As filed with the Securities and Exchange Commission on May 28, 1999
Registration No. ______________
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
WORDCRUNCHER INTERNET TECHNOLOGIES, INC.
(Name of issuer in its charter)
---------------
Nevada 7379 84-1370590
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
405 East 12450 South, Suite B
Draper, Utah 84020
(801) 816-9904
(Address and telephone number of registrant's principal executive offices
and principal place of business)
----------------
Kenneth W. Bell
405 East 12450 South, Suite B
Draper, Utah 84020
(801) 816-9904
(Name, Address and telephone number of agent for service)
----------------
Copies to:
Scott R. Carpenter, Esq.
Parsons Behle & Latimer
201 South Main Street, Suite 1800
Salt Lake City, Utah 84111
(801) 532-1234
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933
check the following box. [ x ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
boxes and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following boxes and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
Calculation of Registration Fee
- -----------------------------------------------------------------------------
Title of each class of Proposed Maximum Proposed Minimum Amount of
securities to be Amount to be Offering price per aggregate offering Registration
registered(1) Registered(2) Share(3) Price Fee
- ------------------------------------------------------------------------------------------------
Common Stock 2,693,137 $5.50 $14,812,253 $4,118
- ------------------------------------------------------------------------------------------------
(1) This registration statement covers the resale by certain selling
stockholders of up to an aggregate of 2,693,137 shares of Common Stock, par
value $0.001, of the Company, 1,035,690 shares of which were previously
acquired by the selling stockholders, and 1,657,447 shares of which may be
acquired by certain of the selling stockholders upon the conversion of
presently outstanding convertible preferred shares and the exercise of
warrants.
(2) If there is a stock split, stock dividend or similar transaction involving
the Company's Common Stock, in order to prevent dilution, the number of shares
registered hereunder will automatically be increased to cover the additional
shares in accordance with Rule 416(a) under the Securities Act.
(3) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act, based on the average of the
high and low prices of the Company's Common Stock on May 27,1999.
The Company hereby amends this Registration Statement on such a date or dates
as may be necessary to delay its effective date until the Company shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
PROSPECTUS SUBJECT TO COMPLETION, DATED May 28, 1999
_____________________________________________________________________________
The information in this Prospectus is not complete and may be changed. The
Company may not sell these securities until the Registration Statement filed
with the Securities and Exchange Commission is effective. This Prospectus is
not an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
WORDCRUNCHER INTERNET
TECHNOLOGIES, INC.
a Nevada corporation
2,693,137 shares of Common Stock
$0.001 per share
This is a public offering of 2,693,137 shares of the Common Stock (the
"Shares") of WordCruncher Internet Technologies, Inc. (the "Company," "we," or
"us"). All of the Shares being offered, when sold, will be sold by certain
selling stockholders (the "Selling Stockholders"), as identified in this
Prospectus. We will not receive any of the proceeds from the sale of the
Shares. However, we will receive proceeds from the exercise of warrants which
can be exercised by certain of the Selling Stockholders. Our Common Stock is
currently traded over the counter under the symbol "WCTI." The last reported
sales price of the Common Stock on that market on May 27, 1999 was $5.50 per
share. We intend to submit an application to list our Common Stock on the
NASDAQ National Market Systm under the symbol "WCTI."
_________________________
Investing in the Shares involves certain risks. See "Risk Factors" beginning
on page 7.
_________________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
_________________________
May 28, 1999
1
You should rely only on the information contained in this Prospectus. We
have not authorized anyone to provide you with information different from that
contained in this Prospectus. The Selling Stockholders are offering and
selling the Shares only in jurisdictions where offers and sales are permitted.
The information contained in this Prospectus is accurate only as of the date
of this Prospectus, regardless of the time of the delivery of the Prospectus
or any sale of the Shares. In this Prospectus, references to the "Company,"
"WordCruncher Internet Technologies, Inc.," "we," "us," and "our," refer to
WordCruncher Internet Technologies, Inc.
Table of Contents
Page
Prospectus Summary 3
Risk Factors 7
Transactions Effected in Connection With the Offering 11
Use of Proceeds 12
Price Range of Common Stock and Shares Eligible for Future Sale 12
Capitalization 13
Dividend Policy 13
Selected Financial Data
Management's Discussion and Analysis of
Financial Condition and Results of Operation 15
Business 18
Management 24
Principal and Selling Stockholders 28
Certain Relationships and Related Transactions 30
Changes In and Disagreements With Accountants 30
Interest of Named Experts and Counsel 31
Plan of Distribution 31
Description of Capital Stock 32
Commission's Position on Indemnification for Securities Act Liabilities 35
Index to Financial Statements 37
_________________________
We own or have the rights to trademarks or trade names that we use in
connection with the sale and marketing of our products and services, including
the "WordCruncher" and "Spyhop" trademarks. This Prospectus may also include
references to trademarks of other companies.
2
SUMMARY
Because this is only a summary of the information contained in this
Prospectus, it does not contain all of the information that may be important
to you in your investment decision to acquire the Shares. You should read
this entire Prospectus carefully, especially the section entitled "Risk
Factors" and the financial statements and notes, before deciding to invest in
the Shares.
Our Business
We develop and intend to market next-generation focused Internet portal
sites coupled with data harvesting, text indexing, retrieval and analysis
software which we market under the brand name "Spyhop." Spyhop allows
Internet and private data network ("intranet") users to search single web
sites, search multiple web sites concurrently or search substantial portions
of an entire data network in an efficient manner.
Spyhop is based on technology originally developed at Brigham Young
University by a team that included educational psychologists, computer
programmers and logic experts. Their goal was to develop a software product
that would assist them in their research and teaching. Since 1986,
researchers have used the basic Spyhop technology for research projects in
over 20 countries and in more than 15 languages. In February 1997, we
purchased an exclusive, worldwide license to market, modify and develop that
technology. Since then, we have augmented the capabilities of the Spyhop
technology by adapting it for use on data systems that incorporate Internet
protocols ("IP") and refining its search and display capabilities. We have
tested Spyhop on an Internet beta site and we expect to launch its production
use in the fourth quarter of 1999. We believe Spyhop provides an effective
method for quickly sifting through large amounts of data on the Internet and
intranets for relevant information.
Our Market
We believe Spyhop can be used for data searching, retrieval and indexing
on both intranets and the Internet, but believe that it will be used primarily
by consumers on the Internet. We intend to market Spyhop initially to
specialized segments of Internet users including business researchers and
professionals, and then to intranet users.
The Internet is an interactive worldwide network of computers and data
systems that allows 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 IP, which is the system of
standards that allows computers in various locations and of various makes to
communicate with one another. The Internet's use has grown substantially
since it was first commercially introduced in the early 1990s. International
Data Corporation estimates that Internet users will grow from approximately 35
million in 1996 to approximately 160 million by 2000. The increase in the
number of users has resulted in a rapid increase in the numbers of
advertisers, products and services on the Internet. For example, Jupiter
Communications estimates that advertisers spent approximately $340 million on
Internet and online advertising in 1996, and that Internet and online
advertising will grow to approximately $5 billion by the year 2000.
3
The use of intranets has also dramatically increased in recent years.
Corporations, universities and other large organizations have recently begun
to create large networks of interconnected computer networks to allow
employees, researchers and other parties access to private data. Many of
these intranets have adopted or use IP, which allows their users to obtain
data and information from the Internet as well as from the organization's
private data cache. A July 1996 survey of fifty Fortune 1000 companies
reported that 64% of the entities responding to the survey were currently
using intranets, and that another 32% were building them.
We believe the rapid growth of the Internet and intranets and,
especially, the proliferation of Internet sites, has made it increasingly
challenging for consumers, content providers and advertisers to effectively
reach one another. Consumers are generally 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 services in an increasingly crowded medium and to improve
the visibility of their sites. Advertisers are challenged to more effectively
deliver their messages to both general audiences and target groups.
Many of our competitors have developed products, including portals,
which they believe make the task of finding relevant data, information,
advertising or products on the Internet or intranets easier and less time
consuming. These portals generally return a list of web sites (based on
search parameters) that contain limited extracts or descriptions of the web
sites. They can answer search inquires with lists of potential documents that
contain several thousand results, with little or no input as to which results
are relevant. As a result, Internet and intranet users generally spend
substantial time searching through the list of the web sites presented to find
out which web sites are relevant to their particular inquiry. This generally
requires the user to call up the referenced page and either visually scan it
or conduct another page search to find the specific information in question.
The Company's Solution
Spyhop provides advanced Internet and intranet harvesting, text
indexing, retrieval and analysis capabilities that create a search result
metaphor we call "what you see is what you get." In a Spyhop search result, a
portion of the computer screen is devoted to an information summary that is
the equivalent of a table of contents or index. Each entry in the table of
contents represents a web site, category or subcategory, and the entry shows
the user how many references match the search criteria on each web site. By
clicking on an entry in the table of contents, users see the search results in
the actual surrounding context and can determine more efficiently and quickly
if the web site provides the information they want.
Spyhop is based on a computer algorithm that takes search result data
and organizes it in terms that are familiar to the average person such as a
table of contents or an index. Spyhop can also sort, analyze, and manipulate
search results to make it easier to find what the user is looking for. This
conceptual "bridge building" is especially useful for new Internet users, who
are not generally familiar with the limitations of existing portals.
Spyhop uses a linguistic analysis technique, formerly known as
"collocation" and commonly known as "neighbors," that assists users in quickly
zeroing in on sites and pages that contain needed, relevant information. This
function also allows users to construct a search request that avoids getting
too many responses to a search that was ambiguously phrased.
4
The Offering
Shares of Common Stock offered by the
Selling Stockholders ......................... 2,693,137(1)
Common Stock outstanding after the offering......... 13,434,449(2)
Common Stock owned by the Selling
Stockholders after the offering .............. 5,210,214(3)
Use of Proceeds..................................... We will not receive any
proceeds from the sale
of the Shares. See
"Use of Proceeds."
Proposed NASDAQ symbol.............................. _____________
(1) Assumes the conversion of outstanding Series A Preferred Stock into
624,999 Shares and the exercise of the warrants we issued in connection with
the Series A Preferred Stock (the "Warrants") for 307,449 Shares. We are
required to register under this Prospectus for the benefit of the holders of
the Series A Preferred Stock two times the number of shares of Common Stock
they can acquire on conversion of their Series A Preferred Stock plus the
number of shares of Common Stock they can acquire under the warrants they
hold. However, that number of Shares is the greatest number of Shares we may
be required to register for the Series A Preferred Stock and Warrant holders,
and the actual number of Shares we issue to them may be smaller.
(2) Based on 11,877,002 Shares of Common Stock outstanding as of March 31,
1999. Excludes approximately 375,000 shares of Common Stock subject to
outstanding options granted under employee stock options, of which 16,500
were exercisable as of March 31, 1999. Also excludes warrants to acquire up
to 200,000 shares of Common Stock (at $5 per share) we have issued to a third
party for services. That party has earned warrants to acquire 50,000 shares
of Common Stock as of March 31, 1999. Assumes (i) 307,449 Shares issuable
upon the exercise of the Warrants as of March 31, 1999, and (ii) the
conversion by certain of the Selling Stockholders of outstanding shares of
Series A Preferred Stock into 624,999 Shares. The number of Shares issuable
on conversion of the Series A Preferred Stock is subject to adjustment. We
are required to register under this Prospectus for the benefit of the holders
of the Series A Preferred Stock two times the number of shares of Common Stock
they can acquire on conversion of their Series A Preferred stock plus the
number of shares of Common Stock they can acquire under the Warrants they
hold. However, that number of Shares is the greatest number of Shares we may
be required to register for the Series A Preferred Stock and Warrant holders,
and the actual number of Shares we issue to them may be smaller. The actual
number of shares of Common Stock currently issuable to the holders of the
Series A Preferred Stock (upon its conversion) and the outstanding Warrants
(upon their exercise) is 932,448 shares, consisting of 624,999 shares from the
assumed conversion of the Series A Preferred Stock and 307,449 shares from the
exercise of the Warrants. See "Description of Capital Stock."
(3) Assumes the matters set forth in footnotes 1 and 2 and the sale by the
Selling Stockholders of all the Shares.
5
Summary and Operating Data
Three Months Ended
Year Ended December 31, March 31,
--------------------------- --------------------------
1997 1998 1998 1999
------------- ------------- ------------ -------------
Statement of Operations Data:
Total Revenues $ 24,484 $ 82,678 $ 38,782 $ 10,097
Operating costs and expenses:
Cost of goods sold and royalties 806 15,864 82 22,714
Research and development - - - -
Depreciation and amortization 6,419 10,406 2,479 15,177
Marketing, general and
administrative 338,429 518,435 33,442 392,620
------------- ------------- ------------ -------------
Income (loss) from operations (321,170) (462,027) 2,779 (420,414)
Non operating income (loss), net (14,048) (20,882) (8,586) 23,169
Provision for income taxes - - - -
------------- ------------- ------------ -------------
Income (loss) before cumulative effect of
change in accounting (335,218) (482,909) (5,807) (397,245)
Cumulative effect of change in
accounting - - - -
------------- ------------- ------------ -------------
Net income (loss) $ (335,218) $ (482,909) $ (5,807) $ (397,245)
============= ============= ============ =============
Basic and diluted loss per common share:
Income (loss) before cumulative effect of
change in accounting $ (0.61) $ (0.08)
Cumulative effect of change in
accounting - - - -
------------- ------------- ------------ -------------
Net Income (loss) per common share $ (0.61) $ (0.08) - -
============= ============= ------------ -------------
Weighted average shares
outstanding 545,535 6,100,679
March 31, 1999
Actual
----------------
Balance Sheet Data: Cash, cash equivalents, marketable debt securities and
certificate of deposit $ 5,745,679
Total assets 6,122,467
Long-term obligations, including current portion 23,213
Deficit accumulated during development stage (1,215,372)
Stockholders' equity 5,951,790
Unless otherwise indicated, all information in this Prospectus (i) assumes no
exercise of outstanding and exercisable options or warrants, (ii) assumes no
exercise of the Warrants (as hereafter defined) or the conversion of the
outstanding Series A Preferred Stock, and (iii) reflects the 3 for 1 forward
stock split we effected in July 1998. See Notes to Financial Statements for
information concerning the computation of per share amounts.
