SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1999.
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________ to _____________.
Commission file number 0-27453
WORDCRUNCHER INTERNET TECHNOLOGIES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Nevada 84-1370590
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
405 East 12450 South, Suite B, Draper, Utah 84020
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(Address of principal executive office) (Zip Code)
801.816.9904
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(Issuer's telephone number)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange
------------------- On Which Registered
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None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), Yes __X__ No _____, and (2) has
been subject to such filing requirements for the past 90 days. Yes __X__ No
_____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing: $63,683,299.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 13,467,698.
Part I
Item 1. Business.
Introduction. We are a development state company engaged in the
development and marketing of a focused Internet site which serves the needs of
the business professional. Content and services found at logio.com, which we
launched on March 19, 2000, are tailored to provide, under one roof, a broad
spectrum of the information and services that are required by business people in
their daily work activities. Information resources include a unique, readily
accessible "drill-down" directory that organizes thousands of business-oriented
web sites according to specific job function. The directory is augmented by an
advanced search technology that can search either the abstracts or the full text
of all the sites listed in the directory, and then displays the search results
in a "hits in context" format. We couple this information with the services that
the average business professional uses on a daily basis, including travel
arrangements, stock quotes, news, weather, maps, financial calculators, e-mail
and calendaring. This combination creates a full service destination site
designed specifically for the business professional. We intend to expand the
delivery of this full service concept to other electronic means of communication
such as cell phones, pagers, personal digital assistants and set top boxes. All
of these services will be marketed under the brand name "Logio."
Although there is a great deal of free information on the Internet,
publishers still own valuable content that is not currently available on the
Internet. This information can be very useful to business people. For example,
research reports, market analyses, industry specific newsletters and commentary,
studies produced by analyst and research firms, are routinely sold in print form
to the business community. We believe that sales and delivery of this kind of
content via the Internet is a logical step in the development of information
distribution channels, and are positioning Logio to take a leading role in this
effort. Logio is developing a method whereby this type of business-oriented
content can be sold and delivered through our Logio site.
We believe that Logio will be used by business professionals for a
number of different activities. Our objective is to have our customers naturally
keep Logio open ("on their desktop") all day long, and when they are away from
their computers, to access Logio-delivered information using whatever device is
practical.
The rapid growth of the Internet and the proliferation of Internet
sites has increasingly challenged consumers, content providers and advertisers
to effectively reach one another. Consumers are often challenged to quickly find
the most relevant information, products and services related to a particular
interest or topic. Content providers are typically challenged to differentiate
their products and services in an increasingly crowded medium, and to improve
the visibility of their web sites. Advertisers are challenged to more
effectively deliver their advertising messages to interested audiences and
target groups. Because of these trends, Internet development is in some ways
mirroring the recent history of the print publishing industry. For example, over
the past thirty years, the number of newspapers and magazines devoted to
specialized subjects has exploded while general interest publications are
experiencing hard times.
Logio has chosen to create a site that meets the needs of business
people, and address some of the more well-documented functional problems that
plague Internet users. For example, most search engines do not differentiate
between the types of sites they search. Hence, a search initiated through a
general interest portal is run against all the sites they have indexed,
regardless of category. With literally billions of web pages on the Internet,
the body of information that is being searched is too broad. Logio has assembled
a team of editors that constantly combs the web to find only sites that deal
with business topics. This means that a business person who searches using Logio
has a much higher level of confidence that search results will come from sites
that pertain to the area of interest.
Because we are focusing solely on the "business subset" of the web, we
can use a far more specialized and powerful search engine that addresses some
common Internet user complaints. General web portals generally return lists of
hundred or even thousands of potential pages for further review. As a result,
Internet users may spend substantial time searching through the list of returned
documents to find out which documents are relevant. This frequently requires the
user to call up the referenced page and either visually scan the page or conduct
another page search to find the specific reference in question.
In contrast, Logio provides advanced search capabilities that display
the desired search result "in context," surrounding several lines of text on
either side of the search result. This allows the user to make some judgement of
a web sites' value prior to leaving the Logio site to more fully examine the
search result. While Logio's "hits-in-context" display is not its sole method of
differentiating itself in the market, it is indicative of the attention
management has paid to refining the Internet experience for the benefit of its
users. For further information on other Logio advantages, see "Our Solution"
below.
Logio Markets. We believe business professionals will use Logio. The
Internet is an interactive worldwide network of computers and data systems that
allow its users to retrieve data, purchase products, send and receive
communications and purchase or provide services. The Internet is based on a
technology platform that incorporates a series of standards that allow computers
in various locations and of various makes and models to communicate effectively
with one another. The use of the Internet has grown substantially since it was
first commercially introduced in the 1990s. Forrester Research Corporation
estimates that by 2003, approximately 200 million business people will be using
the Internet. The significant increase in the number of Internet users has
resulted in a rapid increase in the number of advertisers, products and services
on the Internet. Forrester estimates that approximately $3.3 billion was spent
on Internet and online advertising in 1998, growing to approximately $22.6
billion by the year 2002.
We believe Logio will become an important source not only for free
content, but also for business information that can be purchased for delivery in
electronic form from the Internet. According to a January 2000 study conducted
by Forrester Research, the market for business information sold via the Internet
will reach $11 billion by the year 2004.
The magnitude of the business-to-business market, estimated to be at
minimum $1.3 trillion by 2003, provides Logio with an avenue to focus on the
needs of business people, regardless of industry, while most of the B2B websites
focus on very tight vertical markets (such as steel, waste water treatment,
chemicals). We believe that Logio's `horizontal' focus will create opportunities
for networking and cooperation within the business-to-business marketplace.
Our Solution. Business professionals use the Internet for many reasons
- -- to acquire needed information and/or knowledge, to make business connections,
to obtain business tools and to make purchases. All these resources are
currently available, but scattered about in traditional places and on the
Internet. We seek to bring these solutions together at the Logio business
information service. The Logio.com business portal has the resources to help
business professionals quickly find information they seek:
o A focused, targeted directory of comprehensive information, organized
by occupation.
o A powerful, superior search function that returns results in context
and suggests related concepts.
o News and current events, updated constantly.
Logio also adds the tools and services business professionals generally
need to be efficient:
o Free email and Internet-based group calendaring and scheduling
o Travel services: city guides; hotel, car, airplane reservations
o Maps and directions
o Stock and financial information, portfolio tracking
o Weather information
o Financial calculators
The guiding strategy that we use to achieve our objectives and
differentiate ourselves from our competitors rests on a commitment to timely
relevance, to providing today's business professionals with what they need, when
they need it. This is achieved by constantly identifying and then consolidating
in one place the content and services that business people use. Current
components of Logio product and strategy include:
Robust, Proprietary Business Directory. One of Logio's most useful and
unique information resources is a proprietary business directory. The
directory's organizational structure is simple, but unique. Sites are organized
among broad industries, such as accounting, finance, marketing, sales, human
resources and administration. Business professionals can scan the directory,
find the right category tree, review the titles and abstracts of sites
pertaining to a given subject, and find the ones that should help them get their
job done. Logio's directory will start out with over twenty-five thousand hand
picked business websites.
"Hits in Context" Search Results. The Logio search engine overcomes one
of the most tedious and time-consuming problems on the web. After you do a
search, most search engines make you follow a hyperlink to see if search results
really have what you wanted. Logio shows "hits in context." In other words,
several lines of text surround the search terms you entered. This way, you can
see at a glance if a hit is relevant without leaving the Logio site.
Relevant Products, Services and Features. Because today's business
people don't use the Internet just to find information, part of Logio's charter
is to add features and functionality that will keep users there as much of the
time as possible. Creating individual and group calendars, booking travel and
airline reservations, checking the weather, getting directions and maps, using
the free e-mail service, checking news, and keeping track of investments is just
a start.
Personalization. To develop product affinity with the target audience,
Logio is flexible and able to adjust to the diverse needs of the business
community. The ability to personalize the content stream and functional layout
of the web pages enables the user to define a series of web pages tailored to
their specific taste and needs.
I-Commerce. There are times when needed information is simply not
available for free. At other times, it is less expensive and more efficient to
buy information than to search for it on the Internet. In both cases, the needed
data can often be acquired from a publisher for a price. We are therefore
exploring opportunities and technologies that will enable Logio to deliver
pay-per-view access to a large and valuable library of business reports.
Internationalization. Over the period between 2000 and 2002, our goal
is to create, maintain and support a global presence and develop the ability to
distribute content to all major geographies. We intend to make our service
available in multiple languages and in multiple countries.
Business Model / Revenue Generation. Unlike most other information
services and e-commerce ventures, Logio's value proposition for its customers is
based on convenience, control and choice rather than price. Logio offers its
viewers control and personal management of the vast offerings for business
information and related services. We plan to generate revenue from several key
areas, including advertising, fee-based content, affiliate programs, e-commerce,
co-branding relationships, sponsorships, licensing and merchandising.
Technology Infrastructure. A successful business-to-business Internet
site is available all the time. The Logio site architecture is state-of-the-art.
Designed to be highly available, technically advanced and readily scalable, this
hardware and software configuration can accommodate growth and flex to increased
loads on virtually a moment's notice.
Portfolio of Broadcast Platforms. Although the primary initial platform
is the Internet, we are aggressively exploring content distribution to other
devices, information appliances and platforms.
Partnering. We expect to create long-term, mutually beneficial
partnerships. These partnerships will focus on business media and technology
companies who have a worldwide presence and/or content. We are seeking
affiliations with companies that lend credibility to the Logio brand, and can
benefit from our forward-looking strategies.
Our Business Objectives and Strategy. Logio's objective is to be an
indispensable service for business professionals competing in today's
marketplace, thereby becoming a leading site on the Internet for business
people. We expect to provide the most popular services and the most valuable
content to our customers, with the goal of keeping them on our site for as many
of their Internet-based activities as possible. We will continue to pursue a
convergent media strategy so that we can give business professionals instant
access, anywhere and anytime, to information and services. By supplying them
with cutting edge, comprehensive content, combined with useful features and
powerful tools that can be personalized to meet individual needs, we believe
that Logio will offer today's connected business professional a competitive
edge.
Our research shows that business people typically fall into a highly
desirable demographic profile. They are often well-educated, and possess both
disposable income and business budget dollars to spend on personal and business
purchases. As such, they represent a target market that advertisers have
historically been willing to pay a premium to reach. By tailoring our
destination website to meet the needs of this target market, we believe we will
be able to more quickly generate revenues. According to Zona Research, focused
portals and directories will have an increased impact on the revenues and
advertising expenditures on the Internet. During the next five years online
directory spending for focused portals and directories should increase from 10%
of the overall Internet advertising budget to 80% of the overall Internet
advertising budget.
We believe that, as business people become increasingly familiar with
and dependent on the Internet for information, the market for "paid" content
will continue to accelerate. Logio is positioning itself, from both a
technological and a strategic relationship standpoint, to capitalize on this
trend.
We intend to achieve our business objectives using the following
strategies:
Position Logio as the premier Internet destination for
business professionals. We are developing a comprehensive and strategic brand
strategy that we expect will position Logio as the premier business information
service. Through advertising, we are working to develop market awareness of our
product, and provide strong site traffic. We believe that the site experience
will be such that users will develop loyalty to the brand.
Increase Logio Brand Recognition. We believe brand recognition
on the Internet will be crucial to the growth of Logio. We will actively seek to
develop relationships with companies whose brands will lend credibility and
momentum to ours.
Sales and Marketing. We expect that Logio will generate a large
percentage of its initial revenue from sales of advertising on the site. The
more rapidly we can develop traffic to the site, the more rapidly we will be
able to increase advertising sales. Our ability to fund an aggressive
advertising program that will promote Logio is important. This campaign will
consist of both online and offline components. The online campaign will include
banners and sponsorships, and the offline campaign will include radio,
newspaper, outdoor and funds permitting, television. The company's key partner
in developing the advertising strategy in an internationally recognized firm,
Pittard / Sullivan, headquartered in Los Angeles, California.
Logio's public relations efforts are geared towards developing strong
interest in the site. The company will undertake a full scale publicity campaign
at launch, targeting online, print, and broadcast press for maximum exposure and
site traffic. Our key partner in developing the public relations strategy is
Bailey Gardiner Communications, whose headquarters are in San Diego, California.
The site's "personalization" database is expected to occupy
increasingly greater importance in the marketing strategy. When users come to
the Logio site, they have the option of `customizing' or `personalizing' the
view of the site that they see. This means that they can choose which industry
news feeds they require, what maps and weather reports are first available, and
similar customized functionalities. Some of the information that we will ask for
includes occupation, business type, and industry and information. While
providing this kind of information makes the site all the more useful to the
individual user, it also makes our customers more valuable to advertisers. We
will be able to provide e-mail updates on a periodic basis, and offer specials
based on user preferences.
Customer Support and Services. We believe that our Internet site should
be available virtually all the time. The customer support and services aspect of
the company is therefore reliant on a round-the-clock team that constantly
monitors the operations of the Logio website.
Competition. Our market is new, very competitive and subject to rapid
technological and content change. We expect competition to persist, increase,
and intensify in the future as the markets for our products and services
continue to develop and as additional companies enter our markets. A number of
companies are now participating in the development and operation of portals. For
the sake of this discussion, we have divided them into three categories:
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Type Mega Portals General Portals Business Portals
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Examples AOL Lycos Dowjones.com
Yahoo! GO BizProLink
MSN Snap VerticalNet
Excite Brint.com
Office.com
- --------------------------------------------------------------------------------
The Mega Portals focus on satisfying the needs of every internet user.
They are large, well-funded and established companies that have millions of
daily users. Each has a section devoted to business.
