the Company's President. GMS and the Company's president
retained the remaining $754,477 liability under the license payable. These video
masters were recorded at GMS's cost basis as of March 1996 ($65,786) will be
amortized over a five year period. Remaining license expense totaling $754,477
will be recorded by the Company as sales of the product are made.
F-11
INTERNATIONAL MARKETING DYNAMICS, INC. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
(INFORMATION AT SEPTEMBER 30, 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
NOTE C RELATED PARTY TRANSACTIONS (Continued)
Long-term loans payable-related party are due to the secretary of the Company.
These loans are unsecured, bear interest at a weighted average rate of 8.6% and
are due in principle and interest payments of $1,000 a month.
During 1997, the Company had one employee. Included in selling, general and
administrative is $7,000, $14,343, $7,401 (unaudited) and $9,088 (unaudited) in
consulting fees and other expenses paid to the President and certain other
family members for the years ended December 31, 1996 and 1997 and the nine
months ended September 30, 1997 and 1998, respectively.
See also Note F
NOTE D PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
December 31, September 30,
1996 1997 1998
---- ---- ----
(Unaudited)
Computer equipment $ 286,073 $ 335,939 $ 337,518
Furniture and fixtures 13,985 13,985 15,458
------------ ------------ ------------
300,058 349,924 352,976
Less accumulated depreciation (34,252) (106,860) (163,113)
------------ ----------- -------------
TOTAL $ 265,806 $ 243,064 $ 189,863
========== ========== ===========
NOTE E COMMON STOCK TRANSACTIONS
During 1997, the Company issued 876,131 common shares, including 73,080 common
shares issued as partial payment of offering costs, for total cash proceeds of
$1,623,253 less cash offering costs of $306,020. At December 31, 1997, included
in other current liabilities is $34,985 which relates to amounts received under
a canceled marketing agreement. In addition, at December 31, 1997 included in
other liabilities is $50,000 related to the Company's commitment to issue a
further 25,000 common shares to a third party in settlement of a claim. The
Company has also committed to issue 20,000 common shares to a consultant upon
completion of a project.
F-12
INTERNATIONAL MARKETING DYNAMICS, INC. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
(INFORMATION AT SEPTEMBER 30, 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
NOTE E COMMON STOCK TRANSACTIONS (Continued)
During 1996, the Company issued 986,460 common shares, including 194,017 common
shares issued as partial payment of offering costs, for total cash proceeds of
$890,009 less cash offering costs of $141,001. In addition, during 1996, the
Company issued 10,000 common shares each to three of the Company's directors as
annual payment for their services. Included in selling, general and
administrative expenses is $15,000 in compensation expense related to these
issuances.
During 1996, the Company issued 100,000 common shares to a consultant for
financial and public relations services. Included in selling, general and
administrative expenses is $50,000 in compensation expense related to this
issuance.
All common share amounts herein reflect the 1 to 40 reverse stock split of the
Company's common stock effected on March 15, 1996.
See also Notes C, F & G.
common stock Transactions (Unaudited)
During the nine months ended September 30 ,1998, the Company issued 368,762
common shares, including 65,275 common shares issued as partial payment of
offering costs, for total cash proceeds of $677,217 less cash offering costs of
$42,063. During the nine months ended September 30, 1998, the Company issued
25,000 shares to a third party to repay the $50,000 settlement liability
discussed above. During the nine months ended September 30, 1998, the Company
issued 13,994 shares valued at $34,985 under a canceled marketing agreement.
Other current liabilities also include amounts owed to a former consultant for
compensation of $12,924 which the Company plans to convert such liability to
common stock at a price of $2.00.
In addition, during the nine months ended September 30, 1998, the Company issued
5,000 common shares to an employee as payment for services and 1,750 common
shares to an outside consultant as payment for services. Included in selling,
general, and administrative expenses is $8,500 in consulting expense related to
these issuances.
NOTE F PRODUCT DEVELOPMENT COSTS
In June 1996, the Company entered into a joint product development and
management agreement with Integrative Systems, LLC (IS LLC) which provides IS
LLC with the exclusive right to develop and manage the Company's ISP and
internet related products in exchange for specified payments by the Company for
services rendered, royalties paid to IS LLC on related product sales and 250,000
shares of the Company's common stock. The Company will receive all rights of
ownership for products developed under this agreement.
F-13
INTERNATIONAL MARKETING DYNAMICS, INC. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
(INFORMATION AT SEPTEMBER 30, 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
NOTE F PRODUCT DEVELOPMENT COSTS (Continued)
Product development costs of $260,601 and $160,960 in 1996 and 1997,
respectively, were paid to IS LLC including $125,000 related to the issuance of
the above noted common shares in 1996. Included in Cost of Revenues is $168,096
paid to IS LLC in 1997 in conjunction with such services. Product development
costs of $76,500 (unaudited) and $128,947 (unaudited) in the nine months ended
September 30, 1997 and 1998, respectively were paid to IS LLC. Included in cost
of revenues is $156,778 (unaudited) and $109,785 (unaudited) in the nine months
ended September 30, 1997 and 1998 respectively, paid to IS LLC in conjunction
with such services. Accounts Payable - Related Party are due to IS LLC. In
addition, included in current Related Party Receivables at December 31, 1997 is
$27,310 due from IS LLC related to its management of the Company's ISP.