6
RISK FACTORS
An investment in the Shares is very risky. You should carefully
consider the following risks in addition to the information contained in the
remainder of this Prospectus before purchasing the Shares. This Prospectus
contains forward-looking statements that involve risks and uncertainties.
Many factors, including those described below, may cause actual results to
differ materially from anticipated results.
WE HAVE A LIMITED OPERATING HISTORY. We incorporated in 1996 and
purchased the license to develop and market the basic Spyhop technology in
February 1997. We only recently completed our beta testing of Spyhop on our
web site. We may encounter financial, managerial, technological or other
difficulties as a result of our lack of operating history. Although we
anticipate our operating revenue will increase in the future, we cannot
guarantee that our revenues will exceed our operating expenses.
OUR QUARTERLY RESULTS COULD FLUCTUATE. We have consistently had
losses since our formation. Our quarterly operating results in the future may
vary significantly, depending on factors such as revenue from our advertising
sales and software license fees, the timing of our new product and service
announcements and launches, market acceptance of new and enhanced versions of
Spyhop and related products (if any), changes in our operating expenses,
changes in our business strategy, and general economic factors. We have
limited or no control over many of these factors. Our quarterly revenues will
also be difficult to forecast because the markets for our products and
services are evolving and our revenues in any period could be significantly
affected by new product announcements and product launches by our competitors,
as well as by alternative technologies. We believe period-to-period
comparisons of our results of operations will not necessarily be meaningful
for the foreseeable future.
OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE. Our
operating results will depend to a significant extent on our ability to
successfully introduce our products and improve Spyhop. Internet industries
rapidly change. Accordingly, our ability to compete successfully in our
markets will depend on a number of factors, including our ability to identify
emerging target markets, identify emerging technological trends within those
markets, develop and maintain competitive products, enhance our products by
adding innovative features that differentiate them from our competitor's
products, bring products to market on a timely basis at competitive prices and
respond effectively to new technological changes or new product announcements
by others. We believe we will need to make continuing significant
expenditures for research and development in the future. We may not be able
to successfully develop new products or, if we do, those products may not be
accepted by the market.
WE ARE SUBJECT TO INTENSE COMPETITION. The development and
marketing of search engines and Internet portals is extremely competitive.
Many of our competitors have competitive advantages, including established
positions in the market, brand name recognition, greater financial, technical,
marketing and managerial resources, and established strategic alliances.
Further, our competitors may succeed in developing products or technologies
that are more effective than ours, or that make our products and technologies
obsolete.
WE DEPEND ON OUR MANAGEMENT. We depend on the efforts and
abilities of our officers, directors and certain key employees. If we lose
the services of one or more of those persons, that loss could have a material
adverse effect on our operations.
WE ARE CONTROLLED BY OUR EXECUTIVE OFFICERS AND DIRECTORS. Our
executive officers and directors beneficially own approximately 45.2% of the
Common Stock. After this offering, they will own over 34.1% of the Common
Stock, even assuming the sale of all the Shares. As a result they will have
substantial influence over our operations and on the outcome of matters
submitted to our stockholders for approval. In addition, their ownership of
such a large portion of the Common Stock could discourage the purchase of our
Common Stock by potential investors, and could have an anti-takeover effect,
possibly depressing the trading price of our stock.
WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS. Our ability to
compete effectively in our markets will depend, in part, on our ability to
protect the proprietary nature of the Spyhop technology through a combination
of patents, licenses and trade secrets. Competition in our markets is intense
and our competitors may independently develop or obtain patents on
technologies that are substantially equivalent or superior to Spyhop. We could
incur
7
substantial costs in defending patent infringement lawsuits brought by others
and in prosecuting patent infringement lawsuits against third party
infringers.
A portion of our basic proprietary technology is based on an exclusive,
worldwide license to a patent that was issued to Brigham Young University
("BYU"). Our success depends in part on the continued validity of that patent
and, if we or BYU fail to prosecute or maintain that patent, our business
could be damaged. Further, that patent (or patent applications or
continuances we file in the future) could be challenged, invalidated or
circumvented by our competitors. Patents can also fail to provide meaningful
competitive advantages. For example, another company could develop a search
engine technology that provides search results similar to Spyhop search
results without infringing on the BYU patent.
Intellectual property rights, by their nature, are uncertain and involve
complex legal and factual questions. We may unknowingly infringe on the
proprietary rights of others and may be liable for our infringement, which
could cost us significant amounts. We are not aware of any third party
intellectual property rights which would prevent our use of Spyhop, although
rights of that type may exist. If we infringe on the intellectual property of
another party, we could be forced to seek a license to those intellectual
property rights or alter our products or processes so they no longer infringe
on the rights of the third party. If we are required to obtain a license to
another party's proprietary rights, that license could be expensive, if we
could obtain it at all.
If BYU fails to defend the rights under its patent but we decide to take
up the defense, we would be responsible for those patent litigation costs. If
we were to become involved in a dispute regarding our intellectual property,
we might have to participate in interference proceedings declared by the
United States Patent and Trademark Office to determine who had the claimed
rights first. We could be forced to seek a judicial determination concerning
the rights in question. These types of proceedings can be costly and time
consuming, and we may not prevail. If we did not prevail, we could be forced
to pay significant damages, obtain a license or stop marketing a certain
product.
We also rely on trade secrets and other unpatented proprietary
information in our product development activities. To the extent we rely on
confidential information to maintain our competitive position, other parties
may independently develop the same or similar information. We seek to protect
our trade secrets and proprietary knowledge in part through confidentiality
agreements with our employees and collaborators. These agreements may not
effectively prevent disclosure of our confidential information and may not
provide us with an adequate remedy in the event of unauthorized disclosure of
such information. If employees or collaborators develop products
independently that may be applicable to our products under development,
disputes may arise about ownership of proprietary rights to those products.
Those products will not necessarily become our property, but may remain the
property of those persons. Protracted and costly litigation could be
necessary to enforce and determine the scope of our proprietary rights. Our
failure to obtain or maintain patent and trade secret protection, for any
reason, could have a material adverse effect on our business, financial
position and results of operations.
WE WILL NEED ADDITIONAL CAPITAL. Based on our current expenditure
rate, we believe we will need additional financing by the middle of 2000.
Therefore, the success of our business strategy will be dependent on our
ability to access equity capital markets and borrow on terms that are
financially advantageous to us. We have no external source of financing and
we have not received any commitment for any funds we may need in the future.
We may not be able to obtain funds on acceptable terms. If we fail to obtain
funds on acceptable terms, we may be forced to delay or abandon some or all of
our business plans, which could have a material adverse effect. If we are
unable to obtain additional capital, we also may not have sufficient working
capital to finance acquisitions, pursue business opportunities or develop
products. If we borrow money, we could be forced to use a large portion of
our cash reserves to repay it, including interest. If we issue our securities
for capital, your interest and the interests of the other then-current
shareholders could be diluted.
OUR PRODUCTS ARE COMPLEX. Spyhop is complex and may contain
errors, defects and "bugs." We have detected those kinds of errors, defects
and bugs in the past and have corrected them as quickly as possible.
Correcting any defects or bugs we discover in the future may require us to
make significant expenditures of capital
8
and other resources. Despite our continuing tests, users may find errors or
defects in Spyhop which could cause additional development costs or result in
delays in (or loss of) Spyhop market acceptance.
OUR STOCK PRICE MAY BE VOLATILE. In recent years the stock market
in general, and the market for shares of high technology companies in
particular, have experienced extreme price fluctuations. In many cases these
fluctuations have been unrelated to the operating performance of the affected
companies. The trading price of our Common Stock, including the Shares, may
be subject to extreme fluctuations in response to both business-related issues
(such as quarterly variations in operating results, or announcements of our
new products or our competitors) and stock market-related influences (such as
changes in analysts' estimates, the presence or absence of short-selling of
our Common Stock and events affecting other companies that the market deems to
be comparable to us).
WE MAY HAVE PROBLEMS AS A RESULT OF THE YEAR 2000 ISSUE. We rely
on computer systems, applications and devices in operating and monitoring all
of the major aspects of our business, including financial systems (such as
general ledger, accounts payable and payroll modules), customer service,
networks and telecommunications equipment and end products. Also, we provide
our services and products over the Internet, which is a computer-based
industry. Even if our internal systems are not materially affected by the
year 2000 issue, we could be affected by disruptions in the operation of the
persons and entities with which we interact or year 2000 disruptions that
affect our customers. Despite our efforts to address the impact of year 2000
on our internal systems and operations, we may suffer a material disruption of
our business, which could have a material adverse effect on our financial
condition and results of our operations.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. We have
included forward-looking statements in this prospectus. The information
contained in this Prospectus includes information based on trends or other
forward-looking statements that involve a number of assumptions, risks and
uncertainties. The actual results of our operations could differ materially
from our historical results of operations and those discussed in the forward-
looking statements. The forward-looking statements are based on our
management's beliefs, as well as assumptions they have made based on currently
available information. Words such as "anticipate," "believe," "estimate,"
"plan," "expect," "intend" and words or phrases of similar import, as they
relate to us or our management, are intended to identify forward-looking
statements. The forward-looking statements should be read in light of these
factors and the factors identified elsewhere in this Prospectus.
THE FUTURE SALE OF OUR COMMON STOCK COULD POSE INVESTMENT RISKS.
The market price of our Common Stock could drop as a result of sales of the
Common Stock (including the Shares) in the market after this offering, or the
perception that such sales could occur. These factors could also make it more
difficult for us to raise funds through future offerings of our Common Stock.
There will be a total of 13,434,449 shares of Common Stock outstanding
immediately after this offering, assuming the sale of all the Shares (and also
assuming no exercise of outstanding options or warrants other than the
Warrants). The Shares will be freely transferable without restriction or
further registration under the Securities Act of 1933 (the "Securities Act"),
except for any Shares purchased by our "affiliates," as defined in Rule 144
under the Securities Act. We also have 4.5 million shares of Common Stock
outstanding that are freely transferrable without registration under the
Securities Act, except for any of such shares purchased by our "affiliates."
The remaining shares of Common Stock outstanding will be "restricted
securities," as defined in Rule 144. The Shares may be sold in the future
without further registration under the Securities Act to the extent such sales
are permitted by Rule 144 or any other exemption under the federal securities
laws.
WE HAVE A SHORT MARKET HISTORY. There has not been a large public
market for our equity securities, although our Common Stock has traded on the
over-the-counter market since July 1998. We intend to apply for listing on
the NASDAQ system as soon as possible. We do not know the extent to which
investor interest in our stock will lead to the development of a substantial
and active trading market or how liquid that market might be. The offering
price for the Shares was determined by the Selling Stockholders. You may not
be able to resell your Shares at or above the price you pay for your Shares.
WE HAVE NOT PAID DIVIDENDS. We have never paid dividends on our
Common Stock. We intend to retain future earnings to finance our growth and
development and do not plan to pay cash dividends in the foreseeable future.
9
WE HAVE AN UNPROVEN PRODUCT AND WE OPERATE IN A DEVELOPING MARKET.
Spyhop is based on search engine technology which has been used for over 10
years. We have refined the basic Spyhop technology by adding additional
functions and recently concluded a beta test of Spyhop on our web site. We
are modifying Spyhop in light of those test results. Our success will depend
largely on our ability to refine and continue to develop Spyhop and other
products. If Spyhop does not achieve significant market acceptance and usage,
our business, results of operations and financial condition could be
materially and adversely affected.
The primary markets for Spyhop have only recently begun to develop and
are rapidly evolving. As is typical of new and rapidly evolving industries,
demand for (and market acceptance of) products and services that have been
released recently or that are planned for future release are subject to a high
level of uncertainty. If the markets for Spyhop fail to develop, develop more
slowly than we expect, or become saturated with products of other competitors,
or if Spyhop does not achieve market acceptance, our business, results of
operations and financial condition could suffer.
Our markets are highly dependent on the use of the Internet. A number of
critical issues concerning the commercial use of the Internet, including
security, reliability, capacity, costs, ease of use, access, quality of
service and acceptance of advertising remain unresolved and may retard the
growth of the Internet for commercial applications.
WE ARE DEPENDANT ON THE CONTINUED ADOPTION OF INTRANETS. In
addition to providing services over the Internet, we intend to provide or
license Spyhop for use on intranet systems. Therefore, we will be dependent
on the development of those systems. Intranets may not be adopted by large
numbers of organizations, and the organizations adopting intranets may not
want users to communicate over those systems. Our products may not appeal to
organizations that use intranets.
WE WILL NEED TO MANAGE OUR GROWTH. We hope and expect to grow
rapidly, both in the rate of our sales and operations and the number and
complexity of our products, product distribution channels, and product
development activities. Several members of our key management team only
recently joined us. See "Management." Our growth, coupled with the rapid
evolution of our markets, has placed, and is likely to continue to place,
significant strains on our administrative, operational, technical and
financial resources and increase demands on our internal management systems,
procedures and controls. If we are unable to manage future growth
effectively, our business, results of operations and financial condition could
be materially adversely affected.
WE WILL BE DEPENDANT UPON VALUE ADDED LINKS. We intend to
establish value added links with leading Internet content providers to allow
their users to use Spyhop without leaving the content provider's web site. We
expect to derive revenue from these value added links and to increase Spyhop
brand recognition among users through such relationships. Our success in
establishing Spyhop as a recognized brand name and achieving its acceptance in
the market will depend in part on our ability to establish and maintain value
added links.
WE MAY BE SUBJECT TO RISK OF CAPACITY CONSTRAINTS AND SYSTEM
FAILURES. A key element of our marketing strategy is to make Spyhop available
at no cost to users of the Internet through our own web site. Accordingly,
Spyhop's performance will be critical to our ability to establish the Spyhop
brand name. Increases in the volume of searches conducted using Spyhop could
strain our system capacity, which could lead to slower response times or
complete system failures. In addition, if the number of Internet users
increases, Spyhop may not be able to be scaled appropriately. We will likely
be required to make certain performance and support commitments in our value
added link agreements and if we fail to meet the commitments, those agreements
could be terminated or we could be liable for damages. We will also be
dependent on hardware suppliers for prompt delivery, installation and service
of servers and other equipment that we use to operate our web site and for
Internet access. The servers and other hardware equipment will be vulnerable
to damages from fire, earthquake, power loss, telecommunications failures and
similar events. Our business operations may also be vulnerable to computer
viruses, break-ins and similar disruptive problems.