The General Portals compete with the Mega Portals for a share of the
consumer market. The difference between general and mega portals is primarily
related to prominence in the market. For example, GO (owned by Disney) recently
announced that they were refocusing their efforts and would be refocusing their
site on Entertainment and Recreational activities. This decision occurred after
spending a year trying to grow the number of unique visitors to the site. We
believe that Go's decision is a good indicator of the trend towards
specialization on the Internet.
Business Portals can be broken down into three different groups. The
first group represents the Internet presence of an established print
publication. The second group specializes in delivering information to highly
specialized vertical markets. The third and final group is focused on meeting
the needs of small businesses.
Several of the participants in each of these market sectors have
established web presence and brands, and have been offering their services for a
number of years. The increased use and visibility of Logio will depend, in large
part, on our ability to continue adding content and services to our site,
maintaining operational performance levels, and effectively marketing our
product. We also believe it will be essential for us to develop long-term
business alliances with parties with which we can enter into strategic
relationships. We believe we will need to make significant investments in
research and development in order to keep up with the technological and
operational demands imposed by the anticipated ongoing developments in the
Internet.
At the present time, we have not identified any other companies that
are using precisely the same approach as Logio, or are targeting the horizontal
market as we are. Nonetheless, there is always the potential that other, larger
interests will choose to enter the market we are developing, or that a new
market may emerge. We may not be able to compete effectively with current and
future competitors.
Product Development.
The existing Logio site represents and investment of approximately
$3.5 million in equipment, software, interface design, underlying application
development software, and general costs. The site is connected to the Internet
using Cisco gear, and is hosted by Qwest communications. The technology
selection process for the site is governed by several fundamental principles.
o Internet users want sites to be up constantly, and to load fast.
Hardware is chosen and code is written accordingly.
o The site must be easily and quickly expanded or modified without
adversely affecting performance.
o Equipment and software is supplied by manufacturers with proven track
records and a commitment to timely and effective support.
o The solution must be cost effective.
We elected to use Sun Microsystems Enterprise computers for the core
hardware. These systems have been proven in Internet applications. They are also
readily available should we need to either grow the system quickly, or if a
system should fail. All systems are built using standard components, such that
all hard drives in all systems are the same. This means we have a consolidated
inventory list for field service, and enables us to reuse or re-purpose
individual systems or components as the need demands.
In addition to our proprietary application software, the Logio site
uses iPlanet's (formerly the Sun/Netscape Alliance) Application and Enterprise
Servers, Oracle's 8I Parallel Database Server, the Veritas Volume Management
System, and Dataware's InQuery Search and Retrieval engine.
Our initial target platform for distribution of business relevant
information and services is the Internet. Logio will aggressively develop
distribution capabilities for other digital-enabled devices. These may include;
Intranet, personal digital assistants (PDA), pagers, cellular and smart phones,
electronic books, global positioning systems (GPS), set top boxes and
traditional broadcast channels.
Our ability to successfully develop and release new products and
enhancements to Logio in a timely manner will be subject to a variety of
factors, including our ability to solve technical problems and test products,
the availability of financial, sales and management resources, and other
factors, some of which we may not be able to control. We may experience
difficulties that could delay or prevent our successful development,
introduction or marketing of new products and enhancements.
Material Contracts. We are a party to the following material contracts
and arrangements:
Brigham Young University License. On February 14, 1997 we signed a
master license agreement with BYU, under which we obtained the exclusive
worldwide rights to use, develop, manufacture, market, and modify the
WordCruncher technology. BYU retained the ownership rights to any improvements
to the WordCruncher technology that we develop. We issued BYU (and certain
individuals who developed the licensed technology while they were employed by
BYU) 110,742 shares of common stock for this license. In July 1998, we issued
BYU an additional 434,019 shares of common stock in connection with our
acquisition of WordCruncher Publishing Technologies. The WordCruncher technology
constitutes the core search technology we use in our "Logio" product.
The term of this license is for as long as allowed by law, but it may
be terminated if we materially breach the license. We are required to pay BYU a
royalty of 3% of our adjusted gross sales. Annual minimum royalties began in
January 1999, and $20,000 was due for 1999. The minimum royalty payments
increase annually and, in 2002, will be capped at $150,000. In addition, when we
acquired the License, BYU had already sublicensed the technology to several
other parties for royalty payments ranging from 3% to 8% of the sublicensee's
gross sales. Under the term of the license, we are required to pass through to
BYU 50% of the royalty payments we receive from these sublicenses.
Dataware License. In July 1999 we signed a three year source code
software license agreement with Dataware Technologies, Inc. granting us access
to code for Dataware's proprietary search engine technology. We intend to blend
this technology with our search technologies as we continue to develop our
overall product line. The license has a two year renewal option and cost us
$350,000. In connection with this agreement, we also signed a Consulting
Agreement with Acsiom Inc., an affiliate of Dataware, to provide consulting
services relating to the integration of the Dataware search engine into our
existing technology, including our business professional portal site. This
agreement requires us to pay hourly developer consulting fees ranging from $100
- - $150 per hour.
Pittard Sullivan Contract. In July 1999 we retained Pittard Sullivan, a
marketing communications company in the media and entertainment industries, to
provide us with brand strategy, brand identity and site design consulting
services. Brand strategy and identity efforts include the development of the
brand vision, brand mission, brand positioning policies, and an articulation of
our core branding values. Site development consulting efforts include creative
conceptualization and strategic analysis, design creation, production and
implementation, and testing. This contract runs through year end 1999 and has
cost $365,000.
Digital Boardwalk Agreement. In June 1999 we signed a strategic
agreement with Digital Boardwalk, a commercial website developer and e-commerce
specialist, to integrate business information resources and services offered
within our portal site for business professionals. Components of this effort
include specifications and development of user services and features, web
application flow, site security, third-party data sources, and methods for
connecting the application to our existing data infrastructure. The contract was
for $50,000 and expired in July, 1999. We are currently negotiating an
additional contract with Boardwalk that will be for approximately $200,000.
Purchase Agreement. In February and March 1999, we sold 6,300 shares of
our newly designated Series A Preferred Stock to eight investors under the terms
of a purchase agreement. We received a total of $6.3 million in the transaction.
After we paid the expenses of the placement agent ($378,000) and our other
expenses for the transaction ($15,000), we netted $5,907,900 from the sale. In
connection with the transaction, we also issued warrants to both the purchasers
and the placement agent and granted those parties certain registration rights
for the shares of common stock they can acquire by converting the Series A
Preferred Stock and exercising the warrants.
Columbia Financial Group Services Agreement. In January 1999, we
entered into a services agreement with Columbia Financial Group. Columbia
provides investor relations services for a number of public companies,
particularly those companies that are involved in the Internet business. Under
the agreement, we agreed to grant Columbia warrants to purchase for five years
up to 200,000 shares of our common stock for $5 per share.
Sierra Systems Consulting and Development Agreement. In September 1999,
we entered into a consulting and development contract agreement with Sierra
Systems Consultants, Inc. Under the terms of the agreement, Sierra provides web
site development support services for launching our web site, including the
development, delivery, testing and debugging of our web site technology. We are
required to pay a fixed price of $500,000 in exchange for these services, to be
paid in four installment payments based upon meeting certain milestones.
Veritas Software Financial Agreement. In November 1999, we entered into
a software purchase agreement with Veritas Software. Under the agreement, we are
purchasing software products that will be used in the delivery of our web site
for $60,830. The purchase price must be paid in full by May 2000.
Netscape Software Financial Agreement. In November 1999, we entered
into a software purchase agreement with Netscape. Under the terms of the
agreement, we are purchasing software products, including maintenance services,
for the delivery of our web site. The purchase price for the software products
and maintenance services is $268,068.72, which must be paid in full by November
2000.
Oracle Software Agreement. In November 1999, we entered into a software
license agreement with Oracle Corporation. Under the terms of the agreement, we
have a non-exclusive license to use certain Oracle software products which
manage our database. The purchase price under the license agreement is
approximately $257,000, which is paid in four quarterly payments after an
initial payment and includes support services for one year. The term of the
agreement is for two years, with a November 2001 expiration date.
Sun Microsystems License Agreement. In December 1999, we entered into a
master lease agreement with Sun Microsystems Finance. Under the lease agreement,
we lease the server equipment necessary to host our web site. The term of the
lease is for two years, with a December 2001 expiration date. The monthly
payments under this agreement are approximately $28,500 per month, for the two
year period.
Qwest Dedicated Internet Access Service Agreement. In January 2000, we
entered into an internet access agreement with Qwest Internet Solutions, Inc.
Under the terms of the agreement, Qwest hosts and provides internet access to
our web site for a monthly fee of $2,200 and variable charges based on usage of
our site. The term of the agreement is for two years, expiring in January 2002,
but automatically renews for successive two year terms unless either party gives
60 days notice prior to the expiration date.
Netdotworks Consulting and Support Agreement. In February 2000, we
entered into a consulting and support agreement with Netdotworks, Corporation.
Under the agreement, Netdotworks provides web site administration and management
consulting and support services for our web site. We are required to pay $90,000
per month for the initial 120 day term. Upon expiration of the initial 120 day
term, we have the option to extend the agreement for an additional 240 day term,
or on a month to month basis until February 2001.
DoubleClick, Inc. DART Service Agreement. In February 2000, we entered
into an agreement with DoubleClick Inc. Under the terms of the agreement,
DoubleClick provides advertisement delivery services for our web site. We are
required to pay monthly service fees based on the number of banner impressions
that are delivered to our web site through the service. The agreement expires in
December 2000, after which we would have to renegotiate a new agreement with
DoubleClick if we wished to continue receiving the services.
Corporate Development. Our predecessor in interest was incorporated in
the State of California on May 2, 1997, as Dunamis, Inc. Dunamis, Inc. was
formed for the purpose of publishing and marketing books and audio and video
tapes. On June 25, 1998, Dunamis, Inc. completed a merger with a Nevada
corporation that had been created for the sole purpose for changing Dunamis,
Inc.'s domicile from California to Nevada. On July 14, 1998, the surviving
entity in that transaction completed a merger with WordCruncher Publishing
Technologies, Inc., formerly known as Redstone Publishing, Inc., a Utah
corporation. The Nevada corporation was the surviving entity in that transaction
and, as part of the transaction, changed its name to "WordCruncher Internet
Technologies, Inc."
Patents, Licenses and Intellectual Property. Our success will depend,
in part, on our ability to obtain and protect patents, maintain trade secrets
and operate without infringing on the proprietary rights of others in the United
States and other countries. We intend to file patent applications relating to
our technology, products and processes as the need arises. However, any of these
patents or patent applications could be challenged, invalidated or circumvented
by our competitors.
If we were to become involved in a dispute regarding our intellectual
property, we may have to participate in interference proceedings before the
United States Patent and Trademark Office to determine who has the first claim
to the rights involved. We could also be forced to seek a judicial determination
concerning the rights in question. These types of proceedings can be costly and
time consuming, even if we eventually prevail. If we did not prevail, we could
be forced to pay potentially significant damages, obtain a license to the
technology in question, or stop commercializing a certain product.
We also rely on trade secrets, proprietary know-how and confidentiality
provisions in agreements with employees and consultants to protect our
intellectual property rights. These other parties may not comply with the terms
of their agreements with us, and we may not be able to adequately enforce our
rights against those parties.
We have adopted a policy of requiring our employees and collaborators
to execute confidentiality agreements when they commence employment or
consulting relationships with us. These agreements generally provide that all
confidential information developed or made known to the individual during the
course of his or her relationship with us is to be kept confidential and not
disclosed to third parties, except under certain specific circumstances. In the
case of employees, the agreements also provide that all inventions conceived by
the individual in the course of his or her employment will be our exclusive
property.
Employees. As of March 20, 2000, we had 23 employees 19 independent
contractors. Approximately 20 of our employees are engaged in development
activities, 10 are engaged in operational activities, 6 are engaged in
administrative and finance functions, and 6 are engaged in sales or marketing.
Our employees are not presently covered by any collective bargaining agreement.
We believe our relations with our employees are good, and we have not
experienced any work stoppages.
Item 2. Properties.
On December 31, 1999, we leased 3,600 square feet of administrative,
office and developmental space at the Town Square Professional Plaza in Draper,
Utah 84020. On March 21, 2000, we amended the lease to include an additional
1,800 square feet of administration and development space, and the term of the
lease is from March 15, 1999 until March 31, 2002. Beginning on April 1, 2000,
the rental for the space will be $5,728 per month, which we believe is typical
for similar premises in the area. We believe that our current office space is
adequate for our needs.
Item 3. Legal Proceedings.
We are not a party to any proceeding or threatened proceeding as of the
date of this annual report.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our stockholders during the
fourth quarter of the fiscal year ended December 31, 1999.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Since July 1998, our common stock has been traded over-the-counter and
quoted on the OTC Electronic Bulletin Board under the symbol "WCTI." Standard
Registrar and Transfer Company, Inc. currently, acts as transfer agent and
registrar for the common stock. The following table presents the range of the
high and low bid prices of our common stock as reported by the Nasdaq Trading
and Market Services for each of the periods indicated. The quotations shown
below represent prices between dealers, may not include retail markups,
markdowns, or commissions and may not necessarily represent actual transactions:
Year Quarter High Low
--------- ------------------- ----------- -----------
1999 First Quarter $36.25 $ 4.78
Second Quarter $ 7.81 $ 3.56
Third Quarter $ 6.13 $ 3.63
Fourth Quarter $ 5.75 $ 3.19
First Quarter $14.00 $ 5.75
2000 (through 3/20/00)
There were approximately 147 holders of record of our common stock and
8 holders of record of our Series A Preferred Stock as of December 31, 1999.
We have never declared or paid any cash dividends on our common stock.
We do not intend to pay any cash dividends on our common stock for the
foreseeable future.
The following discussion describes all securities we have sold within
the past three years without registration:
On May 16, 1997 we issued 1,500,000 shares of WordCruncher Publishing
common stock for $1,500 in cash to Carol N. Purcell and Wilford Purcell, the
founders of Dumanis, Inc. In July 1998, these shares were exchanged for
1,500,000 shares of WordCruncher Internet Technologies common stock.