NOTE G FINANCING AGREEMENT
In December 1997, the Company entered into an agreement with Merit Capital
Associates, Inc. ("Merit") to provide financial advisory assistance to the
Company for a contemplated private placement of $7 million. Merit will receive a
fee of 5% of the gross amount of any capital raised, whether debt or equity.
Upon the closing of any offering below $1 million, a 10% fee shall be paid as a
partial payment toward the total fee of 5%. The Company is obligated to
reimburse Merit for all out-of-pocket expense incurred under this agreement. In
addition, regardless of completion of the financing, Merit will receive a
warrant, with a term of 5 years, to purchase 15,385 common shares at a price of
$3.25 per share. Included in selling, general and administrative expenses is
$13,262 which represents the estimated fair value of the warrant.
NOTE H LEASES
The Company rents its facilities in Livermore, California from a third party
under an operating lease agreement on a month-to-month basis. Total rent expense
to the third party was $25,200 and $24,000, $12,000 (audited) and $18,000
(unaudited) for the years ended December 31, 1996 and 1997, and the nine months
ended September 30, 1997 and 1998, respectively.
NOTE I INCOME TAXES
No provision or benefit for income taxes has been recognized in the financial
statements.
At December 31, 1997, the Company had federal and state net operating loss
("NOL") carryforwards of approximately $1,200,000 and $1,000,000 respectively.
The majority of such carryforwards expire from 2001 to 2012.
F-14
INTERNATIONAL MARKETING DYNAMICS, INC. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
(INFORMATION AT SEPTEMBER 30, 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
NOTE I INCOME TAXES (Continued)
Internal Revenue Code Section 382 places a limitation (the "Section 382
Limitation") on the amount of taxable income which can generally be offset by
net operating ("NOL") carryforwards after a change in control (generally greater
than a 50% change in ownership) of a loss corporation. California has similar
rules. Generally, after a control change, a loss corporation cannot deduct NOL
carryforwards in excess of the Section 382 Limitation. Due to these "changes in
ownership" provisions, utilization of the NOL and tax credit carryforwards may
be subject to an annual limitation regarding their utilization against taxable
income in future periods.
Due to this potential limitation and due to the fact that the Company has
sustained cumulative losses, the potential future benefits from these deferred
assets are fully reserved by means of a valuation allowance and will therefore
produce a financial statement benefit if and when utilized.
F-15
INTERNATIONAL MARKETING DYNAMICS, INC. (A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
Deficit
Accumulated
Additional During the
common stock Paid-In Development
Shares Amount Capital Stage
------ ------ ------- -----
BALANCE, January 1, 1996 62,076 $ 62 $ 1,109,385 $ (1,107,043)
Common stock issued for cash 986,460 987 748,021 -
Common stock issued for video master 2,000,000 2,000 43,523 -
Common stock issued for services 380,000 380 189,620 -
Net loss - - - (535,995)
Note receivable from officer - - - -
---------- ------------- ------------ --------------
BALANCE, December 31, 1996 3,428,536 3,429 2,090,549 (1,643,038)
Common stock issued for cash 876,131 876 1,316,357 -
Shares issued to founder for initial contribution 10,000,000 10,000 (10,000) -
Warrants issued for services - - 13,262 -
Net loss - - - (895,842)
Note receivable from officer - - - -
---------- ------------- ------------ --------------
BALANCE, December 31, 1997 14,304,667 14,305 3,410,168 (2,538,880)
Common stock issued for cash (Unaudited) 368,762 368 634,786 -
Common stock issued for services (Unaudited) 6,750 7 8,493 -
Common stock issued for payment of liability (Unaudited) 38,994 39 84,946 -
Net loss (Unaudited) - - - (452,337)
Note receivable from officer - - - -
---------- ------------- ------------ --------------
BALANCE, September 30, 1998 (Unaudited) 14,719,173 $ 14,719 $ 4,138,393 $ (2,991,217)
========== ============= ============ =============
Note Receivable
from
Officer Total
----------- --------------
BALANCE, January 1, 1996 - $ 2,404
Common stock issued for cash - 749,008
Common stock issued for video master - 45,523
Common stock issued for services - 190,000
Net loss - (535,995)
Note receivable from officer (113,676) (113,676)
----------- --------------
BALANCE, December 31, 1996 (113,676) 337,264
Common stock issued for cash - 1,317,233
Shares issued to founder for initial contribution - -
Warrants issued for services - 13,262
Net loss - (895,842)
Note receivable from officer (127,728) (127,728)
----------- --------------
BALANCE, December 31, 1997 (241,404) 644,189
Common stock issued for cash (Unaudited) - 635,154
Common stock issued for services (Unaudited) - 8,500
Common stock issued for payment of liability (Unaudited) - 84,985
Net loss (Unaudited) - (452,337)
Note receivable from officer 7,173 7,173
----------- --------------
BALANCE, September 30, 1998 (Unaudited) $ (234,231) $ 927,664
=========== ============
<FN>
See accompanying notes.