WE MAY BE SUBJECT TO INCREASED REGULATIONS AND WE MAY HAVE
LIABILITY FOR INFORMATION RETRIEVED FROM THE INTERNET. Other than laws and
regulations applicable to businesses generally, there are currently few laws
10
and regulations expressly applicable to access and commerce on the Internet.
Due to the increased popularity and use of the Internet, however, it is
possible that new laws and regulations may be adopted with respect to the
Internet relating to the issues such as user privacy, pricing and
characteristics, and content and quality of products and services. For
example, we may be subject to the provisions of the Communications Decency
Act, which if found to be constitutional, could expose us to substantial
liability. The adoption of any such laws or regulations could retard the
growth or the use of the Internet, which could adversely affect the demand for
our products and services. Those laws or regulations could also result in
significant additional costs and technological challenges for us in complying
with any mandatory requirements. Further, several states have attempted to
tax online retailers and service providers even when they have no physical
presence in the state. There is currently a three-year moratorium on taxing
Internet commerce which was imposed by the federal government. We cannot
predict what effect the lapse of the moratorium period will have on our
business operations. In addition, plaintiffs have brought claims, and
sometimes obtained judgments, against online services for defamation,
negligence, copyright or trademark infringement or under other theories with
respect to materials disseminated through those services. We will maintain a
web site to which users can upload materials, so we may be subject to similar
claims.
WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH GLOBAL OPERATIONS.
Spyhop has multi-language capability. We have not concentrated on developing
that function, but we believe we could do so in the future. As a result, we
could derive substantial portions of our revenues from customers outside the
United States. Our ability to expand products and services internationally
would be limited by the general acceptance of the Internet and intranets in
other countries. In addition, international operations are subject to a
number of risks, including costs of localizing products and services for
international markets, dependence on independent resellers, multiple and
conflicting regulations regarding communications, restrictions on use of data
and internet access, longer payment cycles, unexpected changes in regulatory
environments, import and export restrictions and tariffs, difficulties in
staffing and managing international operations, greater difficulty or delay in
accounts receivable collection, potentially adverse tax consequences, the
burden of complying with a variety of laws outside the United States, the
impact of possible recessionary environments and economies outside the United
States and political and economic instability. Furthermore, we expect that
our export sales would be denominated predominately in United States dollars.
Therefore, an increase in the value of the United States dollar relative to
other currencies could make our products and services more expensive and
potentially less competitive in international markets.
NONE OF OUR SHAREHOLDERS IS SUBJECT TO A LOCK-UP. Our current
stockholders have not entered into any agreements which restrict their ability
to sell or otherwise dispose of their Common Stock. As a result, our
stockholders will be able to sell any and all of their shares of Common Stock,
subject only to applicable federal securities laws. Sales and distributions
of substantial amounts of Common Stock in the public market, whether by reason
of this Prospectus or by the same or other shareholders, could adversely
effect the prevailing market prices for our securities.
TRANSACTIONS EFFECTED IN CONNECTION WITH THE OFFERING
In February 1999, we entered into an agreement (the "Purchase
Agreement") with eight accredited investors relating to the purchase by those
investors of up to $15 million of our newly designated Series A Convertible
Preferred Stock (the "Series A Preferred Stock"). In March 1999, the parties
completed the purchase and sale of the Series A Preferred Stock under the
Purchase Agreement when those investors acquired 6,300 shares of our Series A
Preferred Stock for $6,300,000. The Series A Preferred Stock is convertible
into the number of shares of Common Stock equal to the dollar amount of the
Series A Preferred Stock divided by $10.08, or a total of 624,999 shares. The
holders of the Series A Preferred Stock may receive additional shares of
Common Stock based on the trading price of the Common Stock at certain preset
times. In connection with the transaction, the investors also acquired
warrants (the "Warrants") which will permit them to purchase 307,449
additional shares of Common Stock through February 2004 at weighted average
exercise prices ranging from $28.25 to $40.71 per share. See "Description of
Capital Stock."
In connection with the investors' purchase of the Series A Preferred
Stock, we granted those investors certain registration rights. Under the
terms of those rights, we are required to file a registration statement (of
which this Prospectus is a part) with the Securities and Exchange Commission
which will register not
11
less than twice the number of shares of Common Stock which would be required
for the conversion of the Series A Preferred Stock held by those investors if
that stock were converted on the trading date immediately preceding the filing
of the registration statement. We are also required to register the number of
shares of Common Stock required for exercise of all the warrants. The number
of shares of Common Stock issuable on conversion of the outstanding Series A
Preferred Stock is 624,999 shares and the number of shares of Common Stock
issuable on the exercise of the Warrants is 307,449 shares, so the total
number of shares of Common Stock we are registering for the holders of the
Series A Preferred Stock and the Warrants hereunder is 1,557,447 shares of
Common Stock (624,999 shares times 2, plus 307,449 shares).
USE OF PROCEEDS
We are registering the Shares for the benefit of the Selling
Stockholders and the Selling Stockholders will sell the Shares from time to
time under this Prospectus. Other than the exercise price that certain of the
Selling Stockholders pay to exercise Warrants, we will not receive any of the
proceeds from the sale of the Shares. Those Selling Stockholders are not
obligated to exercise their Warrants, and there can be no assurance they will
exercise all or any of them. If they exercised all of the Warrants, however,
we would receive $9,591,960. We intend to use any proceeds from the exercise
of the Warrants for working capital needs and general corporate purposes. We
will pay all of the costs of this offering, with the exception of the costs
incurred by the Selling Stockholders for their legal counsel and the costs
they incur for brokerage commissions on the sale of their Shares.
PRICE RANGE OF COMMON STOCK AND SHARES ELIGIBLE FOR FUTURE SALE
Since July 1998, our Common Stock has been traded over-the-counter and
quoted on the OTC Electronic Bulletin Board under the symbol "WCTI." There
were approximately 143 holders of record of our Common Stock and 8 holders of
record of our Series A Preferred Stock as of March 31, 1999. 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 the third and fourth fiscal quarters of 1998 and the
first quarter of 1999. 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
---- --------------- ------- ---------
1998 Third Quarter $ 5.0 $0.6875
Fourth Quarter $ 6.8125 $2.0
1999 First Quarter $36.25 $4.78125
Upon completion of the offering, we will have outstanding an aggregate
of 13,434,449 shares of Common Stock. These amounts are inclusive of the
number of shares of Common Stock we would be obligated to issue on the
conversion of the Series A Preferred Stock (two times the 624,999 shares
currently issuable on conversion or 1,299,998 shares) and exercise if the
Warrants, as described below (307,449 shares). In addition, we reserved for
issuance 375,000 shares issuable upon exercise of outstanding options (of
which 16,500 are currently exercisable) and up to an additional 200,000 shares
of Common Stock under warrants we are issuing to a third party for services
(of which 50,000 have been earned as of March 31, 1999). The Shares offered
hereby will be freely transferable without restriction or further registration
under the Securities Act, except for shares which may be acquired by our
"affiliates" as that term is defined in Rule 144 under the Securities Act. We
also have 4.5 million shares of Common Stock that are currently freely
tradable (except for such of those shares as may be acquired by our
affiliates). The remaining shares of Common Stock held by existing
shareholders are "restricted securities" as that term is defined in Rule 144.
Restricted securities may be sold in the public market only if they are
registered or if they qualify for exemption from registration under Rules 144
or 701 under the Securities Act or otherwise. None of the restricted shares
held by our existing shareholders will be eligible for immediate sale in the
public market under Rule 144k).
12
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned shares for at least one year is entitled to sell, within any three-month
period commencing 90 days after the date of this prospectus, a number of
shares that does not exceed the greater of (i) 1% of the then outstanding
Common Shares or (ii) the average weekly trading volume in the Common Shares
during the four calendar weeks preceding such sale, subject to the filing of a
Form 144 with respect to such sale and certain other limitations and
restrictions. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, would be entitled to sell such shares under Rule 144(k) without regard
to the volume, manner of sale and other limitations described above.
An employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permit non-affiliates to sell their Rule
701 shares without having to comply with the public information, holding-
period, volume-limitation or notice provisions of Rule 144 and permit
affiliates to sell their Rule 701 shares without having to comply with the
Rule 144 holding period restrictions, in each case commencing 90 days after
the date of this Prospectus.
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998
and as adjusted to give effect to the offering and the sale of the Series A
Preferred Stock in March 1999, as more particularly described in the section
entitled "Transactions Effected In Connection with the Offering."
December 31, 1998
Actual Proforma March 31, 1999
(as adjusted) Actual (Unaudited)
------------- ------------- -----------------
Long-term debt,
including accrued interest $ 11,617 $ 11,617 $ 7,638
Shareholders equity:
common shares par value $0.001;
11,877,002 shares issued and
outstanding, actual; 11,877,002
shares issued and outstanding,
proforma (as adjusted) $ 1,259,211 $ 866,211 $ 867,111
Series A Convertible Preferred
shares, par value $0.01; no
shares issued and outstanding,
actual; 6,300 shares issued and
outstanding, proforma
(as adjusted) $ 0 $ 6,300,000 $ 6,300,000
Accumulated deficit $ (818,127) $ (818,127) $ (1,215,372)
Total shareholders' equity
(deficit) $ 441,084 $ 6,348,084 $ 5,951,790
Total capitalization $ 452,701 6,359,701 $ 5,959,428
------------- ------------- --------------
DIVIDEND POLICY
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.
13
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
13
1998 are derived from the financial statements included elsewhere in this
Prospectus that has been audited by our independent certified public
accountants, Crouch Bierwolf & Chisolm, and is qualified by reference to such
financial statements and notes related thereto. The financial data for the
three month period ended March 31, 1998 and 1999 are derived from our
unaudited financial statements included elsewhere in this prospectus and, in
the opinion of our management, includes all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the information set
forth. The results for the three months ended March 31, 1999 are not
necessarily indicative of the results that we can expect for the full year.
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".
Three Months Ended
Year Ended December 31, March 31,
--------------------------- --------------------------
1997 1998 1998 1999
------------- ------------- ------------ -------------
Revenues:
Product Sales $ 16,034 $ 32,884 $ 10,560 $ 2,535
Contract research revenues, royalties and
license fees 8,450 49,794 28,222 7,562
------------- ------------- ------------ -------------
Total revenues 24,484 82,678 38,782 10,097
Operating costs and expenses:
Cost of products sold 806 15,864 82 22,714
Research and development - - - -
Selling, general and administrative 344,848 528,841 35,921 407,797
Non-recurring charges - - - -
------------- ------------- ------------ -------------
Total costs and expenses 345,654 555,705 36,003 430,511
------------- ------------- ------------ -------------
Income (loss) from operations (321,170) (462,027) 2,779 (420,414)
Interest expense 17,125 28,158 8,5861 3,018
Interest income and other, net 3,077 7,276 - 26,187
------------- ------------- ------------ -------------
Income (loss) from continuing operations
before income taxes and minority interest (335,218) (482,909) (5,807) (397,245)
Minority interest - - - -
Income tax expense (benefit) - - - -
------------- ------------- ------------ -------------
Income (loss) from continuing operations (335,218) (482,909) (5,807) (397,245)
Income (loss) from discontinued operations - - - -
------------- ------------- ------------ -------------
Net income (loss) $ (335,218) $ (482,090) $ (5,807) $ (397,245)
============= ============= ============ =============
Per Common Share Amounts:
Income (loss) from continuing operations $ (0.61) $ (0.08) - -
Income from discontinued operations - - - -
------------- ------------- ------------ -------------
Net income (loss) $ (0.61) $ (0.08)
============= =============
Shares used in computing per share amounts 545,535 6,100,679
Balance Sheet Data:
Cash and cash equivalents $ 10,369 $ 425,702 $ 4,769 $ 5,745,679
Total Assets 139,928 623,617 135,278 23,213
Long-term obligations, including current
portion 342,272 147,620 339,112 6,122,467
Redeemable, convertible preferred shares - - - -
Accumulated deficit (335,218) (818,127) (341,025) (1,215,372)
Shareholders' equity (deficit) (208,943) 441,084 (214,750) 5,951,790
See Notes to Financial Statements for information concerning the computation
of per share amounts.
14
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, including those factors set forth under the section entitled "Risk
Factors" and elsewhere in this Prospectus.
Overview. We are developing and intend to market a data system search
engine and focused portal sites that can be used to provide efficient,
reliable search results in Internet and intranet environments. We will market
our portal site, coupled with our search engine, under the brand name
"Spyhop." It uses proprietary intellectual property rights that we either own
or license. In early 1999, we conducted beta tests of Spyhop, and are
currently responding to the recommendations and concerns that we received in
the test. We anticipate being able to launch Spyhop commercially in the
fourth quarter of 1999. We intend to initially target the business and
professional segments of the Internet market as a provider of portal search
services and through licensing arrangements with other portal or web site
providers.
We have devoted most of our resources since inception in November 1996
to the research and development of Spyhop and the development of brand
awareness of "Spyhop." We are a development stage company, have generated
only nominal revenues to date, and, as of March 31, 1999, we had an
accumulated earnings deficit of approximately $1,214,000. 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. 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 we currently use.
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 on a common share equivalent basis. 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, 1997 and 1998 and for the
interim period ended March 31, 1999.
Years Ended December 31, Interim Period Ended
1997 1998 March 31, 1999
---------- ---------- ------------------
Revenues $ 24,484 $ 82,678 $ 10,097
Cost of Revenues 806 15,864 22,714
----------- ---------- --------------
15
Gross Profit $ 23,678 $ 66,814 $ (12,617)
Research & Development 66,988 92,744 89,817
General & Administrative 261,741 402,110 266,668
Sales & Marketing 10,845 33,987 51,312
Total Operating Expense 344,848 528,841 407,797
Operating Income/Loss (321,170) (462,027) (420,414)
Interest Expense (17,125) (28,158) 3,018
Interest Income 2,877 7,276 26,186
Net Profit (loss) $ (335,218) $(482,909) $ (397,245)
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 should
continue to decrease as we switch our development and marketing emphasis to an
Internet version of Spyhop. Accordingly, we believe a comparison of the
results of our operations on a period-by-period basis is of little benefit.
We expect that, as we implement our business plan, our revenues will grow,
along with the burdens generally associated with larger revenues, including
increased burdens on our managerial, accounting and technical personnel.