Beginning on May 15 and ending on June 11, 1997, we sold, in exchange,
1,500,000 shares of common stock at $.05 per share, for an aggregate offering
amount of $75,000 pursuant to Rule 504 of Regulation D of the Securities Act.
On July 14, 1998, the Company issued an aggregate of 2,433,334 shares
of common stock to the stockholders of WordCruncher Publishing in a merger of
that company into ours.
On July 1, 1998, we issued 13,500 shares of common stock, valued at
$13,000, to M. Daniel Lunt, one of our officers and directors, in satisfaction
of a note we issued to Mr. Lunt.
On October 30, 1998 we issued an aggregate of 39,000 shares of common
stock, for $70,200, to four individuals in consideration for services they
provided to us. Specifically, 29,000 restricted shares were issued to Timothy J.
Riker, 5,000 shares to Peter T. Stoop, and 5,000 shares to Robert J. Stevens.
In October 1998, we issued 13,000 shares of common stock to Jeffrey B.
Peterson to acquire certain intellectual property rights held by Mr. Peterson.
We valued those shares at $24,000.
In November 1998, we issued 25,000 shares of common stock to Universal
Business Insurance in satisfaction of insurance premiums we owed to it. We
valued those shares at $25,000. On December 7, 1999, we converted approximately
$26,000 of debt to Universal Business Insurance into 8,000 shares of our common
stock, which we valued at $3.25 per share.
On February 8 and March 15, 1999, we issued an aggregate of 6,300
shares of Series A Convertible Preferred Stock to eight persons pursuant to a
purchase agreement. The Series A Convertible Preferred Stock was issued for an
aggregate of $6.3 million. Through March 2000, all of the holders of the issued
Series A Convertible Preferred Stock elected to convert such preferred stock
into 625,000 shares of our common stock. We have issued an additional 727,756
shares of our common stock to our Series A Convertible Preferred Stockholders
pursuant to the provisions of the purchase agreement by which the preferred
stock was purchased. We also issued 61,650 shares of our common stock to our
Series A Convertible Preferred Stockholders through March, 2000, as a cumulative
dividend.
In June, 1999 we issued 2,000 shares valued at $22,000 to two of our
former employees in connection with their termination of employment with us.
During fiscal year 1999, our employees exercised a total of 4,000
options at an exercise price of $.10 per share. In each of January and March,
2000, we issued an additional 2,000 shares, for a total of an additional 4,000
shares, upon the exercise of options held by our employees at an exercise price
of $.10 per share.
In January, 2000, Columbia Financial Group exercised its warrant in
part and purchased from us 100,000 shares of our common stock at a price of
$5.00 per share.
In March, 2000, Cardinal Capital and three of its assignees exercised
its warrant to purchase an aggregate of 58,000 shares of our common stock at an
exercise price of $7.00 per share.
In connection with each of these isolated issuances of our securities,
we believe that each purchaser (i) was aware that the securities had not been
registered under federal securities laws, (ii) acquired the securities for its
own account for investment purposes and not with a view to or for resale in
connection with any distribution for purposes of the federal securities laws,
(iii) understood that the securities would need to be indefinitely held unless
registered or an exemption from registration applied to a proposed disposition
and (iv) was aware that the certificate representing the securities would bear a
legend restricting their transfer. We believe that, in light of the foregoing,
the sale of our securities to the respective acquirers did not constitute the
sale of an unregistered security in violation of the federal securities laws and
regulations by reason of the exemptions provided under ss.ss. 3(b) and 4(2) of
the Securities Act, and the rules and regulations promulgated thereunder.
Item 6. Selected Financial Data.
The financial information set forth below with respect to our
statements of operations for each of the years in the two-year period ended
December 31, 1998, and with respect to our balance sheets at December 31, 1997
and 1998 is derived from the financial statements that have been audited by our
former independent certified public accountants, Crouch, Bierwolf & Chisholm,
and is qualified by reference to such financial statements and notes related
thereto. The financial information set forth below with respect to our
statements of operations for the one-year period ended December 31, 1999, and
with respect to our balance sheet at December 31, 1999 is derived from the
financial statements that have been audited by our current independent certified
public accountants, Grant Thornton, and is qualified by reference to such
financial statements and notes related thereto. The following selected financial
data should be read in conjunction with our financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Result of Operations."
Year Ended December 31,
-----------------------
1999 1998 1997
------------- ------------- -------------
Revenues:
Product Sales.................................. $ 15,289 $ 32,884 $ 16,034
Contract research revenues, royalties and
license fees 8,066 49,794 8,450
------------- ------------- -------------
Total revenues............................. 23,355 $ 82,678 $ 24,484
Cost of sales & royalties...................... 15,071 $ 15,864 $ 806
------------- ------------- -------------
Gross Profit (loss) 8,284 66,814 23,678
Operating costs and expenses:
Research & development......................... 1,198,546 266,563 126,281
Sales & marketing.............................. 953,708 34,554 5,274
General & administrative....................... 1,340,486 217,318 206,874
Depreciation & amortization.................... 179,169 10,406 6,419
Compensation expense for common stock and
options 1,452,610 - -
------------- ------------- -------------
Total operating expense.................... 5,124,519 528,841 344,848
------------- ------------- -------------
Operating loss................................... (5,116,235) (462,027) (321,170)
Other income and (expense)
Interest income and other, net................. 196,310 7,276 3,077
Interest expense............................... (9,955) (28,158) (17,125)
------------- ------------- -------------
Total other income and (expense), net...... 186,355 (20,882) (14,048)
Loss before income taxes......................... (4,929,880) (482,909) (335,218)
Provision for income taxes....................... - - -
------------- ------------- -------------
Net loss......................................... $ (4,929,880) $ (482,909) $ (335,218)
============= ============= =============
Deduction for dividends and accretion............ (6,469,861) - -
------------- ------------- -------------
Net loss attributable to common stockholders..... $(11,399,741) $ (482,909) $ (335,218)
============= ============= =============
Basic and Diluted loss per common share.......... $(0.96) $(0.08) $(0.61)
Weighted average outstanding shares.............. 11,879,919 6,100,679 545,535
============= ============= =============
Balance Sheet Data:
Cash and cash equivalents........................ $ 1,055,371 $ 425,702 $ 10,369
Total Assets..................................... 4,769,737 623,617 139,928
Long term liabilities, including current portion. 553,333 147,620 342,272
Deficit accumulated during the development stage. (12,217,868) (818,127)
Total Stockholders' Equity (deficit)............. 3,164,054 441,084 (208,943)
See Notes to Financial Statements for information concerning the computation of
per share amounts.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of a number of
factors.
Overview. We are a development stage company and our initial product,
has only recently been available for use in the marketplace. We launched on
website at www.logio.com on March 19, 2000. We are continuing to develop and
market Logio for the business professional.
We have devoted most of our resources since inception in November 1996
to the research and development of Logio and are now beginning to expend
additional resources on the development of brand awareness of "Logio." As of
December 31, 1999, we had an accumulated earnings deficit of $12,217,868. We
expect our operating losses to continue until we develop a sufficient customer
and advertising base to cover our operating expenses.
Reverse Acquisition Treatment. Our predecessor in interest was
incorporated in the state of California on May 2, 1997, as Dunamis, Inc. Dunamis
was formed for the purpose of publishing and marketing books and audio and video
tapes. On June 25, 1998, Dunamis completed a merger with a Nevada corporation
that had been created for the sole purpose of changing Dunamis' domicile from
California to Nevada. On July 14, 1998, the surviving entity in that transaction
completed a merger with WordCruncher Publishing Technologies, Inc., formerly
"Redstone Publishing, Inc.", a Utah corporation that was formed in November,
1996. The Nevada corporation was the surviving entity in that transaction and,
as part of the transaction, changed its name to "WordCruncher Internet
Technologies, Inc." At the time of the merger, WordCruncher Publishing
Technologies held the rights to a significant portion of the intellectual
property upon which our site was initially designed. As a result of the merger,
the former shareholders of WordCruncher Publishing Technologies, Inc. also
obtained a majority of the voting power of the combined companies. Accordingly,
in conformance with generally accepted accounting principles, the merger has
been accounted for as a "reverse acquisition." Consistent with reverse
acquisition accounting treatment, our accounting statements are the financial
statements of WordCruncher Publishing Technologies, Inc. and differ from the
financial statements of Dunamis, Inc.
Stock Split and Change in Par Value. In July 1998, we authorized a 3
for 1 forward stock split. We have retroactively restated our financial
statements to reflect that stock split. In connection with the reverse merger
with Dunamis, we also changed the par value of our common stock to $.001. That
change has also been retroactively applied in our financial statements. Unless
otherwise noted in this prospectus, all share amounts reflect the forward stock
split.
Results of Operation. The following summarizes the results of our
operations for the years ended December 31, 1999 and 1998 and 1997.
Year Ended December 31,
-----------------------
1999 1998 1997
------------ ----------- -----------
Revenues $23,355 $82,678 24,484
Cost of sales 15,071 15,864 806
------------ ----------- -----------
Gross profit (loss) $ 8,284 $66,814 $23,678
Research & development 1,198,546 266,563 126,281
Sales & marketing 953,708 34,554 5,274
General & administrative 1,340,486 217,318 206,874
Depreciation & amortization 179,169 10,406 6,419
Compensation expense for common stock
and options 1,452,610 - -
------------ ----------- -----------
Total operating expense 5,124,519 528,841 344,848
Operating Loss $(5,116,235) (462,027) (321,170)
Interest income 196,310 7,276 3,077
Interest Expense (9,955) (28,158) (17,125)
------------ ----------- -----------
Total interest income (expense) 186,345 (20,882) (14,048)
Net loss $(4,929,880) $ (482,909) $ (335,218)
============ =========== ===========
Our expenses have exceeded our revenues for each fiscal period since
our inception. The revenues we have generated to date have been nominal and
almost exclusively related to product sales and licensing fees for our personal
computer based version of our software. Those revenues will continue to decrease
as we switch our development and marketing emphasis to an Internet version of
Logio. Accordingly, we believe a comparison of the results of our operations on
a period-by-period basis is of limited benefit. We expect that, as we continue
to implement our business plan, our revenues will grow, along with the burdens
generally associated with larger revenues, including increased expenses for our
managerial, accounting and technical personnel.
Comparison of Year End Periods. Following is a comparison of our
operating results for the year ended December 31, 1999 with the year ended
December 31, 1998:
Revenue. Revenues decreased $59,323 from $82,678 for the year
ended December 31,1998, to $23,355 for the year ended December 31, 1999. This
72% decrease was due to the discontinuation of our PC-based product and our
intense focus on the development of our Logio.com site which has only recently
become available to the marketplace.
Costs of Revenues. Cost of revenues remained relatively flat
with 1998 cost of sales amounting to $15,864 and 1999 amounting to $15,071. This
slight decrease in cost of sales in the face of significant declines in revenue
is attributed to the added cost of discontinuing our PC based lines.
Research & Development. Research and development expense
increased nearly 450% from $266,563 in 1998 to $1,198,546 in 1999. This was due
to the significant level of expenditure involved in the development of our
Logio.com site over the past 12 months.
Selling Expenses. Sales and marketing expenses also increased
significantly from $34,554 in 1998 to $953,708 in 1999, an increase of nearly
2800%, as we prepared to and initiated the sales effort in connection with our
Logio.com site. Nearly 50% of these monies were spent in connection with our
advertising and branding campaign with Pittard Sullivan and a majority of the
balance was devoted to salaries and marketing fees.
General and Administrative. General and administrative expense
increased significantly in 1999, as we increased staff in preparation for
commercial operations. During 1999, as compared to 1998, our general and
administrative expenses increased 617% to $1,340,486 from $217,138.
Depreciation and Amortization. Depreciation and amortization
expense increased from $10,406 in 1998 to $179,169 in 1999 primarily due to the
additional property, equipment and software that we acquired in 1999 to support
our website operations.
Total Operating Expenses. Total operating expenses increased
$4,595,678 from $528,841 in 1998 to $5,124,519 in 1999. This 969% increase in
operating expenses resulted in an operating loss for 1999 of $5,116,235, an
increased loss of $4,654,208 over the 1998 loss of $462,027.
Other Income. Other income increased from $7,276 in 1998 to
$196,310 in 1999, a 2700% increase, as interest and dividends on invested cash
increased significantly based on higher cash balances associated with the cash
proceeds received from the Series A Preferred Share offering. These cash
balances are temporarily invested pending their ultimate use in funding
development activities.
Interest Expense. As a result of decreased borrowing, our
interest expense decreased from $28,158 in 1998 to $9,955 in 1999.
Net Loss. Our net loss for 1999 grew $4,446,971 to $4,929,880,
compared to a loss of $482,909 for 1998 as a result of our increased costs and
expenses related to the research, development and implementation of our
Logio.com website operations.
Net Loss Attributable to Common Shareholders. Giving effect to
the beneficial conversion feature of our Series A Preferred Share offering, our
total loss attributable to common shareholders was $11,399,741 in 1999. This
resulted in an increase to additional paid in capital and a corresponding
accumulated increase in deficit. This was the first year that the beneficial
conversion feature was available to the preferred stockholders.
Quarterly Trends. We do not anticipate significant "seasonal" changes
in our operations. We expect revenues to grow consistently over the next five
years, but we believe they should grow reasonably even from quarter to quarter.
We believe revenues will come initially from advertising sales at our site. We
believe we will generate additional revenues through our partnership
arrangements with other sites that use Logio in other commerce-related areas
over the Internet and through the sale of information through the Logio site.