</FN>
F-16
Part II. Information Not Required In Prospectus
INDEMNIFICATION OF OFFICERS AND DIRECTORS
ITEM 24. The Utah Revised Business Corporation Act ("URBCA") 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) the director or officer reasonably believed that his conduct was in, or not
opposed to, the corporation's best interest; and (iii) in connection with any
criminal proceeding, the director or officer had no reasonable cause to believe
his conduct was unlawful. However, the URBCA provides that no indemnification
may be made if the director or officer was (i) was adjudged liable to the
corporation or (ii)found liable on the basis that personal benefit was
improperly derived by him, whether or not the benefit involved an action taken
in the person's official capacity. No indemnification may be made in respect of
any proceeding in which the director or officer was found liable for negligent
misconduct on the performance of his duty to the corporation. In cases where the
director or officer is successful, on the merits or otherwise, in the defense of
any proceeding instigated because of his status as an officer or director of a
corporation, the URBCA mandates that the corporation indemnify the director or
officer against reasonable expenses (including attorney's fees) incurred by him
in the proceeding. Notwithstanding the foregoing, the URBCA 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 (a) such
person is entitled to mandatory indemnification or (b) such individual is fairly
and reasonably entitled to indemnification, notwithstanding the fact that (i) he
was adjudged liable to the corporation or (ii) he was adjudged liable on the
basis that personal benefit was improperly received by him.
The Company's Articles of Incorporation provide that to the fullest extent
permitted by Utah 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 URBCA 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore unenforceable.
II-1
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
ITEM 25. Expenses of the Registrant in connection with the issuance and
distribution of the securities being registered are estimated as follows,
assuming the Maximum Offering amount is sold:
Securities and Exchange Commission filing fee $ 6,000
Blue Sky filing fees 0
Accountant's fees and expenses 50,000
Legal fees and expenses 60,000
Printing 15,000
Marketing expenses 10,000
Postage 25,000
Transfer Agent's fees 5,000
Miscellaneous 15,000
--------
Total $186,000
========
The Registrant will bear all expenses shown above.
RECENT SALES OF UNREGISTERED SECURITIES
ITEM 26. The following table sets forth all of the unregistered sales of
securities by the Company since the Company's inception in July 1995.
- ----------------------------------------------------------------------------------------------------
Date Purchaser Securities Purchased Consideration
- ----------------------------------------------------------------------------------------------------
03/06/96 Abram, Leon common stock $ 25,000.00
11/03/97 Afanador, Gina common stock $ 5,000.00
08/18/97 Al, Ang common stock $ 1,000.00
11/03/97 Ang, Domingo & Christine common stock $ 5,000.00
10/01/97 Ang, Norma & Richmond common stock $ 5,000.00
12/23/97 Arnott, Winfield common stock $ 2,000.00
10/07/96 Aronson, Joel common stock $ 3,000.00
11/09/98 Aronson, Joel common stock $ 5,000.00
12/07/98 Aronson, Joel common stock $ 6,000.00
05/11/98 Auslender, Leland common stock $ 30,000.00
06/23/98 Auslender, Leland common stock $ 25,000.00
08/06/98 Auslender, Leland common stock $ 45,000.00
09/17/98 Auslender, Leland common stock $ 50,000.00
01/04/99 Auslender, Leland common stock $ 20,000.00
01/12/99 Auslender, Leland common stock $ 20,000.00
09/25/97 Baber, Kimberly common stock $ 2,000.00
07/24/97 Bailey, Martin & Maureen common stock $ 3,000.00
II-2
01/14/99 Baldessaro, Lisa common stock $ 20,003.75
01/14/99 Ball, Barbara common stock $ 5,200.00
11/03/97 Barretto, Delia & Victoria common stock $ 5,000.00
03/19/96 Barton, Kenneth common stock $ 15,000.00
05/09/96 Barton, Kenneth common stock $ 12,500.00
07/29/97 Basford, Charlie common stock $ 5,000.00
10/24/96 Bates, Richard common stock $ 3,000.00