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 be reasonably even from quarter to
quarter. We believe they will come initially from advertising sales and from
"shared advertising revenues" at associated sites. We believe we will
generate additional revenues through our licensing/partnership arrangements
that use Spyhop in other commerce-related areas over the Internet. As we move
into the corporate intranet market, we believe we will generate additional
revenues from licensing agreements and maintenance agreements with those
corporate clients. We expect slightly greater variation in quarter to quarter
results as we move into the corporate intranet arena.
Liquidity and Capital Resources. Since our inception, we have
funded our cash requirements through debt and equity transactions. We have
used the funds from those transactions to fund our investments in, and
acquisition of, our technology, to provide working capital and for general
corporate purposes, including paying expenses we incurred in connection with
our development of Spyhop. As of the year ended December 31, 1997, we had
current assets of $139,928, and total liabilities of approximately $348,871,
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. See "Certain Relationships
and Related Transactions."
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 approximately $182,000, resulting in a net worth of
$441,084, including an operating loss of $482,909 for the year ending December
31, 1998. In February, 1999, we received the first cash portions ($6.1
million) from our sale of our Series A Preferred Stock to eight investors. In
March, 1999, we received the last of the proceeds from the sale of those
shares (in the amount of $200,000). Our expenses for the offering totaled
$393,000, resulting in net proceeds to us of $5,907,000. As a result, as of
March 31, 1999, we had total assets of $6,122,467. Our total liabilities as
of that date were $169,522, and our stockholders' equity was $5,952,925. Our
cash or cash equivalents at March 31, 1999 totaled $5,745,659.00.
16
A summary of our audited balance sheets for the years ended December 31,
1997 and 1998 and our interim statements for March 31, 1999 are as follows:
Years Ended December 31, Interim Period Ended
1997 1998 March 31, 1999
----------- ----------- --------------------
Cash/Cash Equivalents $ 10,369 425,702 5,745,659
Current Assets 15,369 425,702 5,813,376
Total Assets 139,928 623,617 6,122,447
Current Liabilities 321,307 170,919 149,309
Total Liabilities 348,871 182,533 169,522
Total Stockholder Equity (208,943) 441,084 5,952,925
Total Liabilities & Stockholders
Equity 139,928 623,617 6,122,447
With the infusion of cash from our sale of the Series A Preferred Stock,
we believe we have the resources to continue our product development efforts
and to initiate our sales, marketing and promotional activities for Spyhop.
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 (i) our ability to negotiate favorable prices for purchases
of necessary portal components, (ii) the number of our customers and
advertisers, (iii) the services for which they subscribe, (iv) the nature and
success of the services that we offer, (v) regulatory changes, and (vi)
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.
Year 2000 Compliance. We have completed a review of our
computer systems and operations to determine the extent to which our business
will be vulnerable to potential errors and failures as a result of the "year
2000" problem. The year 2000 problem results from the use of computer
programs which were written using only two digits (rather than four digits) to
define applicable years. On January 1, 2000, any clock or date recording
mechanism, including date-sensitive software which uses only two digits to
represent the year, could recognize a date using "00" as the year "1900,"
rather than the year "2000." This could result in system failures or
miscalculations, causing disruptions of operations, including, among other
things, a temporary inability to process
17
transactions, send invoices, provide services or engage in similar activities.
These failures, miscalculations and disruptions could have a material adverse
effect on our business, operations and financial condition.
We have concluded, based on our review of our operations and computer
systems, that our significant computer programs and operations will not be
materially affected by the Year 2000 problem, and that we can modify or
replace the programs that will be affected by the end of 1999 at a cost which
will not be significant. Under a reasonably likely worst case scenario,
however, our computer systems and/or operations could be materially affected
by the Year 2000 problem.
In addition to our own properties and computer systems, we rely on
operations and computer systems of third-party customers, financial
institutions, vendors and other parties with or through which we conduct
business (such as Internet service providers and the owners of communications
backbones utilized by us).
We have prioritized our year 2000 efforts in an effort to protect, to
the extent possible, our business and operations. Our first priority will be
to protect our critical operations such as those systems and applications that
we use to provide search engine capabilities to various Internet and intranet
customers from incurring material service interruptions that could occur as a
result of the year 2000 transition. To this end, we have attempted to
identify any element within our business operation (including elements
relating to third party relationships) that could be materially impacted by
the year 2000 date change, and have attempted to determine the risks to our
continuing business operations as a result of an adverse effect resulting from
that date change.
We generally require our key vendors and suppliers to warrant they are
year 2000 ready. We have purchased most of our mission-critical systems from
such third-party vendors. We have attempted to identify the vendors and
third-parties with which we have contractual relationships which may not be
year 2000 compliant by the end of 1999, and we have adopted contingency plans
which we believe will mitigate any adverse impact to our business operations
resulting from those vendors' or third parties' inability to perform their
contractual obligations. Our contingency plans include preparing and using
backup copies of our financial records, determining the availability and
reliability of alternate network and backbone communication systems, and
scheduling additional phone center, repair and administrative personnel to be
on hand on the transition date.
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.
BUSINESS
The following description of our business should be read in conjunction
with the information included elsewhere in this Prospectus. This section
contains certain forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
discussed in the forward-looking statements as a result of certain of the risk
factors set forth below and elsewhere in this Prospectus.
Introduction. We are engaged in the development and marketing of next-
generation focused Internet portal sites coupled with data harvesting, text
indexing, retrieval and analysis software which we market under the brand name
"Spyhop." Spyhop allows Internet and intranet users to search single web
sites, search multiple web sites concurrently, or search substantial portions
of an entire data network.
Spyhop is based on technology originally developed at Brigham Young
University ("BYU") by a team that included educational psychologists, computer
programmers and logic experts. Their goal was to create a software product
that would assist scientists and scholars in research and teaching. Since
1986, the basic Spyhop technology has been used in research projects in over
20 countries and in more than 15 languages. In February 1997, we purchased an
exclusive, worldwide license to market, modify, develop and manufacture the
basic Spyhop technology. Since then, we have augmented the basic Spyhop
technology by adapting it for use on the Internet and
18
adding additional search and display functions. We believe Spyhop is well
suited to help persons efficiently sift through large amounts of data for
relevant information.
We believe Spyhop technology can be used for data searching, retrieval
and indexing on both the Internet and Internet protocol-based intranets. As
described in more detail below, we believe Spyhop will be employed primarily
by business researchers and professionals on the Internet. The use of the
Internet has grown substantially since it was first commercially introduced in
the 1990s, resulting in concomitant increases in the number of advertiser and
product service offerings accessible by the Internet.
The rapid growth of the Internet and intranets, and the proliferation of
Internet sites, has increasingly challenged consumers, content providers and
advertisers to effectively reach one another. Consumers are generally
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 both large interested audiences and target groups.
Many competitors have developed products, including portals, which they
believe make the task of finding relevant data, information, advertising or
products on the Internet and other data systems easier and less time
consuming. These portals generally return a list of web sites without showing
which web sites may be relevant to the actual search query. In some cases,
these portals return lists of hundred or thousands of potential documents for
further review. As a result, Internet and intranet users may spend
substantial time searching through the list of returned documents to find out
which documents are relevant. This generally requires the user to call up the
reference page and either visually scan the page or conduct another page
search to find the specific reference in question.
Spyhop provides advanced search capabilities that create a search result
metaphor we refer to as "what you see is what you get." In a Spyhop search
result a portion of the computer screen is devoted to an information summary
that is the equivalent of a table of contents or index. Each entry in the
table of contents represents an Internet site or page, and the entry shows the
user how many references match the search criteria on each web site or page.
By clicking on an entry in the table of contents or index, users can see the
search results in the actual surrounding context of the document and determine
more quickly and efficiently if the web site provides the information they
want.
Spyhop is based on a computer algorithm that takes search result data
and organizes it in terms which we believe are familiar to the average person,
such as tables of contents or indices. Spyhop can also sort, analyze, and
manipulate search results to make it easier to find what the researcher is
looking for. Spyhop uses a linguistic analysis technique, formerly known as
"collocation" and commonly referred to for the benefit of consumers as
"neighbors," that assists users in quickly determining which web sites and
pages contain needed, relevant information. Spyhop also assists users in
properly constructing a search request, thereby avoiding the common problem of
getting too many responses to a search that was ambiguously phrased.
Spyhop Markets. We believe Spyhop will be used primarily by
business researchers and professionals on the Internet. The Internet is an
interactive worldwide network of computers and data systems that allows 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 the Internet protocol ("IP"), which is 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.
International Data Corporation estimates that the Internet user population
will grow from approximately 35 million in 1996 to approximately 160 million
by 2000. 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. For example, Jupiter Communications has estimated
that approximately $340 million was spent on Internet and online advertising
in 1996, and that Internet and online advertising will grow to be
approximately $5 billion by the year 2000.
19
As the Internet developed, corporations, universities and other large
organizations began developing private data networks to serve the needs of
their organizations. Generally, these networks are custom-built, and use
proprietary protocols to connect specific communities or groups of users
through local area networks and wide area networks. Private networks are
generally expensive to build and maintain, and the proprietary nature of the
networks and their applications sometimes makes it difficult to manage and
exchange information between them. In addition, these networks typically use
leased telephone lines, modem banks and other proprietary systems to connect
geographically distinct parts of the same private network (such as connecting
a field office in Boise, Idaho with a home office in New York City), to link
separate private networks and to permit access by remote individual users.
Many organizations have begun to create intranets that adopt IP. Because the
Internet and intranets are increasingly using the same protocols, intranets
can provide users with substantially increased access to information and other
users, both inside an organization and, via the Internet, throughout the
world. As a result, a July 1996 Forrester Research survey of fifty Fortune
1000 companies reported that 64% of the respondents were currently using
intranets, and another 32% were building intranets. According to
International Data Corporation, the market for intranet software products and
services in the year 2000 will exceed $3 billion, up from approximately $276
million in 1995, and the estimated expenditures for intranet software products
and services will exceed $6 billion in the year 2000, up from approximately
$260 million in 1995.
The adoption of IP on private networks to create intranets and the
increasing use of the Internet to link private networks have created a need
for location and platform independent software products and services that
integrate all levels of the workplace and allow users to quickly and
efficiently obtain relevant and useful information. Currently, solutions for
searching and retrieving information from data networks generally involves the
use of catalogs, search services or other specially designed applications. We
believe these tools generally lack sufficient speed, accuracy and
comprehensiveness, and can be difficult to use. In many cases, currently-used
portals and information retrieval devices produce search results that do not
allow the user to easily determine if any particular search result is relevant
to the search query.
Our Solution. The basic Spyhop technology, originally called
"WordCruncher," was developed on the campus of BYU, a non-profit corporation
and educational institution located in Provo, Utah. In the early 1980's, Dr.
Monte Shelley, an educational psychologist, and several professors and
research scholars at Brigham Young University began to design a software
product to assist them with their research and teaching. Their efforts
produced a software program that generates a detailed index of documents of
almost any size. This index included the exact location of each word found in
the search document and its relationship to other words and phrases. The
software also allowed users to retrieve full texts and determine logical
connectors, frequency distribution and collocation. Because they worked with
scholars from around the world, the development team also designed the
software to provide multiple language support capabilities. The resulting
technology has been used in research projects in over twenty countries and in
over 15 languages. In 1997, we purchased the exclusive, worldwide rights to
this search technology, which we augmented by adding technology from another
search engine and adapted for use on the Internet under the brand name
"Spyhop."
Spyhop currently incorporates the following features:
Fast, In-Context Display of Search Results. When an Internet user
initiates a search on other portals, results are returned in the form of a
list of web sites that may or may not contain relevant information. Before
the user knows for certain which web sites are relevant, he must call up the
referenced page and either visually scan the page or do a "page search" to
find the specific reference to the search term. During a Spyhop search,
however, one portion of the screen is devoted to the equivalent of a table of
contents. Each entry in the table of contents represents an Internet site,
page, category or subcategory the entry shows the user how many references
match the search criteria on each web site or page. By clicking on an entry
in the table of contents, the user can see the search results with the actual
surrounding context; in other words, "hit-in-context." With this type of
display, the user can preliminarily determine if a web site provides the
information he wants without having to link to the web site first.
New Information Presentation Model. As part of our efforts to
make Spyhop search results more familiar, Spyhop takes search results data and
organizes it in terms which we believe are familiar to the average
20
person (for example, in the form of a table of contents or index). Spyhop
also provides tools that sort, analyze and manipulate search results to make
it easier to find what the user is looking for. This conceptual "bridge-
building" is useful not only for experienced Internet users, but for the
increased number of new Internet users.
Collocation / Advanced Proximity Analysis (Neighbors). Many
people who search the Internet do not receive the search results they want,
in part because they use an ambiguous search. One of the most common results
of ambiguously constructed searches is the tendency to get far too many
possible search references, or "hits." Spyhop uses a linguistic analysis
technique, formally known as "collocation" and commonly referred to as
"neighbors," to help users quickly zero in on web sites or pages which contain
relevant information.
Relevance. Some portals rank search results based on factors that
may have little or no relevance to the data the user is seeking. For example,
at least one widely-used portal displays search results based, in part, on the
fees paid to the provider of the portal. In contrast, Spyhop uses pre-
computed document ranking, in conjunction with term location, frequency and
distribution feature, to determine the most relevant hits for a given search
and sort these to the top of the list the user sees.
Speed of Engine / Scalability. We believe that two of the primary
requirements for a successful portal are speed and scalability. "Speed"
refers to speed of indexing, and the speed of returning search results to
users. "Scalability" refers to the ability of the portal to cope with the
vast amount of data on the data base being searched. Spyhop uses detailed
indexing to handle rapid searching of very large data bases and is designed
for scalable clustered systems to achieve near linear performance increases as
we add additional hardware.
Our Business Objectives and Strategy. We intend to be the leader in the
development and marketing of specialized portal sites for the Internet and
intranets. Initially, we intend to focus our business efforts on the
continued development and marketing of Spyhop for the Internet, with an
emphasis on the business and professional segments of that market. We believe
Internet users in those market segments typically spend more money on Internet
services, software and hardware and that, therefore, they are a significant
target for advertisers. According to Zona Research, focused portals and
directories will have an increased impact on the revenues and advertising
expenditures on the Internet, and 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. By focusing our target market on the business and professional users
segment of the Internet market initially, we believe we will be able to more
quickly generate revenues on our own site and associated sites through better
advertising and applications of other e-commerce applications that use Spyhop.