Liquidity and Capital Resources. Since our inception, we have funded
our cash requirements through debt and equity financings. We have used the funds
from those transactions to fund our investment in the development of our
Logio.com business information site, provide working capital and for general
corporate purposes. As of the year ended December 31, 1997, we had total assets
of $139,928, and total liabilities of approximately $348,872, resulting in a
negative net worth of $208,943. Our operating losses totaled $335,218. These
losses were funded primarily by related party loans, which were backed by a
revolving bank line of credit. In connection with the merger between
WordCruncher Publishing Technologies, Inc. and Dunamis, Inc. in July 1998, we
obtained a significant new source of operating capital. At the time of the
merger, Dunamis, Inc. held cash reserves of approximately $1 million, and had no
liabilities. As a result of that transaction, our total assets for the year
ended December 31, 1998 were $623,617, including cash or cash equivalents of
$425,702. Our liabilities totaled $182,533, resulting in a stockholders equity
of $441,084, including an operating loss of $482,909 for the year ending
December 31, 1998. Cash provided by financing activities in 1999 included $6.3
million, from our sale of our Series A Preferred Stock to eight investors. Our
expenses for the offering totaled $392,100, resulting in net proceeds to us of
$5,907,900. As a result, as of December 31, 1999, we had total assets of
$4,769,737. Our total liabilities as of that date were $1,605,683 and our
stockholders' equity was $3,164,054. This includes an increase to accumulated
deficit of $6,469,861 and a corresponding increase to paid-in capital in
recognition of the beneficial conversion feature of our convertible preferred
shares issued during the period. We used $2,986,246 in cash for operations. Cash
was used to pay salaries related to development, marketing and administrative
personnel, building operating lease and other operating payables. Cash was used
in investing related activities, including $1,260,831 in property and equipment
purchases and purchases of short-term investments totaling $1,454,207. Our cash,
cash equivalents and short term investments at December 31, 1999 totaled
$2,517,518.
A summary of our audited balance sheets for the years ended December
31, 1999, 1998 and 1997 are as follows:
Year Ended December 31,
-----------------------
1999 1998 1997
Cash and Cash Equivalents and Short- ----------- ----------- ----------
Term Investments $2,517,518 $425,702 $10,369
Current Assets $2,833,391 $425,702 $15,369
Total Assets $4,769,737 $623,617 $139,928
Current Liabilities $1,352,333 $170,919 $321,307
Total Liabilities $1,605,683 $182,533 $348,872
Total Stockholders' Equity $3,164,054 $441,084 $(208,943)
Total Liabilities & Stockholders' Equity $4,769,737 $623,617 $139,928
We have the resources to continue our product development efforts,
commence commercial operations and to initiate our sales, marketing and
promotional activities for Logio through the end of the third quarter of 2000,
based upon our current estimates of projected expenditures during the period. We
operate in a very competitive industry that requires continued large amounts of
capital to develop and promote its products. Many of our competitors have
significantly greater capital resources. We believe it will be essential to
continue to raise additional capital, both internally and externally to compete
in this industry.
Our need to raise external capital in the future will depend upon many
factors, including, but not limited to, the rate of sales growth and market
acceptance of our product lines, the amount and timing of our necessary research
and development expenditures, the amount and timing of our expenditures to
sufficiently market and promote our products and the amount and timing of any
accessory new product introductions. In addition to accessing the public equity
markets, we will pursue bank credit lines and equipment lease lines for certain
capital expenditures. However, there can be no assurance that we will be able to
access the capital we need.
We currently estimate that we will require between $25 and $30 million
to develop our products and launch our operations in accordance with our
business plan through 2002. The actual costs will depend on a number of factors,
including
o our ability to negotiate favorable prices for purchases of necessary
portal components,
o the number of our customers and advertisers,
o the services for which they subscribe,
o the nature and success of the services that we offer,
o regulatory changes, and
o changes in technology.
In addition, our actual costs and revenues could vary from the amounts
we expect or budget, possibly materially, and those variations are likely to
affect how much additional financing we will need for our operations.
Accordingly, there can be no assurance our actual financial needs will not
exceed the amounts available to us.
To the extent that we acquire the amounts necessary to fund our
business plan through the issuance of equity securities, our then-current
shareholders may experience dilution in the value per share of their equity
securities. The acquisition of funding through the issuance of debt could result
in a substantial portion of our cash flows from operations being dedicated to
the payment of principal and interest on that indebtedness, and could render us
more vulnerable to competitive and economic downturns.
Recent Accounting Pronouncements . In June 1998, Statement of Financing
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" was released. The Statement requires recognition of all derivatives
as either assets or liabilities on a company's balance sheet and the measurement
of those instruments at fair market value. The Statement provides for the
accounting treatment of changes in the fair value of a derivative depending on
the planned use of the derivative and the resulting designation. We are required
to implement the Statement in the first quarter of fiscal 2000. We have not used
derivative instruments, however, and we believe that the impact of the adoption
of this Statement will not have a significant effect on our financial
statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use." The Statement is effective for fiscal
years beginning after December 15, 1998. The statement provides guidance and
accounting for the cost of computer software developed or obtained for internal
use by a company. We adopted this Statement on January 1, 1999, but do not
believe that it will have a significant effect on our financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-4, "Deferral of the Effective Date of a
Provision of Statement of Position 97-2." The Statement of Position 98-4 defers
for one year the application of certain provisions of Statement of Position
97-2, "Software Revenue Recognition." Different informal and non-authoritative
interpretations of certain provisions of Statement of Position 97-2 have been
printed and, as a result, the American Institute of Certified Public Accountants
issued Statement of Position 98-9 in December 1998 which is effective for
periods beginning on or after March 15, 1999. Statement of Position 98-9 extends
the effective date of Statement of Position 98-4 and provides additional
interpretative guidance. The adoption of Statement of Position 97-2, Statement
of Position 98-4, and Statement of Position 98-9 have not have and are not
expected to have a material impact on our results of operations, financial
position or cash flows. However, due to the uncertainties related to the outcome
of these amendments, we cannot determine the impact of the Statement on our
future financial results.
Statement of Financial Accounting Standards, or SFAS, No. 130,
"Reporting Comprehensive Income," requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. We adopted the provisions of SFAS No. 130
beginning January 1, 1998, as required. Our comprehensive losses and net losses
are not materially different for all periods presented.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. We adopted the
provisions of SFAS No. 131 for the year ending December 31, 1998 as required.
Currently, we do not believe we have any separately reportable business segments
or other disclosure information required by the Statement.
New Accounting Pronouncements. We have reviewed all recently issued,
but not yet adopted, accounting standards to determine their effects, if any, on
our results of operations or financial position. Based on our review, we believe
that none of these pronouncements will have a significant effect on our current
or future earnings or operations.
Item 8. Financial Statements and Supplementary Data.
WORDCRUNCHER INTERNET TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
-----
INDEPENDENT AUDITORS' REPORTS
Report of Grant Thornton LLP, independent certified public accountants
on the December 31, 1999 financial statements F-2
Report of Crouch, Bierwolf and Chisholm independent certified public accountants
on the December 31, 1998 and 1997 financial statements F-3
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1999 and 1998 F-4
Statements of Operations for the Years Ended
December 31, 1999, 1998, 1997, and cumulative amounts since inception F-5
Statement of Stockholders' Equity for the Years Ended
December 31, 1999, 1998, 1997, and cumulative amounts since inception F-6
Statements of Cash Flows for the Years Ended
December 31, 1999, 1998, 1997, and cumulative amounts since inception F-9
Notes to Financial Statements F-11
F-1
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
WordCruncher Internet Technologies, Inc.
We have audited the accompanying consolidated balance sheet of
WordCruncher Internet Technologies, Inc. (a development stage company), as of
December 31, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements, audited by other auditors, for the period
from November 5, 1996 (inception) to December 31, 1998 reflect total revenues
and net loss of $107,162 and $818,127, respectively, of the related totals. Our
opinion insofar as it relates to the cumulative amounts since inception included
for such prior period, is based solely on the report of other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors,
the 1999 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of WordCruncher Internet
Technologies, Inc. (a development stage company), as of December 31, 1999, and
the consolidated results of their operations and their consolidated cash flows
for the year then ended and cumulative amounts since inception in conformity
with generally accepted accounting principles.
The Company is in the development stage as of December 31, 1999. Recovery of the
Company's assets is dependent on future events, the outcome of which is
indeterminable. In addition, successful completion of the Company's development
plan and its transition, ultimately, to attaining profitable operations, is
dependent upon obtaining adequate financing to fulfil its development activities
and achieving a level of sales adequate to support the Company's cost structure.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As shown in the financial statements,
the Company has incurred consolidated cumulative net losses attributable to
common stockholders of $12,217,868 since inception of operations. This factor,
among others, as discussed in Note B to the financial statements, raises
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 B. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/GRANT THORNTON LLP
Salt Lake City, Utah
March 6, 2000
F-2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of WordCruncher Internet Technologies, Inc.
We have audited the accompanying consolidated balance sheets of WordCruncher
Internet Technologies, Inc. (a development stage company) as of December 31,
1998 and 1997 and the related statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1998, 1997 and 1996 and from
inception of the development stage on November 5, 1996 through December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WordCruncher
Internet Technologies, Inc. (a development stage company) as of December 31,
1998 and 1997 and the results of its consolidated operations and cash flows for
the years ended December 31, 1998, 1997 and 1996 and from inception of the
development stage on November 5, 1996 through December 31, 1998 in conformity
with generally accepted accounting principles.
Crouch, Bierwolf & Chisholm
Salt Lake City, Utah
January 21, 1999
F-3
WordCruncher Internet Technologies, Inc.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
1999 1998
---------------- -------------
Current assets
Cash and cash equivalents $ 1,055,371 $ 425,702
Short-term investments (Note C) 1,462,147 -
Prepaid expenses 311,199 -
Interest receivable 1,983 -
Current maturities of notes receivable (Note F) 1,955 -
Accounts receivable 736 -
---------------- -------------
Total current assets 2,833,391 425,702
---------------- -------------
PROPERTY And Equipment, at cost (Note E) 1,930,335 81,419
NOTES RECEIVABLE, less current maturities (Note F) - 100,200
Other assets (Note D) 6,011 16,296
---------------- -------------
$ 4,769,737 $ 623,617
================ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term obligations (Note G) $ - $ 120,000
Current maturities of capital lease obligations (Note H) 299,983 16,006
Notes payable 659,682 -
Accounts payable 306,349 10,421
Accrued expenses 86,319 24,492
---------------- -------------
Total current liabilities 1,352,333 170,919
CAPITAL LEASE OBLIGATIONS, less current maturities (Note H) 253,350 11,614
COMMITMENTS (Notes H and I) - -
Stockholders' equity (Notes B, C, I, J, K, M and N)
6% preferred stock, par value $0.01; liquidation preference $1,000;
authorized 15,000 shares; issued and outstanding 6,300 shares 63 -
in 1999 and none in 1998
Common stock, par value $0.001; authorized 60,000,000 shares;
issued and outstanding 11,891,002 shares in 1999
and 11,877,002 shares in 1998 11,891 11,877
Additional paid-in capital 15,362,028 1,247,334
Accumulated other comprehensive income 7,940 -
Deficit accumulated during the development stage (12,217,868) (818,127)
---------------- -------------
Total stockholders' equity 3,164,054 441,084
---------------- -------------
$ 4,769,737 $ 623,617
================ =============
The accompanying notes are an integral part of these statements.
F-4
WordCruncher Internet Technologies, Inc.
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
amounts Year ended December 31,
since -------------------------------------------------
inception 1999 1998 1997
-------------- --------------- ---------------- --------------
Revenues $ 130,517 $ 23,355 $ 82,678 $ 24,484
Cost of sales 31,741 15,071 15,864 806
-------------- --------------- ---------------- --------------
Gross profit 98,776 8,284 66,814 23,678
Selling expenses 993,536 953,708 34,554 5,274
Research and development 1,591,390 1,198,546 266,563 126,281
General and administrative 1,764,678 1,340,486 217,318 206,874
Depreciation and amortization 195,994 179,169 10,406 6,419
Compensation expense for common
stock and options (Note K) 1,452,610 1,452,610 - -
-------------- --------------- ---------------- --------------
Total operating expenses 5,998,208 5,124,519 528,841 344,848
-------------- --------------- ---------------- --------------
Loss from operations (5,899,432) (5,116,235) (462,027) (321,170)
Other income (expense)
Interest income and other 206,663 196,310 7,276 3,077
Interest expense (55,238) (9,955) (28,158) (17,125)
-------------- --------------- ---------------- --------------
151,425 186,355 (20,882) (14,048)
-------------- --------------- ---------------- --------------
Net Loss $ (5,748,007) $ (4,929,880) $ (482,909) $ (335,218)
============== =============== ================ ==============
Deduction for dividends and accretion (Note J) $ (6,469,861) $ (6,469,861) $ - $ -
============== =============== ================ ==============
Net loss attributable to common stockholders $ (12,217,868) $ (11,399,741) $ (482,909) $ (335,218)
============== =============== ================ ==============
Net loss per common share - basic and diluted
(Note M) $ (2.09) $ (0.96) $ (0.08) $ (0.61)
============== =============== ================ ==============
Weighted-average number of shares outstanding
- basic and diluted 5,850,408 11,879,919 6,100,679 545,535
============== =============== ================ ==============
The accompanying notes are an integral part of these statements.