11/17/98 Bates, Richard common stock $ 9,750.00
10/15/96 Beatty, Patricia common stock $ 950.00
07/18/97 Beatty, Tom common stock $ 2,200.00
12/28/98 Beauchamp, James Kevin common stock $ 6,500.00
02/01/98 Belnap, Conrad S. common stock $ 15,000.00
12/18/98 Bendetti, Jack common stock $ 3,250.00
01/04/99 Berezak, Michael common stock $ 6,500.00
05/21/96 Berman, Jack common stock $ 10,500.00
08/18/97 Bernabe, Allan common stock $ 1,000.00
06/04/97 Blakley, Della common stock $ 2,000.00
09/04/96 Blase, Larry common stock $ 5,000.00
12/18/98 Bobal, Michael common stock $ 3,250.00
02/01/99 Bobal, Michael common stock $ 3,250.00
01/06/98 Bobo Jr., Wilton C. common stock $ 400.00
02/03/99 Boito, James & Rose Mary common stock $ 3,250.00
08/29/96 Boyer, Wilbur common stock $ 7,500.00
07/24/97 Brandon, Stephen common stock $ 5,000.00
01/04/99 Brown, David common stock $ 13,000.00
11/25/98 Brown, Luke common stock $ 812.50
01/26/99 Burnette, Dennis common stock $ 3,250.00
01/28/99 Bush, Wynde common stock $ 6,500.00
12/08/98 C&C Farms common stock $ 6,500.00
07/10/97 Cabisudo, Rosario common stock $ 5,000.00
01/13/99 Calandra, Gregory common stock $150,000.00
01/14/99 Calandra, Gregory common stock $ 3,250.00
02/02/99 Calandra, Gregory common stock $180,000.00
01/22/97 Campos, Salvator common stock $ 1,000.00
08/22/96 Carlson, Rick common stock $ 7,500.00
II-3
01/14/99 Carney, Andrew common stock $ 3,250.00
01/24/97 Case, Daryl common stock $ 12,000.00
08/18/97 Chan, Janet Ong common stock $ 1,000.00
02/05/98 Chandler, Scot common stock $ 5,000.00
07/12/96 Charron, Richard common stock $ 25,000.00
10/03/96 Charron, Richard common stock $ 10,000.00
03/03/97 Charron, Richard common stock $ 10,000.00
05/15/97 Charron, Richard common stock $ 10,000.00
10/28/97 Charron, Richard common stock $ 8,000.00
11/14/97 Charron, Richard common stock $ 10,000.00
05/08/98 Charron, Richard common stock $ 17,000.00
07/10/97 Chua, Gloria & Tseng common stock $ 5,000.00
08/18/97 Chua, Victorino common stock $ 10,000.00
11/15/96 Chyr, Wolodymyr common stock $ 5,000.00
08/18/97 Co, Elena common stock $125,000.00
08/18/97 Co, Rosario common stock $ 5,000.00
01/07/97 Colbert, Evaleta common stock $ 10,000.00
09/25/97 Colbert, Evaleta common stock $ 10,000.00
10/24/97 Colbert, Gary common stock $ 4,000.00
12/11/98 Cordova, Kelly A. common stock $ 3,250.00
12/08/97 Corey, Daniel common stock $ 3,000.00
11/12/98 Costa, Andrew common stock $ 5,000.00
01/04/99 Costa, George common stock $ 4,500.00
01/04/99 Costa, George common stock $ 2,000.00
11/17/98 Costa, Patrick common stock $ 32,500.00
11/17/98 Cotta, James common stock $ 3,250.00
11/19/96 Coulson, Dana Danford common stock $ 5,000.00
07/11/97 Cuoto, Aurora common stock $ 5,000.00
05/19/98 Curtis, Stephen common stock $ 3,250.00
12/01/97 De Fries, Damian common stock $ 1,000.00
02/01/99 De Leo, Blase & Leslie common stock $ 3,250.00
10/04/96 Defries, Daniel common stock $ 8,000.00
10/03/96 DeFries, D'Ann common stock $ 5,000.00
02/14/97 Denenberg, Todd common stock $ 10,000.00
11/25/98 Denenberg, Todd common stock $ 12,500.00
II-4
08/04/98 Denesuk, Walt common stock $ 25,000.00
01/11/99 Denesuk, Walt common stock $ 25,000.00
12/07/98 Denesuk, Walt common stock $ 25,000.00
11/09/98 Denesuk, Walt common stock $ 25,000.00
11/21/97 Derner, Stacy common stock $ 500.00
06/20/96 Devken common stock $ 50,000.00
07/08/96 Devken common stock $ 20,000.00
10/15/96 Devken common stock $ 5,549.00
07/18/97 Devken common stock $ 23,645.00
05/20/98 Devken common stock $ 20,500.00
11/14/97 Dickens, Janis L. common stock $ 10,000.00
02/18/97 Dinnerstein, Jamie common stock $ 5,000.00
04/11/97 Dobson, Douglas common stock $ 3,550.00
04/11/97 Dobson, Nancy common stock $ 4,400.00
01/27/99 Domurad, William common stock $ 3,250.00
02/01/99 Doran, Roger common stock $ 3,250.00
09/23/98 Drew, Lois common stock $ 12,500.00
12/11/98 Drew, Lois common stock $ 12,500.00
02/09/99 Drew, Lois common stock $ 10,000.00
11/19/96 Drummond, Jack common stock $ 5,000.00
12/01/97 Durant, Roger common stock $ 500.00
02/27/97 Elias, Bassam common stock $ 3,000.00
05/06/97 Ellies, Donna common stock $ 10,000.00
03/24/98 Ellies, Donna common stock $ 2,000.00