Based on the results of our marketing effort in the business and professional
Internet market segments, we intend either to focus our long-term business
efforts on other specialized segments of the Internet or more aggressively
pursue the development of products and services for the intranet segments of
the data services industry.
We intend to achieve our business objectives using the following
strategies:
We Will Launch and Maintain Our Own Web Site. We currently
maintain a web site at http:\\www.wordcruncher.com, where users can preview
descriptions of our Company and Spyhop. In February, 1999, we opened our web
site as a "beta" for evaluating Spyhop's capabilities and consumer reaction.
We discontinued the beta site in March 1999. While it was in operation, we
received up to 25,000 hits per day. We intend to use the data we obtained
from our beta test to further refine Spyhop's capabilities. We also intend to
use our web site as the primary site for third parties to use Spyhop. We will
provide the use of Spyhop to the visitors to our web site for free.
We Intend to Increase Spyhop Brand Recognition. We believe brand
recognition on the Internet will be crucial to effectively marketing Spyhop.
We are offering Spyhop without charge to web users as a showcase and to
establish ourselves as a premier provider of services on the Internet. We
also plan to make available additional free services on the Internet to
showcase our technology and to extend awareness of the Spyhop brand.
21
We Will Use Value Added Links. We intend to develop increased
Spyhop brand recognition in the marketplace by entering into licensing
agreements with major Internet content providers to deliver Spyhop branded
Internet search service results to users through "value added links" on those
other providers' web sites.
We Intend to Maximize Advertising Revenue. Although we expect to
earn revenue from licensing through value added link agreements, we expect
that the primary source of our revenues will be from advertising generated on
our portal site. We also expect to conduct a significant portion of our
business over the Internet, including marketing, communications, partner
registration, sales, software distribution and partner and customer support.
We intend our web page to be a "front door" to a menu of business and
professional oriented activities, and to offer users an interactive multi-
media environment where they can access information about our products,
download software products, receive support and conduct commercial
transactions with us.
Sales and Marketing. Our sales strategy is to achieve broad
market penetration by employing multiple distribution channels, including
direct sales over the Internet and sales through our own sales organization,
value added resellers, Internet service providers, telecommunications
companies, original equipment manufacturers and independent software vendors.
We anticipate that, by the end of 1999, we will have an 8 person sales and
marketing team that will market Spyhop directly to advertisers and content
providers. Our primary sales tool will be our web site, which will
demonstrate, promote and sell software products that can be downloaded
directly to the user's computer.
Customer Support and Services. We believe a high level of customer
support and service for products will be critical to our success. Our
principal customer support focus will be to provide training, documentation
and technical support at our web site to persons using Spyhop.
Competition. Our markets are new, very competitive and subject to
rapid technological change. We face competition in the overall
Internet/intranet software market, as well as in each of the market segments
where Spyhop will compete. 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 provide or have announced intentions to provide
software products based on Internet protocols and which are designed as
portals in either the Internet or intranet markets. In particular, Spyhop
will face competition from AltaVista, Excite, Hotbot, Infoseek, Lycos, Yahoo!,
Ask Jeeves and Open Text. A number of the companies offering these portals
have been offering services on the Internet for a number of years (although,
not to focused Internet segments), so the increased use and visibility of
Spyhop will depend, in large part, on our ability to build and host a large
web index as the web grows in size while maintaining operational performance
levels. We also believe it will be essential for us to develop long-term
business alliances with parties with which we can enter into value added link
contracts. 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 changes in the Internet and
intranet markets.
We are aware of several other large and small software developers that
are focusing significant resources on developing and marketing software
products and services that will compete with Spyhop. Some of our current and
potential competitors may bundle their products with other software or
hardware, including operating systems and browsers, in a manner that may
discourage users from purchasing or using our products and services. We may
not be able to compete effectively with current and future competitors.
Product Development. Our current product development efforts are
focused on post-beta test adjustments to Spyhop. These adjustments include
revisions related to the functionality, speed and interface of our portal
site. Based on our current estimates, we believe that we will be able to
launch Spyhop on a production basis in the fourth quarter of 1999.
We intend to actively support industry standards and, if they are
commercially feasible, incorporate new standards-compliant features into
Spyhop as they become available. Some of the technology we use was developed
22
by third parties and then licensed to us. We have, however, developed
significant additions to this technology internally and, to date, have spent
over $1.25 million in research and engineering activities.
Our ability to successfully develop and release new products and
enhancements to Spyhop 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 (the "License") 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) 544,761 shares of Common Stock for the License. The
WordCruncher technology constitutes the core search technology we use in our
"Spyhop" product.
The term of the 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 will be 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.
Petersen Intellectual Property Purchase. We purchased certain
intellectual property from Jeffrey B. Petersen in December 1998. The
intellectual property consists of software and source codes that we use to
build databases, a boolean search engine for searching databases, a
dynamically updatable search engine, and certain utility/sample programs. We
paid $50,000 for the intellectual property by delivering $15,000 in cash and
13,000 shares of Common Stock to Mr. Petersen.
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 the 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
$5,907,000 from the sale. In connection with the transaction, we also issued
both the purchasers and the placement agent the Warrants 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. See "Transactions Effected in Connection With the Offering,"
"Description of Capital Stock" and "Principal and Selling Stockholders."
Columbia Financial Group Services Agreement. In December 1998, we
entered into a services agreement with Columbia Financial Group ("Columbia").
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. As of March 31, 1999, Columbia had earned warrants to purchase 50,000
shares.
Corporate Development. Our predecessor in interest was incorporated
in the State of California on May 2, 1997, as Dunamis, Inc. ("Dunamis").
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 for 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. 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
23
time of the merger, WordCruncher Publishing Technologies, Inc. held the rights
to a significant portion of the intellectual property we currently use.
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
Untied States and other countries. Spyhop is based, in part, on a United
States patent issued to BYU. We have an exclusive world-wide license to that
patent. If either we or BYU fail to file, prosecute or maintain the patent,
we could be severally damaged. We intend to file additional patent
applications relating to our technology, products and processes as the need
arises. We will also direct BYU to file any additional patent applications
relating to the technology we have licensed from it. 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 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. We have nineteen (19) employees. 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.
Properties. We lease 3,600 square feet of administrative, office and
developmental space at the Town Square Professional Plaza in Draper, Utah
84020. The term of the lease is from March 15, 1999 until March 31, 2002.
The current annual rental for the space is $44,932 ($3,744 per month), which
we believe is typical for similar premises in the area.
Legal Proceedings. We are not a party to any proceeding or threatened
proceeding as of the date of this Prospectus.
24
MANAGEMENT
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 45 President, Chief Executive Officer, Director
James W. Johnston 46 Chairman of the Board, Executive Vice President,
Director
Kenneth W. Bell 49 Senior Vice President, Chief Financial Officer,
Treasurer, Secretary, 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
Spyhop technology, including the Constitution Papers (DC 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.
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 project
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.
25
Board of Directors. Our Articles of Incorporation provide for a Board
of Directors consisting of 3 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 intends to
establish two committees, the audit committee and the compensation committee.
Each of these committees will 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 will be 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 will also
review 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. We are is currently seeking one or more persons to add as
outside directors to the Board of Directors, and we anticipate that one or
more of the new members will be appointed as a member of the audit committee.
The compensation committee will be 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 will also consult with our management regarding
pension and other benefit plans, and our compensation policies and practices
in general. We are currently seeking one or more persons to add as outside
directors to the Board of Directors. We anticipate that one or more of the
new outside directors will be appointed as a member of the compensation
committee.
Compensation of Directors. We do not have any standard arrangement
for compensating our directors for the services they provide to the Company in
their capacity as directors, including services for committee participation or
for special assignments.
Employment Agreements. We have adopted a policy of entering into
employment agreements with our senior management, and have entered into such
agreements with Messers. Lunt, Bell, Johnston, and Stoop. The terms of the
employment agreements for Messers. 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
Messers. 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 Mr. Stoop. The
initial term of the agreement is two years and it provides for a base salary
of $66,000 (increased to $84,000 effective April 1, 1999). The agreement also
provides for standard health and medical insurance, incentive bonuses,
disability coverage and reimbursement for reasonable business expenses. In
addition, Mr. Stoop received options to acquire 300,000 shares of Common Stock
vesting over a three year period.
We may terminate the employment contracts for cause (which is 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, Messers. Lundt, 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 (i) 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; (ii) any realignment of the Board of Directors or
change in officers due to shareholder action; (iii) our sale by 30% or more of
our assets; or (iv) 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.
26
If Mr. Stoop 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.
Limitations of Liability and Indemnification. Our Articles of
Incorporation limit the personal liability of our directors and officers for
monetary damages to the maximum extent permitted by Nevada law. Under Nevada
law, these limitations include limitations on monetary damages for any action
taken or failed to be taken as a director or officer except for (i) an act or
omission that involves intentional misconduct or a knowing violation of a law,
or (ii) payment of improper distributions. Nevada law also permits a
corporation to indemnify any current or former director, officer, employee or
agent if the person acted in good faith and in a manner in which he reasonably
believed to be in (or not opposed to) the best interest of the corporation.
In the case of a criminal proceeding, the indemnified person must also have
had no reasonable cause to believe his conduct was unlawful.
Our by-laws provide that, to the fullest extent permitted by our
Articles of Incorporation and the Nevada Business Corporation Act, we will
indemnify (and advance expenses to) our officers, directors and employees in
connection with any action, suit or proceeding (whether civil or criminal) to
which those persons are made party by reason of their being our director,
officer or employee. Any such indemnification would be in addition to the
advancement of expenses.
At present, there is no pending litigation or proceeding involving any
of our directors, officers, employees or agents where indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding which would result in a claim for such indemnification.
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
$100,000 (collectively, the "named executive officers") during each of the
past two fiscal years. During the fiscal year ended December 31, 1996, none
of our officers received any cash compensation, bonuses, stock appreciation
rights, long-term compensation, stock awards or long-term incentive rights:
Summary Compensation Table
---------------------------
Annual Compensation All Other
--------------------------- ---------------
Name and Principal Position Fiscal Year Salary($) Compensation
- ----------------------------- ------------- ------------- ---------------
M. Daniel Lunt 1998 $102,000 (1) -
President, CEO, Director 1997 - -
James W. Johnston 1998 $102,000 (1) -
Chairman of the Board, 1997 - -
Executive Vice President
Kenneth W. Bell
Senior Vice President, CFO 1998 $102,000(1) -
Director 1997 -
Timothy J. Riker 1998 $84,000 (2) $94,250 (3)
Vice President of Technology 1997 - -
Peter T. Stoop 1998 $66,000 (2) -
Vice President of Sales & 1997 - -
Marketing
- --------------------------------------------
27
(1) Represents annual salary. Each of Messers. Lunt, Johnston and Bell joined
us effective July, 1998.
(2) Represents annual salary. Mr. Riker and Mr. Stoop joined us in September
1998. Mr. Stoop's annual salary was increased to $84,000 effective April
1999. Mr. Riker left us effective May 1, 1999.
(3) Represents the value of Common Stock awards to the person indicated. We
valued the 29,000 shares we awarded Mr. Riker at $3.25 at the time of their
grant.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of March 31, 1999, the beneficial
ownership of our outstanding Common Stock by (i) each person known by us to
own beneficially 5% or more of our outstanding Common Stock, (ii) each of our
executive officers, (iii) each of our directors, (iv) all executive officers
and directors as a group, and (v) the Selling Stockholders. Beneficial
ownership after this offering will depend on the number of shares actually
sold by the Selling Stockholders. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission 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 (a) the exercise of
vested options or warrants held by that person and that are exercisable within
60 days after March 31, 1999 or (b) the conversion of any Series A Preferred
Stock held by that person. 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.
Common Stock Beneficially Number of Common Stock Beneficially Owned
Name of Beneficial Owner Owned Prior to Offering(1) Shares Being After Offering (2)
and Relationship to Us Shares Percent Registered Shares Percent
- ------------------------ --------------- --------- -------------- ----------------- ------------
Officers and Directors:
- -----------------------
M. Daniel Lunt (3)
President, CEO, Director 1,798,383 15.1% 250,000 1,548,383 11.5%
James W. Johnson (4)
Chairman of the Board,
Executive V.P. 2,021,223 17.0% 250,000 1,771,223 13.2%
Kenneth W. Bell (5)
Senior V.P., CFO, Treasurer,
Secretary, Director 1,510,608 12.7% 250,000 1,260,608 9.4%
Peter T. Stoop
V.P. Marketing 5,000 * 5,000 - -
Timothy J. Riker(6)
V.P., Chief Scientist 29,000 * 29,000 - -
Martin Cryer
V.P. Product Development 10,000 * 10,000 - -
All Executive Officers and
Directors as a Group
(6 persons)(7) 5,374,214 45.2% 794,000 4,580,214 34.1%
Selling Stockholders :
- --------------------
Jeffrey Peterson
Consultant 13,000 * 13,000 - -
Mike Schouten
Marketing 5,000 * 5,000 - -
Robert Stevens
Programmer 5,000 * 5,000 - -
Universal Insurance
Consultant 25,000 * 5,000 20,000 *
28
Common Stock Beneficially Number of Common Stock Beneficially Owned
Name of Beneficial Owner Owned Prior to Offering(1) Shares Being After Offering (2)
and Relationship to Us Shares Percent Registered Shares Percent
- ------------------------ -------------- --------- -------------- ----------------- ------------
Shane Smit
Development 4,000 * 4,000 - -
Brett Bell
Marketing 2,000 * 2,000 - -
Alexis Lee
Support 2,000 * 2,000 - -
Shane Jackson
Accounting 2,000 * 2,000 - -
Andrew Blum
Consultant 3,690 * 3,690 - -
Mutual Ventures
Consultant 450,000 3.8% 100,000 350,000 2.6%
Capital Communications
Consultant 360,000 3.0% 100,000 260,000 1.9%
Columbia Financial Group
Consultant 100,000 * 100,000 - -
Tajunnisah Owesh(8)
Series A Preferred
Stockholder 541,281 4.5% 541,281 - -
Ohoud F. Sharbatly(8)
Series A Preferred
Stockholder 216,512 1.8% 216,512 - -
Mohammad A. Al-Quaiz(8)
Series A Preferred
Stockholder 216,512 1.8% 216,512 - -
Urban Development Est.(8)
Series A Preferred
Stockholder 108,256 * 108,256 - -
Yasser M. Zaidan(8)
Series A Preferred
Stockholder 108,256 * 108,256 - -
Khaled A. Almubarak(8)
Series A Preferred
Stockholder 45,512 * 45,512 - -
Gibraltor Worldwide, Inc.(8)
Series A Preferred
Stockholder 108,256 * 108,256 - -
Abdulwahhab A. Abdulwasea(8)
Series A Preferred
Stockholder 23,862 * 23,862 - -
Cardinal Capital Management(8)
Warrantholder 189,000 1.6% 189,000 - -
- -----------------------------------
* Less than 1% of the outstanding Common Stock.