F-5
WordCruncher Internet Technologies, Inc.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998, 1997, and period from November 5, 1996 (inception) to December 31, 1996
Preferred stock Common stock
--------------------------- ---------------------------
Price per Number Number
Date share of shares Amount of shares Amount
------------- ------------- ------------ ------------ ------------ ------------
Balances at November 5, 1996 - $ - - $ - - $ -
Net loss - - - - - -
- - ------------ ------------ ------------ ----------
Balances at December 31, 1996 - - - - - -
Issuance of stock for cash to Jan 97 0.001 - - 622,500 623
organizers
Issuance of stock for cash Feb 97 0.001 - - 67,500 67
Issuance of stock for license Feb 97 - - - 110,742 111
agreement (Note I)
Issuance of stock to employees Sep 97 0.333 - - 252,450 252
for services
Issuance of stock for services Aug 97 1.092 - - 37,875 38
performed
Net loss for the year - - - - - -
- - ------------ ------------ ------------ ----------
Balances at December 31, 1997 - - - - 1,091,067 1,091
Issuance of stock for cash Jul 98 4.17 - - 120,000 120
Reverse acquisition and Jul 98 - - - 9,885,435 9,886
reorganization adjustment
(Continued)
F-6
WordCruncher Internet Technologies, Inc.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998, 1997, and period from November 5, 1996 (inception) to December 31, 1996
--CONTINUED--
Deficit
Accumulated accumulated
Additional other during
paid-in comprehensive development
capital income stage
------------ --------------- ------------
Balances at November 5, 1996 $ - $ - $ -
Net loss - - -
------------ --------------- ------------
Balances at December 31, 1996 - - -
Issuance of stock for cash to 52 - -
organizers
Issuance of stock for cash 8 - -
Issuance of stock for license (111) - -
agreement (Note I)
Issuance of stock to employees 83,898 - -
for services
Issuance of stock for services 41,337 - -
performed
Net loss for the year - - (335,218)
------------ --------------- ------------
Balances at December 31, 1997 125,184 - (335,218)
Issuance of stock for cash 499,880 - -
Reverse acquisition and (8,550) - -
reorganization adjustment
F-6(a)
WordCruncher Internet Technologies, Inc.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Years ended December 31, 1999, 1998, 1997, and period from November 5, 1996 (inception) to December 31, 1996
Preferred stock Common stock
--------------------------- ---------------------------
Price per Number Number
Date share of shares Amount of shares Amount
------------- ------------- ------------ ------------ ------------ ------------
Issuance of stock for cash Jul 98 0.725 - - 690,000 690
Issuance of stock for debt Jul 98 0.96 - - 13,500 13
conversion
Issuance of stock for services Oct 98 1.90 - - 39,000 39
Issuance of stock for software Oct 98 1.80 - - 13,000 13
technology
Issuance of stock for insurance Nov 98 1.00 - - 25,000 25
coverage
Net loss for the year - - - - - -
------------ ------------ ------------ ------------
Balances at December 31, 1998 - - - - 11,877,002 11,877
Issuance of warrants for Jan 99 - - - - -
consulting services (Note K)
Issuance of preferred stock for Feb 99 1,000 6,100 61 - -
cash, net of offering costs
(Note J)
Issuance of preferred stock for Mar 99 1,000 200 2 - -
cash, net of offering costs
(Note J)
(Continued)
F-7
WordCruncher Internet Technologies, Inc.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Years ended December 31, 1999, 1998, 1997, and period from November 5, 1996 (inception) to December 31, 1996
--CONTINUED--
Deficit
Accumulated accumulated
Additional other during
paid-in comprehensive development
capital income stage
------------ --------------- ------------
Issuance of stock for cash 499,310 - -
Issuance of stock for debt 12,987 - -
conversion
Issuance of stock for services 70,161 - -
Issuance of stock for software 23,387 - -
technology
Issuance of stock for insurance 24,975 - -
coverage
Net loss for the year - - (482,909)-
------------ --------------- ------------
Balances at December 31, 1998 1,247,334 - (818,127)
Issuance of warrants for 258,000 - -
consulting services (Note K)
Issuance of preferred stock for 5,719,839 - -
cash, net of offering costs
(Note J)
Issuance of preferred stock for 187,998 - -
cash, net of offering costs
(Note J)
F-7(a)
WordCruncher Internet Technologies, Inc.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Years ended December 31, 1999, 1998, 1997, and period from November 5, 1996 (inception) to December 31, 1996
Preferred stock Common stock
--------------------------- ---------------------------
Price per Number Number
Date share of shares Amount of shares Amount
------------- ------------- ------------ ------------ ------------ ------------
Issuance of common stock to Jun 99 0.11 - - 2,000 2
employees for compensation
Issuance of common stock for Aug 99 0.10 - - 4,000 4
exercise of options
Issuance of common stock for Dec 99 3.25 - - 8,000 8
conversion of debt
Issuance of stock options to Jan-Dec 99 - - - - -
employees for compensation
Accretion of intrinsic value of Feb-Dec 99 - - - - -
preferred stock (Note J)
Dividends on preferred stock (Note J) Feb-Dec 99 - - - - -
Unrealized gain on marketable - - - - - -
securities (Note C)
Net loss for the year - - - - - -
------------ ------------ ------------ ------------
Balances at December 31, 1999 - - 6,300 $ 63 11,891,002 $ 11,891
============ ============ ============ ============
The accompanying notes are an integral part of this statement.
F-8
WordCruncher Internet Technologies, Inc.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Years ended December 31, 1999, 1998, 1997, and period from November 5, 1996 (inception) to December 31, 1996
--CONTINUED--
Deficit
Accumulated accumulated
Additional other during
paid-in comprehensive development
capital income stage
------------ --------------- -------------
Issuance of common stock to 21,998 - -
employees for compensation
Issuance of common stock for 396 - -
exercise of options
Issuance of common stock for 25,992 - -
conversion of debt
Issuance of stock options to 1,430,610 - -
employees for compensation
Accretion of intrinsic value of 6,131,944 - (6,131,944)
preferred stock (Note J)
Dividends on preferred stock (Note J) 337,917 - (337,917)
Unrealized gain on marketable - 7,940 -
securities (Note C)
Net loss for the year - - (4,929,880)
------------ --------------- -------------
Balances at December 31, 1999 15,362,028 $ 7,940 $(12,217,868)
============ =============== =============
F-8(a)
WordCruncher Internet Technologies, Inc.
(a development stage company)
STATEMENTS OF CASH FLOWS
Cumulative
Amounts Year ended December 31,
Since -------------------------------------------------
Inception 1999 1998 1997
--------------- --------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (5,748,007) $ (4,929,880) $ (482,909) $ (335,218)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 195,994 179,169 10,406 6,419
Issuance of common stock and
options for compensation and
other expenses 1,673,335 1,452,610 95,200 125,525
Issuance of warrants for consulting services
258,000 258,000 - -
Changes in assets and liabilities
Prepaid expenses (311,199) (311,199) - -
Interest receivable (1,983) 8,035 (7,141) (2,877)
Accounts receivable (736) (736) - -
Accounts payable 301,349 295,928 4,251 1,170
Accrued expenses 86,319 61,827 19,063 5,429
--------------- --------------- --------------- ---------------
Total adjustments 2,201,079 1,943,634 121,779 135,666
--------------- --------------- --------------- ---------------
Net cash used in
operating activities (3,546,928) (2,986,246) (361,130) (199,552)
--------------- --------------- --------------- ---------------
Cash flows from investing activities
Purchases of property and equipment (1,279,458) (1,260,831) (18,627) -
Increase in short-term investments (1,454,207) (1,454,207) - -
Repayment of notes receivable
from related parties 115,745 110,745 5,000 -
Notes receivable issued to related parties (117,700) (12,500) (23,200) (82,000)
Increase in deposits (5,076) - (5,076) -
--------------- --------------- --------------- ---------------
Net cash used in investing activities (2,740,696) (2,616,793) (41,903) (82,000)
--------------- --------------- --------------- ---------------
(Continued)
F-9
WordCruncher Internet Technologies, Inc.
(a development stage company)
STATEMENTS OF CASH FLOWS - CONTINUED
Cumulative
Amounts Year ended December 31,
Since ------------------------------------------------
Inception 1999 1998 1997
--------------- -------------- -------------- --------------
Cash flows from financing activities
Proceeds from issuance of common stock 1,001,150 400 1,000,000 750
Proceeds from issuance of preferred stock 6,300,000 6,300,000 - -
Payment of fees associated with issuance
of preferred stock (392,100) (392,100) - -
Proceeds from issuance of notes payable 685,682 685,682 - -
Proceeds from issuance of long-term obligations
313,000 - 13,000 300,000
Principal payments under capital lease obligations
(256,423) (241,274) (6,320) (8,829)
Principal payments of long-term obligations (308,314) (120,000) (188,314) -
--------------- -------------- -------------- --------------
Net cash provided by
investing activities 7,342,995 6,232,708 818,366 291,921
--------------- -------------- -------------- --------------
Net increase in cash and
cash equivalents 1,055,371 629,669 415,333 10,369
Cash and cash equivalents at beginning of period - 425,702 10,369 -
--------------- -------------- -------------- --------------
Cash and cash equivalents at end of period $ 1,055,371 $ 1,055,371 $ 425,702 $ 10,369
=============== ============== ============== ==============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 49,128 $ 4,584 $ 29,888 $ 14,656
Income taxes - - - -
Noncash financing activities
Purchase of equipment through lease obligations $ 818,177 $ 766,987 $ - $ 51,190
Unrealized gain on available-for-sale securities 7,940 7,940 - -
Issuance of common stock for
debt conversion 39,000 26,000 13,000 -
The accompanying notes are an integral part of these statements.
F-10
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows:
1. Organization and principles of consolidation
WordCruncher Internet Technologies, Inc. (the Company) was incorporated on
November 5, 1996 in the State of Utah under the name of Redstone
Publishing, Inc. On March 10, 1997, the Company changed its name to
WordCruncher Publishing Technologies, Inc. During July 1998, the Company
merged with Dunamis, Inc. a public company organized in the State of
California. Dunamis had approximately $1 million of cash and essentially no
other assets and liabilities. Management of Dunamis resigned and management
of the Company now manages the consolidated entity. The merger was recorded
as a reverse acquisition, therefore WordCruncher is the accounting
survivor.
In connection with the merger, Dunamis, the legal survivor, changed its
name to WordCruncher Internet Technologies, Inc. and changed its domicile
to the State of Nevada. The Company's headquarters are in Draper, Utah,
where the Company is engaged in the development and marketing of a business
information Internet site. The Internet site is specialized for business
professionals and the business-to-business marketplace. The Company has
acquired a license agreement from a University wherein the Company has an
exclusive, worldwide right to sell, develop and manufacture the
"WordCruncher" technology.
2. Stock split and change in par value
In July 1998, the Company authorized a 3 for 1 forward stock split. These
financial statements have been retroactively restated to reflect the stock
split. Pursuant to the reverse merger with Dunamis, the Company's par value
of its common stock changed to $.001 per share. This change has also been
retroactively applied.
3. Development stage company
The Company is a development stage company and is concentrating
substantially all of its efforts in raising capital and developing its
business information Internet site for future commercial release.
4. Software development costs
Software development costs incurred in the development of software related
products are charged to expense as incurred. Material software development
costs incurred subsequent to the establishment of technological feasibility
are capitalized. Technological feasibility is established by the Company
upon completion of a working model. Software development costs incurred by
the Company subsequent to technological feasibility have been
insignificant.
F-11
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
5. Recognition of revenue
The Company recognizes income and expense on the accrual basis of
accounting. During the development stage, the Company has received revenues
for certain services provided for indexing printed materials to online
format. Revenue is recorded when the services are completed. The Company
also generates revenues during the development stage from the sale of its
publishers' proprietary version of the search engine technology. This
technology is sold separately without future performance such as upgrades
or maintenance, and is not sold with support services, therefore revenue is
recorded upon the sale and delivery of the product. Licensing fees are also
received from the sublicensing of this technology which is included in the
software of certain sublicenses. Licensing fees are recorded as revenue as
software is reported as sold by the sublicensee.
6. Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
7. Short-term investments
Short-term investments are comprised of various government securities,
commercial paper and other securities, which mature in one year or less and
are classified as available-for-sale. Available-for-sale securities are
measured at fair value with net unrealized gains and losses reported in
equity.
8. Fair value of financial instruments
The fair value of the Company's cash equivalents, receivables, accounts
payable and accrued liabilities approximate carrying value due to the
short-term maturity of the instruments. The fair value of long-term
obligations approximate carrying value based on their effective interest
rates compared to current market rates.
9. Use of estimates
In preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of 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 significantly from those estimates.
10. Depreciation and amortization
Depreciation of property and equipment is provided on the straight-line
method over the estimated useful lives of the assets. Accelerated methods
of depreciation of property and equipment are used for income tax purposes.
F-12
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
10. Depreciation and amortization - continued
Property and equipment under capital leases are amortized over the lessor
of the life of the asset or the term of the lease.
Maintenance, repairs, and renewals which neither materially add to the
value of the property nor appreciably prolong its life are charged to
expense as incurred. Gains or losses on dispositions of property and
equipment are included in earnings.
11. Income taxes
In 1997, WordCruncher Publishing Technologies, Inc. elected to file federal
and state income taxes under the provisions of Subchapter S of the Internal
Revenue Code. Under those provisions, the Company did not pay corporate
income taxes on its taxable income during that period of time. Instead, the
stockholders were liable for individual income taxes on their respective
shares of the Company's net operating income in their individual income tax
returns. Effective July 1, 1998, the Company filed consolidated tax returns
with its parent and terminated its S-Corporation status.
Since July 1, 1998, the Company utilizes the liability method of accounting
for income taxes. Under the liability method, deferred income tax
liabilities are provided based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the
currently enacted tax rates in effect for the years in which these
differences are expected to reverse. Deferred tax expense or benefit is the
result of changes in deferred tax assets and liabilities.
12. Comprehensive income
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 establishes
standards for disclosure and financial statement display for reporting
total comprehensive income and its individual components. Comprehensive
income, as defined, includes all changes in equity during a period from
nonowner sources. The Company's comprehensive income includes net loss and
unrealized gains on investments and is displayed in the statement of
stockholders' equity.
13. Net loss per common share
The computation of net loss per common share is based on the
weighted-average number of shares outstanding during each period presented.