12/01/97 Elliott, Joyce/Stewart N. common stock $ 500.00
12/23/97 Ezzell, Jack common stock $ 2,000.00
01/04/99 Ferrera, Augustine & Carol common stock $ 9,750.00
02/04/99 Ferrera, Augustine & Carol common stock $ 6,500.00
01/27/99 Ferrera, Michele common stock $ 9,750.00
12/08/98 Firchow, R. common stock $ 1,625.00
01/20/99 Firchow, R. common stock $ 1,625.00
05/20/98 Fit Net Int'l Corp. common stock $ 50,000.00
07/08/96 Five Star Financial common stock $ 25,000.00
10/15/96 Five Star Financial common stock $ 13,000.00
07/18/97 Five Star Financial common stock $ 35,865.00
II-5
01/16/98 Five Star Financial common stock $ 82,050.00
05/20/98 Five Star Financial common stock $ 26,000.00
01/13/99 Five Star Financial common stock $ 19,500.00
07/10/97 Fleshman, Bradley common stock $ 5,000.00
10/01/97 Fonte,Samuel & Glorietta common stock $ 5,000.00
01/04/99 Frank, Bryant & Mary common stock $ 6,500.00
04/09/97 Friedman, Francine common stock $ 5,000.00
03/04/97 Friedman, Steve common stock $ 20,000.00
10/15/96 Fyfee, Stacey common stock $ 2,250.00
07/11/97 Galito, Jude common stock $ 5,000.00
07/11/97 Galito, Maria Teresa common stock $ 5,000.00
07/11/97 Galito, Omar common stock $ 5,000.00
07/11/97 Galito, Reynaldo common stock $ 5,000.00
11/22/96 Garloch, lawrence common stock $ 5,000.00
01/14/99 Gingrich, Gary G common stock $ 1,625.00
01/14/99 Gingrich, Warren common stock $ 1,625.00
09/24/97 Gonte, Gary common stock $ 20,000.00
05/13/96 Gonte, Henry common stock $ 25,000.00
12/18/96 Gonte, Henry common stock $ 10,500.00
01/17/97 Gonte, Henry common stock $ 30,000.00
05/02/97 Gonte, Henry common stock $ 5,000.00
12/18/96 Gonte, Sheldon common stock $ 7,500.00
02/10/97 Gonte, Sheldon common stock $ 10,000.00
09/24/97 Gonte, Sheldon common stock $ 20,000.00
02/15/96 Gonte, William common stock $ 25,000.00
02/28/96 Gonte, William common stock $ 8,000.00
03/01/96 Gonte, William common stock $ 9,500.00
03/04/96 Gonte, William common stock $ 8,566.00
03/25/96 Gonte, William common stock $ 20,000.00
04/18/96 Gonte, William common stock $ 7,854.37
04/23/96 Gonte, William common stock $ 4,171.53
05/15/96 Gonte, William common stock $ 25,000.00
10/04/96 Gonte, William common stock $ 25,000.00
12/18/96 Gonte, William common stock $ 4,500.00
02/14/97 Gonte, William common stock $ 5,000.00
II-6
11/24/97 Gonte, William common stock $ 150.00
01/06/99 Gonte, William common stock $ 5,000.00
02/01/99 Gonte, William common stock $ 40,000.00
12/15/97 Gonzales, J. Tim common stock $ 1,500.00
05/19/98 Gonzales, Tim common stock $ 5,200.00
09/09/98 Goode, Thomas common stock $ 1,000.00
12/19/97 Gray Jr., William F. common stock $ 2,000.00
05/09/97 Green, Harold common stock $ 10,000.00
12/08/97 Greig, Margaret common stock $ 35,000.00
01/27/98 Greig, Margaret common stock $ 65,000.00
04/20/98 Greig, Margaret common stock $ 8,000.00
05/11/98 Greig, Margaret common stock $ 3,000.00
01/08/99 Griffin, John common stock $ 8,125.00
02/24/97 Grosinger, Emery common stock $ 6,000.00
09/03/96 Halverson, Theodore common stock $ 3,000.00
03/31/97 Hart, Rosie common stock $ 4,000.00
02/05/97 Haubenreich, Garrett common stock $ 25,000.00
11/12/98 Hester, Patricia common stock $ 2,500.00
07/09/96 Hidrogo, Eduardo common stock $ 6,000.00
07/10/97 Ho, Dennis & Georgiana common stock $ 6,000.00
11/06/98 Jacobs, Brent common stock $ 1,625.00
11/04/96 Jano, Maha common stock $ 5,000.00
02/11/97 Jano, Maha common stock $ 5,000.00
08/18/97 Jaucian, Jonathan common stock $ 1,000.00
06/11/97 Jensen, Scott common stock $ 10,000.00
05/30/97 Jimenez, Jose common stock $ 6,000.00
03/19/97 Jordan, Ronald common stock $ 10,000.00
06/30/97 Jordan, Ronald common stock $ 20,000.00
01/14/99 Kearns, J Casey & Mary T common stock $ 3,250.00
01/14/99 Kearns, John & Grace common stock $ 9,000.00
11/01/95 Kickliter, George common stock $ 30,000.00
01/19/96 Kickliter, George common stock $ 10,000.00
12/17/97 Kickliter, George common stock $ 66,000.00
04/29/98 Kickliter, George common stock $ 20,000.00
05/19/97 Knopick, David common stock $ 5,900.00
II-7
10/02/98 Kohls, Dr. common stock $ 12,500.00
07/24/97 Korellis, John S. common stock $ 5,000.00
02/14/97 Kostecki, Janet common stock $ 10,000.00