(1) Percentage of beneficial ownership prior to offering is based on
11,877,002 shares of Common Stock outstanding as of March 31, 1999. See
"Summary" for a description of the calculation of the number of shares of
Common Stock outstanding.
(2)Percentage of beneficial ownership after offering is based on
13,434,449 shares of Common Stock. See "Summary". That figure assumes the
sale of all the Shares. The actual number of Shares sold may be less than the
total registered hereunder. See footnote number 7 below. See "Summary" for a
description of the calculation of the number of shares of Common Stock to be
outstanding.
(3)Mr. Lunt shares voting power and investment power with his wife, Lori
Lunt.
(4)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.
(5)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.
(6)Mr. Riker left us effective May 1, 1999.
29
(7)Assumes the matters set forth in footnotes 1 through 6.
(8)Under the terms of the Purchase Agreement, we are required to
register for the benefit of the holders of the Series A Preferred Stock and
the Warrants the number of Shares equal to twice the number of shares of
Common Stock those persons could acquire on the conversion of their Series A
Preferred Stock, plus the number of shares of Common Stock those persons could
acquire on exercise of the Warrants. The number of Shares set forth with
respect to such Series A Preferred Stock holders and Warrant holders reflects
twice the number of Shares that could be currently acquired upon the
conversion of the Series A Preferred Stock plus the number of shares they
could acquire on the exercise of the Warrants. We may issue the holders of
the Series A Preferred Stock and Warrants fewer than the number of Shares
reflected for them in the chart, depending on the market value of our Common
Stock on certain dates. See "Transactions Effected in Connection With the
Offerings" and "Description of Capital Stock."
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 Company. James Johnston, Kenneth Bell and Daniel
Lunt secured a $250,000 line of credit for our benefit and loaned us $50,000
(for a total of $300,000) in 1997. We subsequently drew down the entire line
of credit. 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 $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 $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 $14,000 in 1997. A portion of the loan ($5,000) was repaid by
offsetting amounts we otherwise owed Mr. Lunt, another portion ($5,000) was
repaid in cash, and the balance ($4,000) was paid to us in March 1999.
Intellectual Property Development Rights. We purchased certain
intellectual property from Jeffery Petersen in December 1998. In connection
with that transaction, Timothy Riker disclaimed any interest he had in the
property. Mr. Riker was involved in the early stages of the development of
the intellectual property, which was further developed by Mr. Petersen before
we purchased it.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have had no change in, or disagreements with, our principal
independent accountant during our last two fiscal years.
30
INTEREST OF NAMED EXPERTS AND COUNSEL
We are not aware of any expert or legal counsel named in this
Registration Statement who will receive a direct or indirect substantial
interest in the offering. Our counsel, Parsons Behle & Latimer, will pass on
the legality of the Shares to be issued pursuant to the conversion of the
Series A Preferred Stock and the exercise of the Warrants. Our financial
statements at December 31, 1998 and 1997, and for the periods ending then,
have been audited by Crouch, Bierwolf & Chisholm, as set forth in this report
at the end of this Prospectus, and are included in reliance on that report
given on the authority of that firm as experts in accounting and auditing.
PLAN OF DISTRIBUTION
We will not use the services of underwriters or dealers in connection with
the sale of the Shares. The Shares will be freely transferable, except for
the Shares issued to certain of the Selling Stockholders who are affiliates.
We will hold 1,557,447 of the Shares in reserve for the conversion of the
shares of Series A Preferred Stock and the exercise of the Warrants, as
defined below, pursuant to the terms of the Purchase Agreement.
The Selling Stockholders will offer and sell the Shares from time to
time. They will act as principals for their own accounts in selling the
Shares and may sell the Shares through public or private transactions, on or
off established markets, at prevailing market prices or at privately
negotiated prices. The Selling Stockholders will receive all of the net
proceeds from the sale of the Shares and will pay all commissions and
underwriting discounts in connection with their sale. Other than the exercise
price the Selling Stockholders may pay with respect to the exercise of the
Warrants, we will not receive any proceeds from the sale of the Shares.
The distribution of the Shares by the Selling Stockholders is not
subject to any underwriting agreement. We expect that the Selling
Stockholders will sell the Shares through customary brokerage channels,
including broker/dealers acting as principals (who then may resell the
Shares), in private sales, in transactions under Rule 144 under the Securities
Act, or in block trades in which the broker/dealer engaged will attempt to
sell the Shares as agent but position and resell a portion of the block as
principal to facilitate the transaction. We expect the Selling Stockholders
to sell the Shares at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or negotiated prices. The Selling
Stockholders may also pledge all or a portion of the Shares as collateral in
loan transactions. Upon any default by the Selling Stockholders, the pledgee
in the loan transaction would then have the same rights of sale as the Selling
Stockholders under this Prospectus. The Selling Stockholders may also
transfer the Shares in other ways not involving market makers or established
trading markets, including directly by gift, distribution or other transfer
without consideration, and upon any such transfer, the transferee would have
the same rights of sale as the Selling Stockholders under this Prospectus.
Finally, the Selling Stockholders and the brokers and dealers through whom
sales of the Shares are made may be deemed to be "underwriters" within the
meaning of the Securities Act, and the commissions or discounts and other
compensation paid to those persons could be regarded as underwriters
compensation.
From time to time, the Selling Stockholders may engage in short sales,
short sales against the box, puts and calls and other transactions in our
securities or derivatives of our securities, and will be able to sell and
deliver the Shares in connection with those transactions or in settlement of
securities loans. In effecting sales, brokers and dealers engaged by the
Selling Stockholders may arrange for other brokers or dealers to participate
in those sales. Brokers or dealers may receive commissions or discounts from
the Selling Stockholders (or, if any such broker dealer acts as agent for the
purchaser of those shares, from the purchaser) in amounts to be negotiated
(which are not expected to exceed those customary in the types of transactions
involved.) Brokers and dealers may agree with the Selling Stockholder to sell
a specified number of shares at a stipulated price per share and, to the
extent those brokers and dealers are unable do so acting as agent for the
Selling Stockholder, to purchase as principal any unsold Shares at the price
required to fulfill the broker dealer commitment to the Selling Stockholder.
Broker dealers who acquire Shares as principals may thereafter resell those
shares from time to time in transactions in the over-the-counter market or
otherwise and at prices and on terms then prevailing at the time of sale, at
prices then related to the then-current market price or negotiated
transactions and, in connection with those resells, may pay to or receive from
the purchasers of those Shares commissions as described above.
31
We will pay all expenses of registration incurred in connection with
this offering, but the Selling Stockholders will pay all brokerage commission
and other similar expenses incurred by them.
At the time a particular offer of the Shares is made, to the extent it
is required, we will distribute a supplement to this Prospectus which will
identify and set forth the aggregate amount of Shares being offered and the
terms of the offering. The Selling Stockholder may sell the Shares at any
price. Sales of the Shares at less than market price may depress the market
price of our Common Stock. Subject to applicable securities laws (and the
provisions of the Purchase Agreement, which limit the number of shares of
Series A Preferred Stock that their holders can convert to shares of Common
Stock at any one time), the Selling Stockholders will generally not be
restricted as to the number of Shares which they may sell at any one time, and
it is possible that a significant number of Shares could be resold at the same
time. The Selling Stockholder and any other person participating in the
distribution of the Shares will also be subject to applicable provisions of
the Securities Exchange Act of 1934 and the rules and regulations promulgated
under it, including, without limitation, Regulation M, which may limit the
timing of purchases and sales of the Shares by the Selling Stockholders and
any other person. Furthermore, Regulation M of the Securities Exchange Act of
1934 may restrict the ability of any person engaged in the distribution of the
Shares to engage in market- making activities with respect to the particular
shares being distributed for a period of up to 5 business days prior to the
commencement of the distribution. All of the foregoing may affect the
marketability of the Shares and the ability of any person or entity to engage
in market-making activities with respect to the Shares.
To comply with certain states securities laws, if applicable, the Shares
may be sold in those jurisdictions only through registered or licensed brokers
or dealers. In certain states the Shares may not be sold unless the Selling
Stockholder meets the applicable state notice and filing requirements.
Available Information. This Prospectus does not contain all of the
information set forth in the registration statement relating to the Shares.
For further information, reference is made to the registration statement and
such exhibits and schedules. Statements contained in the Prospectus
concerning any documents are not necessarily complete and, in each instance,
reference is made to the copies of the documents filed as exhibits to the
registration statement. Each such statement is qualified in its entirety by
that reference. Copies of these documents may be inspected, without charge,
at the Commission's Public Reference Room at 450 Fifth Street N.W.,
Washington, D.C. 20549 and at the Denver Regional offices of the Commission
located at 1801 California Street, Suite 4800, Denver, Colorado 80202. The
public may obtain information on the operation of the Public Reference Room by
calling the Commission at 1-800-SEC-0330. Copies of this material also should
be available through the Internet by using the Commission's EDGAR Archive, the
address of which is http://www.sec.gov.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital consists of 60,000,000 shares of Common Stock,
$0.001 par value, and 50,000 preferred shares, $0.01 par value, of which
15,000 shares have been designated as the Series A Preferred Stock. As of
March 31, 1999, there were 11,877,002 shares of Common Stock and 6,300 shares
of Series A Preferred Stock outstanding. An additional 375,000 shares of
Common Stock may be issued upon the exercise of outstanding share options (of
which 16,500 are presently exercisable), up to an additional 200,000 shares
may be issued to a third party upon the exercise of warrants being acquired by
that party in exchange fore services (of which, it has earned warrants for
50,000 shares to date), an additional 307,449 shares may be issued upon the
exercise of the outstanding Warrants as described below, and an additional
624,999 shares of Common Stock may currently be issued upon the conversion of
the Series A Preferred Stock into Common Stock. As of March 31, 1999, there
were approximately 143 holders of record of the Common Stock and eight record
holders of the Series A Preferred shares.
Common Stock. Subject to preferences that may be applicable to any
then outstanding preferred shares, holders of the Common Stock are entitled to
receive, pro rata, such dividends as may be declared by our Board of Directors
out of funds legally available for such purposes. In the event of our
liquidation, dissolution or winding-up, the holders of the Common Stock are
entitled to participate in all assets remaining after the payment of
liabilities and the liquidation preferences of any then-outstanding preferred
shares. The holders of the Common Stock have no preemptive rights and no
right to convert the Common Stock into any other securities. There are no
redemption
32
or sinking fund provisions applicable to the Common Stock, and all outstanding
Common Stock are fully paid and non-assessable. The holders of the Common
Stock are entitled to one vote for each share they hold of record on all
matters submitted to a vote of our stockholders. We have not paid, and do not
intend to pay, cash dividends on the Common Stock for the foreseeable future.
Preferred Shares. Our Articles of Incorporation grant our Board of
Directors the authority to issue up to 50,000 shares of preferred stock, and
to determine the price, rights, preferences, privileges and restrictions,
including voting rights of those shares without any further vote or action by
the stockholders.
In February 1999, our Board of Directors created 15,000 shares of the
Series A Convertible Preferred Stock, and sold 6,300 of these shares to
certain of the Selling Stockholders for $1,000 per share. The Series A
Convertible Preferred Stock gives its holders the right to receive $1,000,
plus 6% each year, before any of our other stockholders receive anything if we
are liquidated, but does not give their holders the right to vote in most
matters our stockholders are asked to consider and vote on. These shares of
preferred stock also give their holders a right to receive an annual 6%
dividend at the time the preferred shares are converted into Common Stock. We
have the option of paying the dividend in cash or in shares of Common Stock.
The Series A Preferred Stock will first be convertible into shares of Common
Stock on the day this registration statement becomes effective. Up to 20% of
the Series A Preferred Stock can be converted into Common Stock during each
month following the effective date of this Prospectus. In addition to the
right to convert the Series A Preferred Stock into Common Stock, we also gave
the holders of the Series A Preferred Stock a limited right to receive
additional shares of Common Stock at certain times if the market price for the
Common Stock is less than $12.096 per share. On the 10th trading day after
each of July 8, 1999, October 6, 1999 and February 13, 2000, the holders of
the Series A Preferred Stock are entitled to receive the number of Shares of
Common Stock equal to one-third of the purchase price for their Series A
Preferred Stock times the difference between the 10 day average closing price
of the Common Stock and $12.096, divided by the ten day trading average. For
example, if for the ten day trading period beginning July 8, 1999 our Common
Stock trades at $10 per share, the holders of the Series A Preferred Stock
would receive 43,667 additional shares of Common Stock ([$12.096-$10.00] x
[$6,300,000 / 3] / 10). The Series A Preferred Stockholders also receive
additional shares of Common Stock under certain other limited conditions,
including if the Securities and Exchange Commission places a stop order on
this registration statement.
We believe our Board of Directors' authority to set the terms of, and
our ability to issue, additional shares of preferred stock will provide
flexibility in connection with possible financing transactions in the future.
The issuance of additional preferred stock, however, could adversely affect
the voting power of holders of Common Stock, and the likelihood that the
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in our control.
However, we do not presently have any plan to issue any additional shares of
preferred stock.
Warrants. When we sold the Series A Preferred Stock to investors in
February and March, we also issued warrants (the "Warrants")to acquire shares
of our Common Stock. The Warrants were issued in three series Series A and
Series B, which the investors in the Series A Preferred Stock acquired, and
Series C, which we issued to a third party as a finder's fee for the
transaction. The Series A Warrants allow their holders to purchase up to an
aggregate of 71,069 shares of Common Stock at an approximate weighted average
exercise price of $33.93 per share (125% of the closing bid price for our
Common Stock on the day prior to the closing of the Purchase agreement (the
"Closing Price")) at any time through the fifth anniversary of the closing of
the Purchase Agreement (the "Warrant Expiration Date"). The Series B Warrants
allow their holders to purchase up to an aggregate of 47,380 shares of Common
Stock at an approximate weighted average exercise price of $40.71 (equal to
150% of the Closing Price) at any time through the Warrant Expiration Date.