Diluted loss per common share would include the dilutive potential effects
of options, warrants, and convertible and reset features of Series A
preferred stock, but were not included in the calculation of diluted EPS
because their effects were antidilutive.
F-13
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
14. Certain reclassifications
Certain nonmaterial reclassifications have been made to the 1998 and 1997
financial statements to conform to the 1999 presentation.
NOTE B - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company is a development stage
company, has generated only limited revenue through December 31, 1999, and
has sustained losses from operations each period since inception. In
addition, it has a deficit accumulated during the development stage of
$12,217,868. Also, the Company has used cash in, rather than provided cash
from, its operations.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheets is dependent upon continued operations of the Company, which
in turn is dependent upon the Company's ability to meet its financing
requirements on a continuing basis, to maintain present financing and to
succeed in its future operations. The financial statements do not include
any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence.
The Company has taken the following steps to revise its operating and
financial requirements which it believes are sufficient to provide the
Company with the ability to continue in existence:
o During February and March 1999, Company received a total of $6,300,000
for a preferred stock offering (Note J).
o During December 1999, the Company's pending S-1 Registration Statement
became effective.
o Through January 2000, the Company entered into agreements with
prominent ad serving and reporting technology companies to utilize
various technologies for its site management.
o Also in January 2000, the Company has selected a full-service
advertising agency to promote its planned business information
Internet site.
o In March of 2000, negotiations were underway to obtain up to
$15,000,000 of additional financing.
o In March 2000, the Company completed a working model of its planned
business information Internet site.
F-14
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE C - SHORT-TERM INVESTMENTS
At December 31, 1999, the cost, fair value and unrealized gain on
short-term investments are as follows:
Fair value $ 1,462,147
Cost 1,454,207
------------
Unrealized gain $ 7,940
============
NOTE D - OTHER ASSETS
Other assets consist of the following:
1999 1998
------------ ------------
Deposits $ 5,076 $ 5,076
Other 935 1,202
Interest receivable - 10,018
------------ ------------
$ 6,011 $ 16,296
============ ============
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment, at cost and estimated useful lives are as follows:
Estimated
useful
1999 1998 lives
------------ ------------- -------------
Computer equipment $ 1,217,668 $ 54,352 5
Furniture and fixtures 49,392 5,358 7
Software technology 858,868 38,400 3
------------ -------------
2,125,928 98,110
Less accumulated depreciation 195,593 16,691
------------ -------------
Total property and equipment $ 1,930,335 $ 81,419
============ =============
F-15
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE F - NOTES RECEIVABLE - RELATED PARTIES
Notes receivable consist of the following:
1999 1998
------------- ------------
8% note receivable from a former employee, interest and
principal due in full April 2000, not collateralized $ 1,955 $ -
8% note receivable from an officer, interest and principal
due in full January 1, 2000, received in full in 1999 - 66,700
8% note receivable from an officer, interest and principal
due in full January 1, 2002, received in full in 1999 - 29,500
8% note receivable from a corporation owned by an officer,
interest and principal due in full January 1, 2000,
received in full in 1999 - 4,000
------------- ------------
1,955 100,200
Less current maturities 1,955 -
------------- ------------
$ - $ 100,200
============= ============
NOTE G - LONG-TERM OBLIGATIONS
At December 31, 1998, the Company had prime plus 1.5 percent (9.25
percent) notes payable to officers in the amount of $120,000. Interest
payments were due monthly, and principal was due in December 1999. The
notes were not collateralized and were paid in full in 1999.
NOTE H - LEASES
1. Operating leases
The Company leases their office facilities under an operating lease,
which expires in March 2002. Future minimum lease payments are as
follows:
Year ending December 31,
2000 $ 44,933
2001 44,933
2002 11,233
Thereafter -
-------------
$ 101,099
=============
F-16
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE H - LEASES - CONTINUED
2. Capital lease obligations
Included in property and equipment is $818,177 and $51,101 of computer
equipment under capital leases at December 31, 1999 and 1998, respectively.
The related accumulated amortization is $56,411 and $16,333 at December 31,
1999 and 1998, respectively.
Future minimum lease payments at December 31, 1999, are as follows:
Year ending December 31,
2000 $ 335,930
2001 260,923
2002 3,388
Thereafter -
-------------
Total minimum lease payments 600,241
Less amount representing interest 46,908
Present value of net minimum lease payments 553,333
Less current maturities 299,983
-------------
Noncurrent portion $ 253,350
=============
NOTE I - COMMITMENTS
1. Licenses
On February 14, 1997, the Company signed an exclusive license agreement
with Brigham Young University (BYU), a Utah nonprofit corporation and
educational institution, wherein the Company has the worldwide rights to
market, modify, develop and manufacture the "WordCruncher" technology,
which is a software program used to search data for specific items (search
engine). The term of the license covers the underlying period of the patent
as provided for by federal law, which is 17 years. The agreement calls for
license fees and royalties of three percent of adjusted gross sales, and 50
percent of royalty payments from sublicenses. Annual minimum royalties
begin for the calendar year 1999 and are due the quarter following the year
end, as specified below. Minimum royalty payments will be capped at
$150,000 from 2002 forward. The Company acquired the license through stock
issuance, and was required to maintain BYU's equity interest of 10 percent
through July 1998.
F-17
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE I - COMMITMENTS - CONTINUED
1. Licenses - continued
The Company is committed to minimum royalty payments as follows:
Year ending December 31,
2000 $ 50,000
2001 100,000
2002 150,000
2003 150,000
2004 150,000
Thereafter 1,368,750
-------------
$ 1,968,750
=============
These minimum royalties are due as long as the license agreement is in
effect.
2. Employment agreements
The Company has six employment and severance agreements with certain
officers and a manager of the Company. Salaries covered by these agreements
range from $100,000 to $120,000 annually, subject to annual adjustment.
Contracts with three individuals provide for annual salaries of $120,000
(plus annual increases of at least eight percent and cash bonuses
determined by the board of directors or the compensation committee), and
are for terms of three years expiring in August 2001. The agreements
provide for severance equal to one year's salary if the individual is
terminated without cause. Furthermore, if there is a change in control as
defined by these three agreements, the contracts provide for compensation
equal to five times the average of the sum of amounts paid to the executive
for salary for the five fiscal years immediately preceding the date of the
change in control. The other three contracts provide for annual salaries of
$84,000 to $100,000 (plus monthly commissions equal to 50 percent of
monthly base salary and/or annual incentive bonuses equal to 30-60 percent
of annual base salary), and are for terms of two years expiring April
through December 2001. The agreements also provide for severance equal to
90 days of the employee's base salary plus the maximum amount of incentive
pay the employee would have earned in the same 90 day period. Furthermore,
if there is a change in control, as defined by these agreements, the
contracts provide for compensation equal to the employee's annual base
salary. There is no provision for any severance payments under these
employment contracts.
3. Consulting and development contract
The Company has entered into a consulting and development contract in
connection with the launch of its website. The Company is required to pay a
fixed price of $500,000 in exchange for these services, to be paid in four
installments based upon meeting certain milestones. At December 31, 1999,
$275,000 remains payable under this contract.
F-18
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE J - PREFERRED STOCK
In January of 1999, the Board of Directors approved the creation of Series
A Convertible Preferred Stock (Preferred Stock) and authorized 15,000
shares. The Preferred Stock has a stated value of $1,000 per share, and a
cumulative dividend of 6 percent. The Company issued 6,100 and 200 shares
of the Preferred Stock in February and March of 1999, respectively. The
Preferred Stock is convertible into a total of 625,000 shares of the
Company's common stock at a conversion rate of $10.08 per share. The
conversion price is based on the average closing price of the Company's
common stock during the 20 day period immediately preceding the closing of
the preferred issuance. The Preferred shares hold no voting rights and have
liquidation preferences of $1,000 per share and cumulative dividends.
The Preferred shareholders have a limited right to receive additional
shares of common stock ("reset shares") if the market price of the common
stock is less than the "reset price" of $12.096 per share for a ten day
period of time following certain reset dates (adjustment price). The
additional shares are calculated as the difference between the reset price
and the adjustment price, multiplied by one third of the purchase price of
Preferred stock divided by the conversion price, divided by the adjustment
price. The reset dates commence 150, 240 and 360 calendar days following
the issuance of the Preferred Stock. As of December 31, 1999, the holders
of Preferred stock are entitled to receive 574,867 shares of common stock
under this provision.
On the dates that the Preferred Stock was issued, the intrinsic values of
the beneficial conversion feature were $10,995,740 and $31,994 in February
and March, respectively. The intrinsic values were derived by the
difference between the conversion price and the market value of the common
stock on the day of the preferred stock issuance multiplied by the number
of common shares into which the Preferred Stock is convertible. The closing
price of the stock was $28.25 and $11.69 at each of the respective closing
dates. The proceeds received from the sale of these convertible instruments
were $6,100,000 and $200,000, respectively. Because the intrinsic values of
the beneficial conversion features are greater than the proceeds received,
the discounts assigned to the convertible instruments are $6,100,000 and
$31,944, respectively, creating a total discount of $6,131,944. The
Preferred Stock became fully convertible into common stock as of November
of 1999 and the discount was accreted accordingly during 1999 and is
reflected on the statement of operations as a deduction for dividends and
accretion.
Offering cost related to the issuance of Preferred Stock total $392,100 and
have been netted with the proceeds for reporting purposes.
Cumulative Preferred dividends total $337,917 as of December 31, 1999.
F-19
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE K - STOCK OPTIONS AND WARRANTS
1. Stock options
The Company provides for issuance of stock options to certain employees,
directors, officers and others. There has been no formal stock option plan
adopted as of December 31, 1999. The Board of Directors has approved the
granting of options as follows:
Directors, officers and key employees have been granted options to acquire
1,079,000 shares of common stock. The options were granted at various dates
at prices ranging from $0.10 to $5.54 per share, which amounts represent
prices below market price of the Company's shares on the dates granted as
determined by the Board of Directors. The options vest periodically through
November 2002 and expire through June 2003.
Fair market value of options granted
The Company has adopted only the disclosure provisions of Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation". Therefore, the Company accounts for stock based
compensation under Accounting Principles Board Opinion No. 25, under which
compensation cost has been recognized using the intrinsic value method.
Under this method, compensation cost is recognized over the vesting period
based on the difference, if any, on the date of grant between the fair
value of the Company's stock and the amount an employee must pay to acquire
the stock. Had compensation cost been determined based upon the fair value
of the options at the grant date consistent with the methodology prescribed
by SFAS 123, the Company's net loss and loss per share would have been
changed to the following pro forma amounts:
1999
----------------
Net loss attributable to As reported $ (11,399,741)
common stockholders Pro forma (11,453,549)
Net loss per common share - As reported (.96)
basic and diluted Pro forma (.96)
The fair value of these options was estimated at the date of grant using
the Black-Scholes American option-pricing model with the following
weighted-average assumptions: expected volatility of 120 percent; risk-free
interest rate of 6.5 percent; and expected life of 3.50 years. The
weighted-average fair value of options granted was $4.75.
Option pricing models require the input of highly sensitive assumptions,
including the expected stock price volatility. Also, the Company's stock
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially
affect the fair value estimate. Management believes the best input
assumptions available were used to value the options and that the resulting
option values are reasonable.
F-20
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE K - STOCK OPTIONS AND WARRANTS - CONTINUED
Information with respect to the Company's stock options is as follows:
Weighted-
average
Stock Exercise exercise
options price price
------------ ------------- -------------
Outstanding at January 1, 1997 - $ - $ -
Granted - - -
Exercised - - -
Canceled/expired - - -
------------ ------------- -------------
Outstanding at December 31, 1997 - - -
Granted - - -
Exercised - - -
Canceled/expired - - -
------------ ------------- -------------
Outstanding at December 31, 1998 - - -
Granted 1,079,000 0.10 - 5.54 1.79
Exercised (4,000) 0.10 0.10
Canceled/expired - - -
------------ ------------- -------------
Outstanding at December 31, 1999 1,075,000 $ 0.10 - 5.54 $ 1.80
============ ============= =============
Exercisable at December 31, 1999 116,833 $ 0.10 $ 0.10
============ ============= =============
Additional information regarding stock options outstanding and exercisable
at December 31, 1999 is summarized as follows:
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------------
Weighted-
average Weighted- Weighted-
remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life (years) price xercisable price
------------------------ ------------- ----------- ----------- ------------ -----------
$ 0.10 440,000 13.3 $ 0.10 116,833 $ 0.10
$ 2.72 - $ 2.77 550,000 21.0 2.73 - -
$ 3.00 - $ 3.47 35,000 1.3 3.17 - -
$ 5.54 50,000 1.9 5.54 - -
------------- ------------
1,075,000 37.5 $ 1.80 116,833 $ 0.10
============= ============
F-21
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE K - STOCK OPTIONS AND WARRANTS - CONTINUED
2. Warrants
Series A, B and C warrants
In connection with the sale of Series A Convertible Preferred Stock (Note
J), purchasers, were issued Series A and B warrants to purchase the
Company's common stock. Series C warrants were also issued to a third party
for a finder's fee.
Series A warrants allow holders to purchase up to an aggregate of 71,069
shares of common stock at a weighted-average price of $34.53 per share.
Series B warrants allow holders to purchase up to an aggregate of 47,380
shares of common stock at a weighted-average of $41.44 per share.
Series C warrants allow holders to purchase up to 189,000 shares of common
stock at a weighted-average price of $29.01 per share.
All 307,449 Series A, B and C warrants expire in February 2004.
Other warrants issued for services
In January of 1999, and in conjunction with the sale of Series A
Convertible Preferred Stock (Note J), the Company issued warrants to
purchase 200,000 shares of the Company's common stock to its investor
relations consultant. The warrants were issued with an exercise price of
$5.00 per share and are fully vested at December 31, 1999. The fair value
of $1.29 was estimated as the value of the services performed. Consulting
expenses relating to these warrants totaled $258,000 during 1999.