05/05/97 Kostecki, Janet common stock $ 10,000.00
05/19/98 Lamb, Michael Sr. common stock $ 3,250.00
06/03/98 Lamb, Michael Sr. common stock $ 3,250.00
12/04/98 Lampel, David common stock $ 16,250.00
12/22/98 Lampel, David common stock $ 8,125.00
12/23/98 Lampel, Irwin common stock $ 3,250.00
12/10/98 Lampel, Irwin common stock $ 13,000.00
02/27/97 Lange, Mark common stock $ 11,000.00
03/19/97 Lange, Mark common stock $ 15,000.00
01/14/99 Laskey, William T. & Terry common stock $ 3,250.00
10/17/96 Layman, Brenda common stock $ 20,000.00
11/16/98 Lee, Brian common stock $ 3,250.00
11/16/98 Lee, Jennie common stock $ 3,250.00
01/04/99 Lee, Ronald common stock $ 32,500.00
11/13/96 Lee, Young-Soo common stock $ 5,000.00
08/21/96 Levin, Nancy common stock $ 5,000.00
10/23/96 Levin, Nancy common stock $ 4,000.00
12/23/97 Lewis, Henry common stock $ 2,000.00
01/04/99 Linden, Irwin common stock $ 15,000.00
01/19/99 Lupinetti, Anthony J. common stock $ 13,000.00
06/11/97 Maisano, Paul common stock $ 5,000.00
01/05/99 Marcolin, Maurizio common stock $ 32,500.00
08/12/97 Mattice, Darrin common stock $ 4,500.00
08/26/96 McCabe, Margaret common stock $ 3,000.00
12/07/98 McClellan, Kelly common stock $ 3,250.00
08/23/96 Menicou, Panayiotis common stock $ 3,000.00
01/27/99 Miller, Alvin L. common stock $ 3,250.00
12/23/97 Miller, Brian S. common stock $ 5,000.00
01/22/97 Monson, Mitchell common stock $ 2,000.00
02/10/97 Monson, Mitchell common stock $ 2,000.00
07/25/97 Monson, Mitchell common stock $ 4,000.00
10/07/98 Moore, Wayne common stock $ 5,005.00
II-8
06/16/97 Morimoto, Rick common stock $ 5,000.00
07/08/96 Morra, Linda common stock $ 4,700.00
01/06/98 Morrel, William R. common stock $ 2,000.00
01/14/99 Moyer, David common stock $ 3,250.00
01/14/99 Myers, Warrem common stock $ 3,250.00
09/10/96 Nash, Buford common stock $ 3,000.00
10/08/98 Nash, Buford common stock $ 9,750.00
11/18/98 Nash, Buford common stock $ 43,875.00
09/03/98 Nash, Dennis common stock $ 1,950.00
12/10/98 Nash, Dennis common stock $ 6,500.00
12/15/98 Nash, Dennis common stock $ 13,000.00
08/27/96 Nash, Tim common stock $ 10,500.00
09/10/96 Nash, Tim common stock $ 10,000.00
08/10/98 Nash, Tim common stock $ 32,500.00
08/10/98 Nash, Tim common stock $ 6,500.00
10/27/98 Nash, Tim common stock $ 13,000.00
12/10/98 Nash, Tim common stock $ 6,500.00
01/04/99 Nash, Tim common stock $ 4,875.00
08/10/98 Nash, Tim common stock $ 1,625.00
09/03/98 Nash, Tim and Dennis common stock $ 32,500.00
10/08/98 Nash, Tim and Dennis common stock $ 32,500.00
11/18/98 Nash, Tim and Dennis common stock $ 26,000.00
05/23/97 Neubauer, Daniel common stock $ 23,000.00
05/02/97 Neubauer, David common stock $ 10,000.00
01/05/99 Newsome, Eric common stock $ 10,000.00
07/24/97 Nolta, Lisa common stock $ 1,000.00
01/04/99 Nora, John common stock $ 8,125.00
07/24/97 Ochipinti, Bob common stock $ 2,000.00
01/12/99 Olah, Susan common stock $ 3,250.00
12/11/98 O'Neil, Kevin common stock $ 3,250.00
01/04/99 Oszust, Dennis common stock $ 8,125.00
01/14/99 Pacifico, Anthony common stock $ 10,000.00
06/11/97 Palen, Barbara & Randolph common stock $ 5,000.00
02/18/97 Parker, Jeffrey common stock $ 4,000.00
05/27/97 Parker, Jeffrey common stock $ 36,000.00
II-9
01/05/99 Peltier, Mark common stock $ 32,500.00
08/18/97 Penaflor, John common stock $ 1,000.00
01/22/97 Perez, Paul common stock $ 1,650.00
03/19/97 Peterson, Mark common stock $ 25,000.00
07/03/96 Pickens, Patricia common stock $ 15,000.00
09/25/97 Poblete, Jose common stock $ 5,000.00
04/22/97 Poynera, Cort common stock $ 1,000.00
07/18/97 Poynera, Cort common stock $ 8,700.00
05/20/98 Poynera, Cort common stock $ 2,000.00
07/13/98 Provisor, Marc R. common stock $ 7,500.00
01/22/99 Puckette, William T. common stock $ 6,500.00
01/04/99 Puscas, James common stock $ 6,500.00
12/08/98 Reed, Jo Ann common stock $ 1,625.00
01/20/99 Reed, Jo Ann common stock $ 1,625.00
03/19/97 Rochlin, Morris common stock $ 20,000.00
10/05/96 Rohner, Gerry common stock $ 8,000.00
02/05/98 Rumney, Jeff common stock $ 3,500.00
05/06/97 Rymal, Christopher common stock $ 10,000.00
06/11/97 Rymal, Christopher common stock $ 5,000.00
02/04/99 Sbragia, Eugene common stock $ 16,250.00