The Series C Warrants allow its holder to purchase up to 189,000 shares of
Common Stock at an approximate weighted average exercise price equal to $28.25
per share (105% of the Closing Price) at any time through the Warrant
Expiration Date. If the holders exercise all of the Warrants, we would
receive a total of $9,591,960.
We have also entered into an agreement with a third party that is
providing investor relations services to us. Under the agreement, we will
grant that party warrants to acquire up to 200,000 shares of our Common Stock
at $5 per share. As of March 31, 1999, that party has earned warrants to
purchase 50,000 shares.
33
Registrations Rights. We have granted contractual registration rights
to the holders of the Series A Preferred Stock. Those persons are part of the
Selling Stockholders. The registration rights we granted those Selling
Stockholders are as follows:
(i) the "registerable securities" covered by the rights include any of
our shares of capital stock which are acquired on exercise of the Warrants or
the conversion of the Series A Preferred Stock. A particular security is no
longer a "registerable security" if it has been registered under a
registration statement filed under the Securities Act and disposed of pursuant
to the registration statement, the registration statement under the Securities
Act is no longer required for the immediate public distribution of that
security as a result of the application of the provisions of Rule 144 under
that act, or the security in question ceases to be outstanding. "Registerable
Securities" also includes all securities acquired as a result of stock splits,
stock dividends, reclassifications, recapitalizations or similar events
relating to those securities.
(ii) Subject to certain limitations, we were obligated to prepare and
file with the Securities and Exchange Commission, on or before April 30, 1999,
a registration statement (under the Securities Act) in order to permit a
public offering sale of the registerable securities under the Securities Act.
The holders of the Series A Preferred Stock waived the deadline for the filing
of the registration statement from April 30, 1999 through the date hereof. We
are also obligated to use our best efforts to cause a registration statement
to become effective on or before June 30, 1999. This Prospectus is a part of
the registration statement contemplated by the registration rights.
(iii) We are required to maintain the registration statement, or a
post-effective amendment, until the earlier the date of all the registerable
securities have been sold pursuant to the registration statement, the date the
holders of those share receive an opinion of counsel that the registerable
securities may be sold under the provisions of Rule 144 without limitation, or
five years after the date the holders of the Series A Preferred Stock first
subscribed for their shares.
(iv) We are obligated to pay all fees, disbursements and out-of-pocket
expenses and costs connected with the preparation and filing of the
registration statement and complying with applicable securities and Blue Sky
Laws (including, without limitation, attorneys fees). The holder of the
shares subject to the registration statement are obligated to bear the costs,
pro rata, of any underwriting discounts and commissions, if any, applicable to
the registered securities being registerable, as well as the fees of their own
counsel.
(v) If this registration statement was not filed with the Securities
Exchange Commission on or before April 30, 1999, or is not declared effective
by the Securities and Exchange Commission on or before June 30, 1999 we are
obligated to pay the holders of the Series A Preferred Stock, as liquidated
damages for that failure (and not as a penalty), 2% of the purchase price of
the then outstanding shares of Series A Preferred Stock for each thirty
calendar day period until the registration statement is filed and/or declared
effective. We would be required to pay the liquidate damages in cash.
We have also granted registration rights to Messers. Lunt, Johnston and
Bell under the terms of their employment contracts. Those rights include both
demand and "piggyback" rights.
Anti-Takeover Effective Nevada Law In Certain Provisions. Nevada law
provides that any agreement providing for the merger, consolidation or sale of
all or substantially all of the assets of a corporation be approved by the
owners of at least the majority of the outstanding shares of that corporation,
unless a different vote is provided for in our Article of Incorporation. Our
Articles of Incorporation do not provide for a super-majority voting
requirement in order to approve any such transactions. Nevada law also gives
appraisal rights for certain types of mergers, plans of reorganization, or
exchanges or sales of all or substantially all of the assets of a corporation.
Under Nevada law, a stockholder does not have the right to dissent with
respect to (a) a sale of assets or reorganization, or (b) any plan of merger
or any plan of exchange, if (i) the shares held by the stockholder are part of
a class of shares which are listed on a national securities exchange or the
NASDAQ National Market Systems, or are held of record by not less than 2,000
shareholders and (ii) the stockholder is not required to accept for his shares
any consideration other than shares of a corporation that, immediately after
the effective time of the
34
merger or exchange, will be part of a class of shares which are listed on a
national securities exchange or the NASDAQ National Market System, or are held
of record by not less than 2,000 holders.
The Nevada Private Corporation Law also has three provisions designed to
deter take-over attempts:
Control Share Acquisition Provision. Under Nevada law, when a person
has acquired or offers to acquire one-fifth, one-third or a majority of the
stock of a corporation, stockholders meeting must be held after delivery of an
"offerors" statement, at the offerors expense, so that the stockholders of the
corporation can vote on whether the shares proposed to be acquired (the
"control shares") can exercise voting rights. Except as otherwise provided in
a corporation's Articles of Incorporation, the approval of the majority of the
outstanding stock not held by the offerors is required so that the stock held
by the offerors will have voting rights. The control share acquisition
provisions are applicable to any acquisition of a controlling interest, unless
the Articles of Incorporation or by-laws of a corporation in effect on the
tenth day following the acquisition of a controlling interest by an acquiring
person provides that the control share acquisition provisions do not apply.
We have has not elected out of the control share acquisition provisions of
Nevada law.
Combination Moratorium Provision. Nevada law provides that a
corporation may not engage in any "combinations," which is broadly defined to
include mergers, sales and leases of assets, issuances of securities and
similar transactions with an "interested stockholder" (which is defined as the
beneficial owner of 10% or more of the voting power of the corporation) and
certain affiliates of their associates for three years after an interested
stockholder's date of acquiring the shares, unless the combination or the
purchase of the shares by the interested stockholder is first approved by the
Board of Directors. After the initial three-year period, any combination must
still be approved by majority of the voting power not beneficially owned by
the interested stockholder or the interested stockholders affiliates or
associates, unless the aggregate amount of cash and the market value of the
consideration other than cash that could be received by stockholders as a
result of the combination is at least equal to the highest of: (a) the highest
bid per share of each class or series of shares, including the common shares,
on the date of the announcement of the combination or on the date the
interested stockholder acquired the shares; or (b) for holders of preferred
stock, the highest liquidation value of the preferred sock.
Other Provisions. Under Nevada law, the selection of a period for
achieving corporate goals is the responsibility of the directors. In
addition, the directors and officers, in exercising their respective powers
with a view to the interest of the corporation, may consider (i) the interest
of the corporations employees, suppliers, creditors and customers, (ii) the
economy of the state and the nation, (iii) the interest of the economy and of
society and (iv) the long-term, as well as short-term, interests of the
corporation and its stockholders, including the possibility that those
interests may be best served by the continued independence of the corporation.
The directors may also resist any change or potential change of control of the
corporation if the directors, by majority vote of a quorum, determine that a
change or potential change is opposed to or not in the best interest of the
corporation "upon consideration of the interest of the corporations
stockholders," or for one of the other reasons described above. The directors
may also take action to protect the interests of the corporation' stockholders
by adopting or executing plans that deny rights, privileges, powers or
authority to a holder of a specific number of shares or percentage of share
ownership or voting power.
COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Pursuant to Nevada Revised Statutes Section 78.7502 and 78.751, our
Articles of Incorporation and bylaws provide for the indemnification of our
officers and directors. Mandatory indemnification is required for present and
former directors. However, the director must have conducted himself in good
faith and reasonably believed that his conduct was in, or not opposed to, our
best interests. In a criminal action he must not have had a reasonable cause
to believe his conduct was unlawful. Advances for expenses may be made if the
director affirms in writing that he believes he has met the standards and that
he will personally repay the expense if it is determined he did not meet the
standards. We provide permissive indemnification for officers, employees or
agents. Our Board must approve such indemnification and the standards and
limitations are the same as for a director.
35
We will not indemnify a director or officer adjudged liable due to his
negligence or willful misconduct toward us, adjudged liable to us, or if he
improperly received personal benefit. Indemnification in a derivative action
is limited to reasonable expenses incurred in connection with the proceeding.
Also, we are is authorized to purchase insurance on behalf of an individual
for liabilities incurred whether or not we would have the power or obligation
to indemnify him pursuant to our bylaws.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, or officers or persons controlling us
pursuant to the foregoing provisions, the registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
36
INDEX TO FINANCIAL STATEMENTS
WORDCRUNCHER INTERNET TECHNOLOGIES, INC.
Audited Financial Statements: Page
Auditor's Report............................................. F-1
Balance Sheets at December 31, 1998 and 1997................. F-2
Statements of Operations for Years Ended
December 31, 1998 and 1997........................... F-4
Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1998 and 1997....... F-5
Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997........................... F-7
Notes to Financial Statements ............................... F-8
Interim Financial Statements (Unaudited):
Balance Sheets at March 31, 1999............................. F-17
Statement of Operations for the Three Months
Ended March 31, 1999................................... F-19
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
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. as of December 31, 1998 and 1997 and the related
statements of operations, stockholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. 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. as of December 31, 1998 and 1997
and the results of its consolidated operations and cash flows for the years
then ended in conformity with generally accepted accounting principles.
Salt Lake City, Utah
January 21, 1999
F-1
WordCruncher Internet Technologies, Inc.
Consolidated Balance Sheets
ASSETS
December 31,
1998 1997
-------------- ---------------
CURRENT ASSETS
Cash & Cash Equivalents (Note 1) $ 425,702 $ 10,369
Notes receivable-current portion (Note 3) - 5,000
-------------- ---------------
Total Current Assets 425,702 15,369
-------------- ---------------
PROPERTY & EQUIPMENT (Note 2) 81,419 44,682
-------------- ---------------
OTHER ASSETS
Organization Costs (Note 1) 1,202 -
Notes receivable-related party (Note 3)
long-term portion 100,200 77,000
Interest receivable-long term 10,018 2,877
Deposits 5,076 -
-------------- ---------------
Total Other Assets 116,496 79,877
-------------- ---------------
TOTAL ASSETS $ 623,617 $ 139,928
============== ===============
F-2
The accompanying notes are an integral part of these financial statements.
WordCruncher Internet Technologies, Inc.
Consolidated Balance Sheets continued
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
1998 1997
--------------- ---------------
CURRENT LIABILITIES
Accounts payable $ 10,421 $ 1,170
Accrued expenses 23,752 2,960
Accrued Interest 740 2,469
Current portion of long-term
liabilities (Note 4) 136,006 314,708
-------------- ---------------
Total Current Liabilities 170,919 321,307
-------------- ---------------
LONG TERM LIABILITIES (Note 4)
Notes payable-related party 120,000 300,000
Capital lease obligations 27,620 42,272
Less current portion (136,006) (314,708)
-------------- ---------------
Total long term Liabilities 11,617 27,564
-------------- ---------------
TOTAL LIABILITIES 182,533 348,871
-------------- ---------------
STOCKHOLDERS' EQUITY
Common stock, authorized 60,000,000
shares of $.001 par value, issued and
outstanding 11,877,002 and 363,689
shares, respectively 11,877 1,091
Additional Paid-in capital 1,247,334 125,184
Retained earnings (818,127) (335,218)
-------------- ---------------
Total Stockholders' Equity 441,084 (208,943)
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 623,617 $ 139,928
============== ===============
The accompanying notes are an integral part of these financial statements.
F-3
WordCruncher Internet Technologies, Inc.
Consolidated Statements of Operations
For the
Year Ended
December 31
1998 1997
------------ ------------
REVENUES $ 82,678 $ 24,484
COST OF SALES 15,864 806
GROSS PROFIT 66,814 23,678
SELLING EXPENSES - 5,274
GENERAL & ADMINISTRATIVE EXPENSES 528,841 339,574
------------ ------------
TOTAL OPERATING EXPENSES 528,841 344,848
OPERATING LOSS (462,027) (321,170)
OTHER INCOME AND (EXPENSES)
Interest income 7,276 2,877
Miscellaneous income - 200
Interest expense (28,158) (17,125)
------------ ------------
Total Other Income and (Expenses) (20,882) (14,048)
LOSS BEFORE INCOME TAXES (482,909) (335,218)
PROVISION FOR INCOME TAXES (Note 1)
------------ ------------
NET LOSS $ (482,909) $ (335,218)
============ ============
NET LOSS PER SHARE $ (.08) $ (.61)
============ ============
WEIGHTED AVERAGE OUTSTANDING SHARES 6,100,679 545,535
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
WordCrunchers Internet Technologies, Inc.
Consolidated Statements of Stockholders' Equity
From Inception on November 5, 1996 through December 31, 1998
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit)
-------------- --------- ------------ ------------
Balance at inception-November 5, 1996 - $ - $ - $ -
January 97 - Issuance of stock for cash
to organizers at $.001 per share 622,500 623 52 -
February 97 - Issuance of stock for
cash at $.001 per share 67,500 57 8 -
February 97 - Issuance of stock for
license agreement 110,742 111 (111) -
September 1997 - Issuance of stock
to employees for services at
$.33 per share 252,450 252 83,898 -
August 1997 - Issuance of stock for
services performed at $1.09 per share 37,875 38 41,337 -
Net loss for the year
ended December 31, 1997 - - - (335,218)
-------------- --------- ------------ ------------
Balance on December 31, 1997 1,091,067 1,091 125,184 (335,218)
July 1998 - Issuance of stock for cash
at $4.17 per share 120,000 120 449,880 -
July 98 - Reverse acquisition and
reorganization adjustment 9,885,435 9,886 (8,550) -
July 98 - Stock issued for cash at
$.725 per share 690,000 690 499,310 -
July 98 - Stock issued for debt conversion
at $.96 per share 13,500 13 12,987 -
October 98 - Shares issued for services
at $1.80 per share 39,000 39 70,161 -
F-5
WordCruncher Internet Technologies, Inc.
October 98 - Shares issued for software
technology at $1.80 per share 13,000 13 23,387 -
November 98 - Shares issued for
insurance coverage at $1.0 per share 25,000 25 24,975 -
Net Loss for the year
ended December 31, 1998 - - - (482,909)
-------------- --------- ------------ -------------
Balance on December 31, 1998 11,887,002 $ 11,877 $1,247,334 $ (818,127)
============== ========= ============ =============
The accompanying notes are an integral part of these financial statements.