Information with respect to the Company's warrants is as follows:
Weighted-
Number average
of shares exercise price
------------ -------------
Outstanding at January 1, 1997 - $ -
Granted - -
Exercised - -
Forfeited - -
------------ -------------
Outstanding at December 31, 1997 - -
Granted - -
Exercised - -
Forfeited - -
------------ -------------
Outstanding at December 31, 1998 - -
Granted 507,449 $ 21.48
Exercised - -
Forfeited - -
------------ -------------
Outstanding at December 31, 1999 507,449 $ 21.48
============ =============
Warrants exercisable at December 31, 1999 507,449 $ 21.48
============ =============
F-22
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE L - INCOME TAXES
The income tax expense (benefit) reconciled to the tax computed at the
federal statutory rate of 34 percent is as follows:
1999 1998
------------ -----------
Income tax benefit at statutory rate $ (1,676,159) $ (164,189)
Income tax attributed to the S-Corporation - 8,560
State income tax benefit, net of federal
tax benefit (115,157) (15,936)
Nondeductible option compensation 493,887 -
Deductible stock option compensation (6,068) -
Change in valuation allowance 1,301,627 169,896
Other, net 1,870 1,669
------------ -----------
Income tax expense $ - $ -
============ ===========
Deferred income tax assets and liabilities
are as follows:
1999 1998
------------ -----------
Deferred tax assets
Deferred expenses $ 146,465 $ -
Net operating losses 1,442,150 169,896
------------ -----------
1,588,615 169,896
Less valuation allowance (1,471,524) (169,896)
------------ -----------
117,091 -
------------ -----------
Deferred tax liabilities
Deferred income (117,091) -
------------ -----------
Net deferred tax assets (liability) $ - $ -
============ ===========
The Company has sustained net operating losses in each of the periods
presented. There were no deferred tax assets or income tax benefits
recorded in the financial statements for net deductible temporary
differences or net operating loss carryforwards because the likelihood of
realization of the related tax benefits cannot be established. Accordingly,
a valuation allowance has been recorded to reduce the net deferred tax
asset to zero and consequently, there is no income tax provision or benefit
for any of the period presented. The increase in the valuation allowance
was $1,301,628 and $169,896 for the years ended December 31, 1999 and 1998,
respectively.
As of December 31, 1999, the Company had net operating loss carryforwards
for tax reporting purposes of approximately $3,866,354 expiring in various
years through 2019.
Through June 30, 1998, the Company elected to file federal and state income
taxes under the provisions of Subchapter S of the Internal Revenue Code.
Effective July 1, 1998, the Company revoked its S election, and will
therefore be a taxable entity under the provisions of Subchapter S of the
Internal Revenue Code.
F-23
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE M - NET LOSS PER COMMON SHARE
Cumulative
amounts Year ended December 31,
since --------------------------------------------
inception 1999 1998 1997
------------ ------------- ------------ -------------
Common shares outstanding during
the entire period - 11,877,002 1,091,067 -
Weighted-average common shares
issued during the period 5,850,408 2,917 5,009,612 545,535
------------ ------------- ------------ -------------
Weighted-average common shares
used in basic EPS 5,850,408 11,879,919 6,100,679 545,535
Dilutive effects of potential common
shares - - - -
------------ ------------- ------------ -------------
Weighted-average number of common
shares and dilutive potential
common stock
used in diluted EPS 5,850,408 11,879,919 6,100,679 545,535
============ ============= ============ =============
For the years ended December 31, 1999, 1998 and 1997, and for cumulative
amounts since inception, all of the convertible securities, reset
provisions, options and warrants discussed in Notes J and K were not
included in the computation of diluted EPS because to do so would have been
antidilutive.
NOTE N - SUBSEQUENT EVENTS
1. Company name change
In January 2000, the Company began conducting business under the name
"Logio".
2. Preferred stock conversion
Through March 2000, 6,300 shares of the Company's preferred stock were
converted into 625,000 common shares and 728,046 "reset shares" of the
Company's common stock were issued to preferred shareholders (Note J).
Also, through March 2000, cumulative dividends were paid to preferred
shareholders in the form of 61,650 shares of the Company's common stock.
3. Options granted
Through March 2000, options for 5,000 shares of the Company's common stock
were granted to an employee.
4. Options and warrants exercised
Through March 2000, warrants were exercised for 158,000 shares of the
Company's common stock and options were exercised for 4,000 shares of the
Company's common stock.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
On February 1, 2000, our Board of Directors authorized the engagement
of Grant Thornton LLP as our auditor for the fiscal year ended December 31,
1999. Our decision to change accountants was prompted by the ability of Grant
Thornton LLP to provide audit services for us on an extended scale as our
operations are expected to expand. We entered into an engagement letter with
Grant Thornton on February 23, 2000, and concurrently with that engagement, we
dismissed Crouch Bierwolf & Chisholm, P.C., which had served as our independent
accountants since 1998. Our Board of Directors participated in and approved the
decision to change independent accountants.
The reports of Crouch Bierwolf on our financial statements for the past
fiscal year contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with its audit for the most recent fiscal year and through
February 23, 2000, there were no disagreements with Crouch Bierwolf on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of Crouch Bierwolf would have caused Crouch Bierwolf to make
reference thereto in their report on the financial statements for such year.
During the most recent fiscal year and through February 23, 2000, we
had not consulted with Grant Thornton LLP regarding either: (i) the application
of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on our financial
statements, and neither a written report was provided to us nor oral advice was
provided that Grant Thornton LLP concluded was an important factor considered by
us in reaching a decision as to the accounting, auditing or financial reporting
issue; or (ii) any matter that was either the subject of a disagreement or a
reportable event.
Item 10. Directors and Executive Officers of the Registrant.
Our directors, executive officers and key employees, as of the date
hereof, and their respective ages and positions with us are set forth below.
Biographical information for each of those persons is also presented below. Our
executive officers are chosen by our Board of Directors and serve at its
discretion. There are no existing family relationships between or among any of
our directors or executive officers.
Name Age Position Held
- ----------------- --- ----------------------------------------------------
M. Daniel Lunt 46 President, Chief Executive Officer, Director
James W. Johnston 47 Chairman of the Board, Executive Vice President,
Director
Kenneth W. Bell 50 Senior Vice President, Chief Financial Officer,
Treasurer, Secretary, Director
Edward Sullivan 47 Director
David Grow 43 Director
Michael Fowler 56 Director
Peter T. Stoop 38 Vice President of Marketing
Martin E. Cryer 39 Vice President of Product Development
M. Daniel Lunt: Mr. Lunt was a co-founder of WordCruncher Publishing
and has served as our President, Chief Executive Officer and Director since
November 1996. Mr. Lunt has over 20 years experience in the computer software
industry. Between 1983 and 1993, he was employed by WordPerfect Corporation,
most recently as Vice President of Worldwide Marketing. In that capacity, he was
responsible for the development and implementation of WordPerfect's marketing,
sales and support divisions. After leaving WordPerfect in 1993, Mr. Lunt became
the president of a residential real estate development company. Mr. Lunt
attended Brigham Young University.
James W. Johnston: Mr. Johnston was a co-founder WordCruncher
Publishing and has served as our Director, Chairman of the Board and Executive
Vice President since November 1996. From December 1990 to November 1996, he was
president of Johnston & Company, which published virtual works using Logio
technology, including the Constitution Papers (CD ROM). Mr. Johnston has 15
years of expertise in developing and marketing products involving content
presentation, analysis software and virtual publishing.
Kenneth W. Bell: Mr. Bell joined us as our Senior Vice President, Chief
Financial Officer, Secretary and Treasurer and Director in February 1997.
Between April 1990 and December 1996, he served as President and Chief Financial
Officer of Kelmarc Corporation, a financial and management advisory company. He
has twenty-five years experience in a variety of finance and management
positions, including employment in the commercial banking area for fifteen years
in Utah and California. Mr. Bell received his B.S. from BYU in 1972.
Edward Sullivan: Mr. Sullivan joined us as one of our directors in
February 2000. Since 1989, he served as President and Chief Executive Officer of
Pittard Sullivan, a brand and marketing communications company. Mr. Sullivan has
twenty years of experience in advertising, marketing and media management, with
over 250 channel launches around the world. Mr. Sullivan was educated at the
University of Cincinnati and Central Academy of Commercial Arts. He has also
attended Harvard Business School's Accelerated Business Administration Program
as well as Carnegie Mellon's Oral Communications Program
David R. Grow: Mr. Grow joined us as one of our Directors on February
1, 2000. Since 1995, Mr. Grow has served as Executive Vice President, Chief
Operating Officer and Chief Financial Officer for Daw Technologies, Inc. Prior
to joining Daw Technologies, Mr. Grow was employed by Novell, Inc. from 1992 to
1995, most recently as director of operations for Novell's $500 million software
applications division. Mr. Grow also served as Corporate Controller for
WordPerfect Corporation from 1992 to 1994 where he was responsible for the
accounting, financial analysis and reporting for the $700 million,
multi-national software publishing company. He was employed by Price Waterhouse
as a Senior Audit Manager for the years 1982 to 1992. Mr. Grow is a certified
public accountant, licensed in the State of Utah.
Michael D. Fowler: Mr. Fowler joined us as one of our Directors on
February 1, 2000. Since 1997, Mr. Fowler serves as the Vice President, Chief
Financial Officer of Howa Construction, Inc. During the period of 1995 through
1997, Mr. Fowler was a small business consultant to companies involved in
medical services, microbrewery/restaurants, telecommunications and employee
leasing. From 1990 to 1995, Mr. Fowler served as Vice President, Treasurer and a
director of Grand Valley Gas Company, where he was responsible for the company's
accounting, treasury, risk management, legal affairs and investor relations.
Peter T. Stoop: In September 1998, Mr. Stoop joined us as our Vice
President of Sales and Marketing. He was employed by Novell, Inc. from February
1994 through June 1997, most recently as senior director of product management
for Novell's $70 million product division. Mr. Stoop has eight years of
experience in the computer industry. Mr. Stoop received his MBA in marketing
from the William E. Simon School of Business at the University of Rochester in
1989.
Martin Cryer: Mr. Cryer joined us as our Vice President of Product
Development in March 1999. Mr. Cryer has nearly 20 years experience in the
computer industry. He has designed and developed several generations of computer
systems, covering both symmetrical multi-processing and parallel architectures.
Between 1996 and 1999, Mr. Cryer oversaw the Salt Lake City based Siemens
Research and Development Centre. Mr. Cryer also served 12 years in the Unisys
UNIX Systems Group, contributing significantly to many of its innovative server
system designs. He graduated from Queen Mary College, University of London and
has been residing in the United States for the past 10 years.
Board of Directors. Our Board of Directors is comprised of six persons.
The number of directors can be increased as provided in our by-laws, which allow
either our board of directors or our stockholders to approve the change. Our
directors serve for terms of one-year.
Board of Directors Committees. Our Board of Directors has established
three committees, the audit committee, the compensation committee and the
executive committee. Each of these committees is be responsible to the full
Board of Directors, and, in general, its activities will be subject to the
approval of the full Board of Directors.
The audit committee is primarily charged with the review of
professional services provided by our independent auditors, the determination of
the independence of those auditors, our annual financial statements, and our
system of internal accounting controls. The audit committee also reviews such
other matters with respect to our accounting, auditing and financial reporting
practices and procedures as it finds appropriate or as is brought to its
attention, including our selection and retention of independent accountants. Our
audit committee is currently comprised of Messrs. Bell, Grow and Fowler.
The compensation committee is charged with the responsibility of
reviewing executive salaries, administering bonuses, incentive compensation and
our stock option plans and approving our other executive officer benefits. The
compensation committee also consults with our management regarding pension and
other benefit plans, and our compensation policies and practices in general. Our
compensation committee is currently comprised of Messrs. Lunt, Johnston and
Sullivan.
The executive committee is charged with the performance of the duties
of the Board of Directors between regularly scheduled meetings of our Board, and
with the functions of the full Board of Directors with regard to matters
addressed by it. The executive committee is currently comprised of Messrs. Lunt,
Johnston and Bell.
Compensation of Directors. We do not have any standard arrangement for
compensating our directors for the services they provide to us in their capacity
as directors, including services for committee participation or for special
assignments. We have, however, approved a stock option package for the year 2000
under which our independent directors, Messrs. Grow, Fowler and Sullivan, may
each earn options on up to 10,000 shares of our common stock with an exercise
price of $5.86 a share.
Employment Agreements. We have adopted a policy of entering into
employment agreements with our senior management, and have entered into such
agreements with Messrs. Lunt, Bell, Johnston, Cryer and Stoop. The terms of the
employment agreements for Messrs. Lunt, Bell and Johnston begun on September 1,
1998 and have initial terms of three years. Under the agreements, each is
entitled to receive a base annual salary of $102,000 during the first year of
the agreements. The salary will be increased annually, effective in September of
each year, by an amount equal to the greater of 8% or an amount determined by
the Board of Directors. In addition to the base salary amounts, each of Messrs.
Lunt, Bell and Johnston will receive incentive bonuses, as determined by our
Board of Directors, standard benefits such as health and life insurance,
disability payments and reimbursement of reasonable business expenses.
We have also entered into an employment agreement with each of Messrs.
Stoop and Cryer. The initial term of each agreement is two years and each
provides for a base salary of $100,000. The agreements also provide for standard
health and medical insurance, incentive bonuses, disability coverage and
reimbursement for reasonable business expenses. In addition, through of March
15, 2000 Mr. Stoop received 500,000 options and Mr. Cryer received 300,000
options to acquire shares of our common stock vesting over a three year period.