01/08/99 Schocchi, Melinda common stock $ 3,250.00
10/16/96 Scholz, Kevin common stock $ 3,000.00
01/22/97 Scholz, Kevin common stock $ 1,600.00
12/17/98 Sciaulino, Mary common stock $ 3,250.00
03/27/96 Shafran, Igor common stock $ 20,000.00
03/25/96 Shapiro, Jonathan common stock $ 15,000.00
05/03/96 Shapiro, Jonathan common stock $ 12,067.50
05/15/96 Shapiro, Jonathan common stock $ 23,000.00
09/05/96 Shapiro, Jonathan common stock $ 10,000.00
09/16/96 Shapiro, Jonathan common stock $ 10,000.00
07/29/97 Shumate, Norman common stock $ 5,000.00
11/03/97 Shumate, Norman common stock $ 5,000.00
06/05/98 Shumate, Norman common stock $ 5,000.00
07/15/96 Slawson, Eric common stock $ 5,000.00
01/22/99 Sowieja, Gary D. & Joan E. common stock $ 5,000.00
II-10
05/10/96 Sowieja, Steve common stock $ 25,000.00
05/28/96 Sowieja, Steve common stock $ 40,000.00
07/29/96 Sowieja, Steve common stock $ 75,000.00
10/01/96 Sowieja, Steve common stock $ 50,000.00
11/15/96 Sowieja, Steve common stock $ 60,000.00
02/05/97 Sowieja, Steve common stock $ 49,999.50
06/26/97 Sowieja, Steve common stock $ 60,000.00
10/31/97 Sowieja, Steve common stock $ 44,000.00
09/29/98 Sowieja, Steve common stock $337,500.00
01/25/99 Sowieja, Steve common stock $136,500.75
12/01/97 Storm, Tiffany common stock $ 4,000.00
06/29/98 Storm, Tyler B. common stock $ 650.00
09/18/97 Su, Jim C. common stock $ 5,000.00
08/20/96 Sutton, James common stock $ 37,500.00
12/23/98 Suverkrubee, Michael common stock $ 6,500.00
08/25/97 Sy, Maxima L. common stock $ 10,000.00
10/31/96 Thomas, Terri common stock $ 8,000.00
03/11/97 Thor, Carolyn & Rolph, R. common stock $ 21,000.00
12/03/96 Trautvetter, George common stock $ 2,600.00
11/13/97 Tsai, Henry L. common stock $ 34,985.00
11/06/98 Tsamisis, Chris common stock $ 1,625.00
10/24/97 Tugmon, Bernice F common stock $ 2,000.00
08/23/96 Valentine, Andrea common stock $ 5,000.00
12/08/98 Van Dyke, Steven common stock $ 1,000.00
06/11/97 Wade, Barbara & Elizabeth common stock $ 20,000.00
07/15/96 Ward, James common stock $ 1,050.00
12/23/97 Washington, Darwin common stock $ 500.00
01/04/99 Watt, David common stock $ 6,500.00
01/08/99 Watt, David common stock $ 8,125.00
12/21/98 Weakland, F.C. common stock $ 4,875.00
12/21/98 Weakland, Joseph T. common stock $ 3,250.00
04/29/97 Wedgle, Craig common stock $ 20,000.00
10/09/98 Weiler, Richard common stock $ 12,025.00
04/11/97 Weinberg, Constance common stock $ 5,000.00
02/18/97 Weinberg, Maxine, Herbert common stock $ 10,000.00
II-11
12/21/98 Weinstein, Kenneth B. common stock $ 16,900.00
06/11/97 Weisberg, Robert common stock $ 10,000.00
06/20/96 Wheeler, Larry common stock $125,000.00
09/25/97 Wheeler, Lee & Karen common stock $ 6,000.00
01/14/99 Wiggins, Spencer common stock $ 3,250.00
02/05/96 Williams, Gerald common stock $ 15,000.00
09/03/96 Williams, Gerald common stock $ 15,000.00
02/10/97 Williams, Gerald common stock $ 45,000.00
12/17/97 Williams, Gerald common stock $ 20,000.00
12/23/97 Williams, James K. common stock $ 2,000.00
12/01/97 Williams, Marc V. common stock $100,000.00
12/05/97 Williams, Marc V. common stock $142,000.00
12/19/97 Williams, Marc V. common stock $ 58,000.00
12/01/97 Williams, Ric common stock $ 15,000.00
04/14/98 Williams, Ric common stock $ 8,956.26
01/04/99 Williams, Robert common stock $ 9,750.00
01/20/99 Wilson, Cynthia common stock $ 3,250.00
01/05/99 Wysong, Ronald Jr. common stock $ 3,250.00
05/11/98 Yukawa, Patricia common stock $ 700.00
01/13/99 Zack, Cynthia common stock $ 3,250.00
08/21/96 Zanetti, Charles common stock $ 5,000.00
06/29/98 Zimmerman, Leroy common stock $ 500.00
These shares were issued to investors in connection with private placements.
The Company believes that the issuances of securities pursuant to the foregoing
transactions were exempt from registration under the Securities Act of 1933, as
amended, by virtue of Rule 506 of Regulation D, and Section 4(2) thereof as
transactions not involving public Offerings. All securities referenced in the
preceding table were sold for cash. No underwriters were engaged in connection
with the foregoing issuances of securities, and no underwriting commissions or
discounts were paid.
II-12
EXHIBITS
ITEM 27. DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation, July 14, 1983
3.2 Amendment to Articles of Incorporation filed October 29, 1984
3.2.1 Amendment to Articles of Incorporation filed May 9, 1988
3.2.2 Amendment to Articles of Incorporation filed July 18, 1995
3.3 By-laws
3.4.1 Certification of Articles of Amendment Enacting Name Change-Utah
3.4.2 Name Change-Certificate of Qualification-California
4.1 Share Specimen
5.1 Opinion of Evers & Hendrickson, LLP with respect to the legality
of the shares being registered
10.1 Management Services Agreement with Spunky Productions, LLC
10.2 Lease of registrant's facilities
16.1* Letter Regarding Change in Accountants
23.1 Consent of Marc Lumer & Company
23.2 Consent of Evers & Hendrickson, LLP (included in Exhibit 5.1)
99.1* Escrow Agreement
- -------------
*To be filed by Amendment
II-13
UNDERTAKINGS
a) The Registrant hereby undertakes that it will:
1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(iii) Include any additional or changed material information on
the plan of distribution.
2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the Offering of the securities at that time to
be the bona fide Offering.
3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the Offering.
e) Insofar as indemnification for liabilities arising under the securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
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, thereunto duly
authorized, in the City of San Francisco, State of California, on March 11,
1999.
Two Dog Net, Inc.
By /s/ Sholeh Hasmedani
---------------------
Sholeh Hamedani, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/ Sholeh Hamedani President, March 11, 1999
- ---------------------
Sholeh Hamedani Director
/s/ Nassar Hamedani Chief Executive Officer, March 11, 1999
- ---------------------
Nassar Hamedani Director
/s/ Jamshid Ghosseiri Director March 11, 1999
- ---------------------
Jamshid Ghosseiri
/s/ Roger Campos Director March 11, 1999
- ---------------------
Roger Campos
II-14
POWER OF ATTORNEY
I, Nassar Hamedani, whose signature appears below, constitute and appoint
Sholeh Hamedani, my true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution in her, for him and in his name, place and
stead, and in any and all capacities, to sign the Registration Statement on Form
SB-2, and any required amendments or supplements thereto, (and any other
registration statement for the same Offering that is to be effective upon filing
pursuant to Rule 415 under the Securities Act of 1933, as amended) and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in or about the premises, for to all
intents and purposes as she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or her substitute or
substitutes lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 11th day of March, 1999.
/S/ Nassar Hamedani
-------------------
POWER OF ATTORNEY
I, Jamshid Ghosseiri, whose signature appears below, constitute and appoint
Sholeh Hamedani, my true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution in her, for him and in his name, place and
stead, and in any and all capacities, to sign the Registration Statement on Form
SB-2, and any required amendments or supplements thereto, (and any other
registration statement for the same Offering that is to be effective upon filing
pursuant to Rule 415 under the Securities Act of 1933, as amended) and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in or about the premises, for to all
intents and purposes as she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or her substitute or
substitutes lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 11th day of March, 1999.
/S/ Jamshid Ghosseiri
---------------------
II-15
POWER OF ATTORNEY
I, Roger Campos, whose signature appears below, constitute and appoint
Sholeh Hamedani, my true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution in her, for him and in his name, place and
stead, and in any and all capacities, to sign the Registration Statement on Form
SB-2, and any required amendments or supplements thereto, (and any other
registration statement for the same Offering that is to be effective upon filing
pursuant to Rule 415 under the Securities Act of 1933, as amended) and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in or about the premises, for to all
intents and purposes as she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or her substitute or
substitutes lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 11th day of March, 1999.
/S/ Roger Campos
---------------------
II-16
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No dealer, salesperson or other
individual has been authorized to give
any information or to make any
representations not contained in this 2,000,000 Shares
Prospectus in connection with the common stock
Offering covered by this Prospectus. If
given or made, such information or
representation must not be relied upon [OMMIT GRAPHIC]
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 TWO DOG NET, INC.
common stock in any jurisdiction where,
or to any person to whom, it is unlawful
to make such offer or solicitation.
Neither 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.
TABLE OF CONTENTS
PROSPECTUS SUMMARY 3
SUMMARY FINANCIAL DATA 6
RISK FACTORS 7
USE OF PROCEEDS 18
CAPITALIZATION 18
DILUTION 19 --------------------
BUSINESS 20
MANAGEMENT'S DISCUSSION AND ANALYSIS 37 PROSPECTUS
MANAGEMENT 45
EXECUTIVE COMPENSATION 47 --------------------
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 48
CERTAIN RELATIONSHIPS AND RELATED __________________,1999
TRANSACTIONS 49
DESCRIPTION OF SECURITIES 49
SHARES ELIGIBLE FOR FUTURE SALE 50
PLAN OF DISTRIBUTION 51
DESCRIPTION OF PROPERTY 52
INTEREST OF NAMED EXPERTS AND COUNSEL 52
LEGAL MATTERS 52
EXPERTS 52
ADDITIONAL INFORMATION 52
CONSOLIDATED FINANCIAL STATEMENTS F-1
SHARE PURCHASE AGREEMENT APPENDIX A
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