We may terminate the employment contracts for cause, as defined in the
agreements, or without cause. If the contract is terminated without cause or as
a result of a "change of control", as defined in the agreements, the employee is
generally entitled to receive severance pay. In the event of a change of
control, Messrs. Lunt, Bell and Johnston will each receive a payment equal to
five times the sum of his average annual salary, bonus and profit sharing, based
on a per year average over the five preceding years. The term "change of
control" is defined in their agreements as
o any tender offer, stock exchange offer or other take-over device in
which any person becomes the beneficial owner of 30% or more of the
total voting power of our outstanding securities;
o any realignment of the Board of Directors or change in officers due to
shareholder action;
o our sale by 30% or more of our assets; or
o any merger or reorganization where we are not the surviving entity or
our shareholders fail to retain substantially the same direct or
indirect ownership in us immediately after the merger or
reorganization.
If Mr. Stoop or Cryer is terminated for cause under his agreement, he
will not be entitled to receive any severance compensation. If the termination
is without cause, we are obligated to pay him a severance payment equal to 90
days' of base salary, payable in three equal monthly installments, and if the
termination is because of a change of control, he is entitled to receive a
severance payment equal to his annual salary, payable in three installments. A
change of control is defined in his agreement as any sale or other disposition
by the us of all or substantially all of our assets, any merger or consolidation
with another corporation in which our shareholders as a group do not hold at
least 50% of the voting power of the surviving corporation, or any person
becomes the beneficial owner of 50% or more of our voting power.
Section 16(a) of the Securities Exchange Act of 1934. Section 16(a) of
the Securities Exchange Act of 1934 requires our executive officers and
directors, and persons who own more than ten percent of a registered class of
our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Executive officers,
directors and greater than 10% shareholders are required by SEC regulation to
furnish us with copies of all Section 16(a) forms they file. Based solely on our
review of the copies of such forms received by us, or written representations
from certain reporting persons, we believe that during fiscal 1999 all filing
requirements applicable to our executive officers and directors and greater than
10% shareholders were complied with, except that Messrs. Lunt, Johnston and Bell
each filed one report on Form 4 late.
Item 11. Executive Compensation.
The following table summarizes the compensation paid to or earned by
our chief executive officer and our four most highly-compensated executive
officers whose total salary and bonus exceed $100,000 during each of the past
two fiscal years:
Summary Compensation Table
- -----------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term
Compensation Awards
----------------------------------------------------------------
Other Annual Securities Underlying
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Options / SARs (#)
- -----------------------------------------------------------------------------------------------------------
M. Daniel Lunt 1999 $120,000 - - -
President, CEO, Director 1998 $102,000 - - -
James W. Johnston 1999 $120,000 - - -
Executive V.P.,Chairman 1998 $102,000 - - -
Kenneth W. Bell 1999 $120,000 - - -
Senior V.P., CFO, Director 1998 $102,000 - - -
Peter Stoop 1999 $100,000 - - 500,000
V.P. Sales and Marketing 1998 $66,200 - - -
Martin Cryer 1999 $100,000 - - 300,000
V.P. Product Development 1998 - - - -
- -----------------------------------------------------------------------------------------------------------
The following table presents additional information concerning the
option awards made during fiscal year 1999 to each of our named executive
officers:
OPTION GRANTS IN LAST FISCAL YEAR
- --------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates of Stock
Individual Grants Price Appreciation for Option
-------------------------------------------------------- Term
Percent
of Total Market
Number of Options Price
Securities Granted Exercise on
Underlying to Emp. of Base Grant
Options in Fiscal Price Date Expiration
Name Granted (#) Year ($/Sh) ($/Sh) Date 5% ($) 10% ($)
- --------------------------------------------------------------------------------------------------------------------
M. Daniel Lunt - - - - - - -
President, CEO, Director
James W. Johnston - - - - - - -
Executive V.P.,Chairman
Kenneth W. Bell - - - - - - -
Senior V.P., CFO,
Director
Peter Stoop 50,000 4.6% $0.10 $2.375 3/21/02 $135,905 $160,959
V.P. Sales and Marketing 250,000 23.2% $0.10 $3.562 11/18/02 $1,031,637 $1,219,518
200,000 18.5% $2.72 $3.625 6/23/03 $316,260 $469,224
Martin Cryer 50,000 4.6% $0.10 $8.875 9/22/02 $521,538 $615,162
V.P. Product Development 250,000 23.2% $2.72 $3.625 6/23/03 $395,325 $586,530
- --------------------------------------------------------------------------------------------------------------------
The intrinsic value of each respective grant to Mr. Stoop as of the
date of such grant was $113,750, $865,500, and $181,000 respectively. The
intrinsic value of each respective grant to Mr. Cryer as of the date of such
grant was $438,750 and $226,250 respectively.
The following table summarizes the exercise of stock options during
fiscal year 1999 by each of our named executive officers, and the fiscal
year-end value of unexercised stock options held by each of them:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------
Number of Securities Value of
Shares Value Underlying Unexercised Unexercised In-The-
Acquired on Realized Options at Fiscal Year-End (#) Money Options at
Name Exercise (#) ($) Exercisable / Unexercisable Fiscal Year-End ($)
- -------------------------------------------------------------------------------------------------------------------
M. Daniel Lunt - - - -
President, CEO, Director
James W. Johnston - - - -
Executive V.P.,Chairman
Kenneth W. Bell - - - -
Senior V.P., CFO, Director
Peter Stoop - - 103,333 / 396,667 $2,875,000
V.P. Sales and Marketing
Martin Cryer - - 5,000 / 295,000 $1,725,000
V.P. Product Development
- -------------------------------------------------------------------------------------------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of December 31, 1999, the beneficial
ownership of our outstanding common stock by
o each of our executive officers,
o each of our directors, and
o all executive officers and directors as a group.
As of December 31, 1999, no other person held five percent or more of our common
stock. Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to
securities. For purposes of calculating the percentages shown in the chart, each
person listed is also deemed to beneficially own any shares issuable on either
the exercise of vested options or warrants held by that person and that are
exercisable within 60 days after December 31, 1999. Except as indicated by
footnote, the persons named in the table have sole voting and investment power
with respect to all shares of common stock shown as beneficially owned by them.
The inclusion of any shares as beneficially owned does not constitute an
admission of beneficial ownership of those shares. The percentage calculation of
beneficial ownership is based on 11,891,002 shares of common stock outstanding
as of December 31, 1999.
- -------------------------------------------------------------------------------------------------------------------
Name of Beneficial Owner, Common Stock Beneficially Owned
Title of Class Relationship to Us Shares Percent
- -------------------------- ---------------------------------------------- ----------------- --------------------
Officers and Directors
Common Stock M. Daniel Lunt 1 1,798,383 15.1%
President, CEO, Director
Common Stock James W. Johnston 2 2,021,223 17.0%
Chairman of the Board, Executive V.P.
Common Stock Kenneth W. Bell 3 1,510,608 12.7%
Senior V.P., CFO, Treasurer, Secretary,
Director
Common Stock Edward Sullivan 4 2,500 *
Director
Common Stock Michael Fowler 4, 5 3,000 *
Director
Common Stock David Grow 4 2,500 *
Director
Common Stock Peter T. Stoop 103,333 *
V.P. Marketing and Sales
Common Stock Martin Cryer 5,000 *
V.P. Product Development
Common Stock All Executive Officers and Directors as 5,446,047 45.8%
a Group (8 persons)
- ------------------------------ -----------------------------------------------------------------------------------
1 Mr. Lunt shares voting power and investment power with his wife, Lori
Lunt.
2 Mr. Johnston shares voting power and investment power of 1,953,339 shares
held jointly with his wife, Catherine F. Johnston, 66,408 of such shares are
held in the name of his wife, Catherine F. Johnston. He also influences the
investment power and voting power of 1,476 shares held by his son, LeGrand
Johnston. Mr. Johnston does not disclaim beneficial ownership of his wife's and
son's shares.
3 Mr. Bell has sole voting power and investment power of 330,000 shares and
shares voting power and investment power of 1,180,608 shares with his wife,
Roberta L. Bell.
4 Represents options to acquire shares of our common stock within sixty
days of the date of this report at an average weighted exercise price of $5.86
per share.
5 Includes 2,500 options to acquire shares of our common stock within sixty
days of the date of this report at an average weighted exercise price of $5.86
per share.
Item 13. Certain Relationships and Related Transactions.
The following information summarizes certain transactions either we
engaged in during the past two years or we propose to engage in involving our
executive officers, directors, 5% stockholders or immediate family members of
those persons:
Management Loans to Us. James Johnston, Kenneth Bell and Daniel Lunt
secured a line of credit in the amount of $250,000, which they agreed to use to
loan us up to that amount on a revolving basis, and loaned us an additional
$50,000, for a total of $300,000 in 1997. Mssers. Johnston, Bell, and Lunt have
received no direct or indirect consideration for their securing this line of
credit. We subsequently drew down the entire $250,000 loan commitment. As of
December 31, 1998, we owed $120,000 of the $300,000. In October 1998, we repaid
the $50,000 loan and the line of credit was paid down to zero in January 1999,
but it still remains available to be drawn on, if we need it, through December
31, 1999. In May 1998, Mr. Lunt loaned us $13,000, which we repaid in July 1998
though our issuance of additional common stock to Mr. Lunt.
Indebtedness of Management. We advanced a total of $66,700 to James
Johnston during 1997 and 1998. The amounts outstanding on these loans as of
December 31, 1998 was $66,700. The interest rate is 8%, with interest and
principle due on January 1, 2000, but was paid in full by Mr. Johnston in March
1999. We also advanced a total of $29,500 to Kenneth Bell in 1997 and 1998. Mr.
Bell repaid those amounts to us in March 1999. We also loaned an entity owned by
M. Daniel Lunt $10,000 in 1997, and loaned him $4,000 personally in 1998. Five
thousand dollars of the $10,000 loan was repaid by offsetting amounts we
otherwise owed Mr. Lunt, and the other $5,000 was repaid in cash, and the $4,000
loan was paid to us in March 1999.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
The following documents are filed as part of this Annual Report on Form
10-K.
(a) Financial Statements and Schedules.
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
All schedules have been omitted since the required information is not
present, is not present in amounts sufficient to require submission of the
schedule or because the required information is included in the financial
statements or notes thereto.
(b) Exhibits
Exhibit Number Description
2.1* Agreement and Plan of Reorganization between the Company and
WordCruncher Publishing Technologies, Inc., dated July 14
1998
3.1* Articles of Incorporation of the Company
3.2* Articles of Merger, filed June 20, 1998
3.3* Articles of Merger, filed July 15, 1998
3.4* Articles of Merger
3.5* Certificate of Amendment, filed February 1, 1999
3.6* Bylaws of the Company
4.1* Reference is made to Exhibit 3.4
4.2* Specimen of Common Stock Certificate
10.1* Lease between the Company and SLT III, LLC, dated December
24, 1998
10.2* License Agreement between the Company and Brigham Young
University, dated February 14, 1997
10.3* Purchase Agreement between the Company and Jeffrey B.
Petersen, dated December 28, 1998
10.4* Employment Agreement between the Company and Kenneth W.
Bell, dated September 1, 1998
10.5* Employment Agreement between the Company and James W.
Johnston, dated September 1, 1998
10.6* Employment Agreement between the Company and M. Daniel Lunt,
dated September 1, 1998
10.7* Employment Agreement between the Company and Peter T. Stoop
10.8* Preferred Stock Purchase Agreement between the Company and
certain Series A Preferred investors, dated February 8, 1999
10.9* Letter Amendment Regarding Preferred Stock Purchase
Agreement, dated April 21, 1999
10.10* Escrow Agreement among the Company, the Goldstein Law Group
and certain Series A Preferred Investors, dated February 8,
1999
10.11* Registration Rights Agreement among the Company and certain
Series A Preferred Investors, dated February 8, 1999
10.12* Form of Warrant issued to certain Series A Preferred
Investors on February 8, 1999
10.13* Warrant issued to Placement Agent, dated February 8, 1999
10.14* Dataware License Agreement, dated July 1999
10.15* Pittard Sullivan Contract, dated July 1999
10.16* Digital Boardwalk Agreement, dated July 1999
10.17* Acsiom, Inc. Consulting Agreement, dated July 1999
10.18 Columbia Financial Group Services Agreement, dated January,
1999
10.19 Sierra Systems Consulting and Development Agreement, dated
September, 1999
10.20 Veritas Software Financial Agreement, dated November, 1999
10.21 Netscape Software Financial Agreement, dated November,1999
10.22 Oracle Software Agreement, dated November, 1999
10.23 Sun Microsystems License Agreement, dated December, 1999
10.24 Qwest Dedicated Internet Access Service Agreement, dated
January 2000
10.25 Netdotworks Consulting and Support Agreement, dated
February, 2000
10.26 DoubleClick, Inc. DART Service Agreement, dated February,
2000
16.1** Letter of Crouch, Bierwolf & Chisholm
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
- -------------------------
* Incorporated by reference to Registration Statement Form S-1, File No.
333-79357, filed on May 28, 1999, and amended on August 17, 1999, September 24,
1999, October 25, 1999, November 19, 1999 and December 6, 1999.
** Incorporated by reference to Current Report Form 8-K, File No. 000-27453,
filed on March 1, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WORDCRUNCHER INTERNET TECHNOLOGIES, INC.
By: /s/
---------------------------------------
M. Daniel Lunt, Chief Executive Officer
Dated:
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on March 30, 2000.
By: /s/
----------------------------------------
James W. Johnston, Chairman of the Board,
Executive Vice President
By: /s/
----------------------------------------
Kenneth W. Bell, Senior Vice President,
Chief Financial Officer, Treasurer,
Secretary, Director
By: /s/
----------------------------------------
M. Daniel Lunt, President, Chief
Executive Officer, Director
By: /s/
----------------------------------------
Michael Fowler, Director