F-6
WordCruncher Internet Technologies, Inc.
Consolidated Statements of Cash Flows
December 31,
1998 1997
--------------- ----------------
Cash Flows From Operating Activities
Net income (loss) $ (482,909) $ (335,218)
Non-cash items:
Depreciation & amortization 10,406 6,419
Stock issued for services 95,200 125,525
(Increase)/decrease in current assets:
Interest receivable (7,141) (2,877)
Increase/(decrease) in current liabilities:
Accounts payable 4,251 1,170
Accrued expenses 19,063 5,429
--------------- ---------------
Net Cash Provided (Used) by
Operating Activities (361,130) (199,552)
--------------- ----------------
Cash Flows from Investing Activities
Cash paid for property, equipment and
software technology (18,627) -
Cash received on notes receivables 5,000 -
Cash advanced on notes receivable (23,200) (82,000)
Cash paid for deposits (5,076) -
--------------- ----------------
Net Cash Provided (Used) by
Investing Activities (41,903) (82,000)
--------------- ----------------
Cash Flows from Financing Activities
Cash received from stock issuance 1,000,000 750
Cash received from debt financing 13,000 300,000
Principal payments on long-term debt (194,634) (8,829)
--------------- ----------------
Net Cash Provided (Used) by
Financing Activities 818,366 291,921
--------------- ----------------
Increase/(decrease) in Cash 415,333 10,369
Cash and Cash Equivalents at
Beginning of Period 10,369 -
--------------- ----------------
Cash and Cash Equivalents at
End of Period $ 425,702 $ 10,369
=============== ================
F-7
WordCruncher Internet Technologies, Inc.
Supplemental Cash Flow Information:
Cash paid for interest $ 29,888 $ 14,656
Cash paid for income taxes $ - $ -
Non-cash financing transaction:
Purchase of equipment with lease
obligations $ - $ 51,190
The accompanying notes are an integral part of these financial statements.
F-8
WordCruncher Internet Technologies, Inc.
Notes to the Consolidated Financial Statements.
December 31, 1998 and 1997
NOTE 1 - Summary of Significant Accounting Policies
a. Organization
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 has essentially no assets and liabilities, and management
of Dunamis has resigned and management of the Company now manages the
consolidated entity. The merger will be recorded as a reverse acquisition,
therefore WordCruncher will be the accounting survivor.
In connection with the merger, the Company changed it's 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 marketing of a search engine software product. 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.
b. Recognition of Revenue
The Company recognizes income and expense on the accrual basis of
accounting.
c. Earnings (Loss) Per Share
The computation of earnings per share of common stock is based on the
weighted average number of shares outstanding at the date of the financial
statements.
d. Provision for 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 does not pay
corporate income taxes on its taxable income during that period of time.
Instead, the stockholders are 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 will file a
consolidated return with it's parent and will lose it's S-Corp status.
F-9
NOTE 1 - Summary of Significant Accounting Policies (Continued)
No provision for income taxes has been recorded due to net operating
loss carry forwards totaling approximately $460,000 that will be offset
against future taxable income. These NOL carry forwards begin to expire in
2013. No tax benefit has been reported in the financial statements because
the Company has not yet proven it can generate taxable income.
d Provision for Income Taxes (continued)
Deferred tax assets and the valuation account is as follows at December
31, 1998 and 1997:
1998 1997
---------------- ------------------
Deferred tax asset:
NOL carry forward $ 156,400 $ -
Valuation allowance (156,400) -
---------------- ------------------
Total $ - $ -
================ ==================
e. Cash and Cash Equivalents
The company considers all highly liquid investments with
maturities of three months or less to be cash equivalents.
f. Property and Equipment
Expenditures for property and equipment and for renewals and
betterments, which extend the originally estimated economic life of assets or
convert the assets to a new use, are capitalized at cost. Expenditures for
maintenance, repairs and other renewals of items are charged to expense. When
items are disposed of, the cost and accumulated depreciation are eliminated
from the accounts, and any gain or loss is included in the results of
operations.
The provision for depreciation is calculated using the straight-
line method over the estimated useful lives of the assets. Depreciation
expense for the period ended December 31, 1998 and 1997 is $10,272 and $6,419,
respectively.
g. Stock Split & 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 changed to $.001. This change has also been retroactively applied.
NOTE 2 - Property & Equipment
F-10
Property and equipment consists of the following at December 31,
1998 and 1997:
1998 1997
------------------ -----------------
Computer equipment $ 8,609 $ -
Leased computer equipment 45,743 45,743
Leased furniture equipment 5,358 5,358
Software technology 38,400 -
------------------ -----------------
98,110 51,101
Less:
Accumulated depreciation
- equipment 358 -
Accumulated depreciation
- leased equipment (16,333) (6,419)
------------------ ----------------
Total Property &
Equipment $ 81,419 $ 44,682
================== ================
NOTE 3 - Notes Receivable - Related Party
The Company loaned money to several officers/shareholders of the
Company. Notes receivable at December 31, 1998 and 1997 consist of the
following:
December 31,
1998 1997
--------- -----------
Note receivable from James Johnston, an officer,
interest rate of 8%, interest and principle due
January 1, 2000. 66,700 56,250
Note receivable from Kenneth Bell, an officer,
bears interest at 8%, principle and interest
due January 1, 2000. 29,500 20,750
Note receivable from a corporation owned by
Dan Lunt, an officer, bears interest at 8%
principal and interest due January 1, 2000 4,000 5,000
---------- ----------
Total 100,200 82,000
Less current portion - 5,000
---------- ----------
Notes receivable - long term $ 100,200 $ 77,000
========== ==========
NOTE 4 - Long-Term Liabilities
Long Term Liabilities are detailed in the following schedules as of
December 31, 1998 and 1997:
F-11
Notes payable related party is detailed as follows:
December 31
1998 1997
---------- -----------
Note payable to three officers of the Company,
bears interest of prime +1 1/2%,
with principal due October 1998,
unsecured note $ 120,000 $ 300,000
---------- -----------
Total notes payable - related party 120,000 300,000
---------- -----------
Capital lease obligations are detailed in the following schedule as of and
December 31, 1998 and 1997:
Capital lease obligation to a corporation
for computer equipment, lease payments due
monthly of $234 through December 2001,
bears interest at 14%, secured by computer
equipment. $ 6,818 $ 8,386
Capital lease obligation to a corporation
for computer equipment and furniture,
lease payments due monthly of $436
through April 2000, bears interest at 11%,
secured by equipment. 6,946 11,467
Capital lease obligation to a corporation
for equipment, lease payments due
monthly of $499 through April 2000,
bears interest at 11.5%, secured by
equipment. 7,786 12,569
Capital lease obligation to a corporation
for computer equipment, lease payments due
monthly of $369 through June 2000, bears
interest at 11.5%, secured by computer
equipment. 6,070 9,850
----------- -----------
Total Lease Obligations 27,620 42,272
----------- -----------
Total long term liabilities 147,620 342,272
----------- -----------
NOTE 4 - Long-Term Liabilities (Continued)
1998 1997
----------- -----------
Less current portion of:
Notes payable - related party 120,000 300,000
Capital lease obligations 16,006 14,708
----------- -----------
Total current portion 136,006 314,708
----------- -----------
F-12
Net Long Term Liabilities $ 11,614 $ 27,564
=========== ===========
Future minimum principal payments on notes payable related party are as
follows:
1999 $ 120,000
--------------
Total notes payable-related party $ 120,000
==============
Future minimum lease payments are as follows at December 31, 1998:
1999 18,456
2000 9,758
2001 2,806
---------------
31,020
Less portion representing interest (3,400)
---------------
Total $ 27,620
===============
NOTE 5 - Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. In these
financial statements, fixed assets involve reliance on management's estimates.
Actual results could differ from those estimates.
NOTE 6 - Commitments and Contingencies
The Company is committed for their office facilities. Monthly lease
payments are due of $3,744 for a 38 month period.
F-13
NOTE 6 - Commitments and Contingencies (Continued)
Future minimum lease payments are as follows at December 31, 1998:
1999 44,928
2000 44,928
2001 44,928
2002 7,488
--------
142,272
As part of the license agreement described in Note 7, the Company is
committed to minimum royalty payments as follows:
1999 $ 20,000
2000 50,000
2001 100,000
2002 and thereafter 150,000
These minimum royalties are due as long as the license agreement is in
effect.
The Company has committed to Employment agreements to three officers of
the Company. The agreements commenced in September 1998 and end in August
2001. Monthly installments on the agreements total $25,500.
NOTE 7 - Licenses
On February 14, 1998, the Company signed an exclusive license agreement
with Brigham Young University, a Utah non-profit 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 lease is as long as allowed by law. The agreement calls for license fees
and royalties of 3% of adjusted gross sales. Annual minimum royalties begin
for the calendar year 1999 and are due the quarter following the year end, as
specified in Note 6. The Company acquired the license through stock issuance,
and is required to maintain BYU's equity interest of 10%.
NOTE 8 - Related Party Transactions
James Johnston, Kenneth Bell and Dan Lunt, officers and shareholders of
the Company, borrowed $300,000 from a bank and loaned the funds to the
Company. At December 31, 1998 and 1997, $120,000 and $300,000 was
outstanding, respectively. Also in May 1998, Dan Lunt loaned the Company
$13,000, which was paid by December 31, 1998.
F-14
NOTE 8 - Related Party Transactions (Continued)
The Company has advanced funds to James Johnston in the amount of $66,700
and 56,250 at December 31, 1998 and 1997, respectively. Advances have also
been made to Kenneth Bell of $29,500 and 20,750 at December 31, 1998 and 1997,
respectively.
The Company loaned $14,000 to a Company owned by Dan Lunt during the
year. $5,000 was repaid , $5,000 was offset against advertising costs
incurred by Mr. Lunt, with $4,000 due at December 31, 1998.
NOTE 9 - Subsequent Events
On January 19, 1999 the Board of Directors organized a Series A Preferred
Stock with 15,000 shares authorized. The preferred stock has a stated value
of $1,000, a cumulative dividend of 6% and is convertible into shares of
common stock. In February, the Company issued 6,100 shares of its preferred
series A for proceeds of $6,100,000.
F-15
WORDCRUNCHER INTERNET TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
F-16
WordCruncher Internet Technologies, Inc.
Balance Sheet
As of March 31, 1999
Mar 31, 1999
----------------
ASSETS
Current Assets
Checking/Savings
Checking - First Security 9,210.85
Investments 5,736,456.63
Cash 11.40
----------------
Total Checking/Savings 5,745,678.88
Accounts Receivable
Accounts Receivable 589.00
----------------
Total Accounts Receivable 589.00
Other Current Assets
Interest Receivable 10,017.57
Note Receivable 12,500.00
Prepaid Deposits 5,075.71
Software Development 38,400.00
Organization 1,135.30
----------------
Total Other Current Assets 67,128.58
----------------
Total Current Assets 5,813,396.46
Fixed Assets
Computer Equipment 270,880.94
Furniture & Fixtures 38,190.07
----------------
Total Fixed Assets 309,071.01
----------------
TOTAL ASSETS 6,122,467.47
================
LIABILITIES & EQUITY
Liabilities
Current Liabilities
Accounts Payable
Accounts Payable 49,086.88
----------------
Total Accounts Payable 49,086.88
Other Current Liabilities
Payroll Liabilities 43,220.64
Accrued Interest 740.00
Accrued Preferred Dividend 54,416.79
-----------------
Total Other Current Liabilities 98,377.43
-----------------
F-17
Total Current Liabilities 147,464.31
Long Term Liabilities
Leases Payable 23,213.39
-----------------
Total Long Term Liabilities 23,213.39
-----------------
Total Liabilities 170,677.70
Equity
Opening Balance Equity 50.63
Common Stock 11,877.00
Preferred Stock 63.00
Additional Paid-in Capital 7,155,171.00
Retained Earnings (818,127.21)
Net Income (397,244.65)
-----------------
Total Equity 5,951,789.77
-----------------
TOTAL LIABILITIES & EQUITY 6,122,467.47
=================
F-18
WordCruncher Internet Technologies, Inc.
Profit and Loss
January through March 1999
Jan-Mar '99
-----------------
Ordinary Income/Expense
Income
Licensing Fees $ 7,562.09
Retail Sales 2,534.61
-----------------
Total Income 10,096.70
Cost of Goods Sold,
Materials 120.00
Shipping 102.30
Advertising & Promotion 12,642.50
Royalties 9,848.90
----------------
Total COGS 22,713.70
-----------------
Gross Profit (12,617.00)
Expense
Amortization 66.70
Bank Service Charges 287.19
Consulting Services 32,294.57
Depreciation Expense 15,110.49
Dues and Subscriptions 1,659.89
Equipment Leasing 58.48 58.48
Finance Charges 42.01
Insurance
Medical 11,414.27
--------------
Total Insurance 11,414.27
Interest Expense 3,017.54
Internet Services 2,355.40
Licenses and Permits 181.00
Office Expenses 2,375.05
Postage and Delivery 1,305.20
Printing and Reproduction 583.47
Preferred Dividend Expense 54,416.79
Professional Fees
Legal 467.28
Accounting & Audit 1,955.83
Consulting 625.00
Referral 35,700.00
---------------
Total Professional Fees 38,748.11
Rent
Rental Fees 6,466.57
F-19
CAM Fees 1,997.00
---------------
Total Rent 8,463.57
Repairs
Computer Repairs 106.25
----------------
Total Repairs 106.25
Salaries & Wages
Officers 76,500.00
Management 46,875.00
Development 54,116.66
Support 3,600.00
Marketing 19,017.45
----------------
Total Salaries & Wages 200,109.11
Software 206.00
Taxes
Payroll 16,572.73
Property 58.26
----------------
Total Taxes 16,630.99
Telephone 5,324.62
Travel & Entertainment
Travel 14,715.50
Entertainment 1,150.67
---------------
Total Travel & Entertainment 15,866.17
Utilities 191.29
-----------------
Total Expense 410,814.16
-----------------
Net Ordinary Income (423,431.16)
Other Income/Expense
Other Income
Interest Income 18,323.22
Dividend Income 7,863.29
-----------------
Total Other Income 26,186.51
-----------------
Net Other Income 26,186.51
-----------------
Net Income (397,244.65)
=================
F-20
We have not authorized any
dealer, salesperson or other
person to give any information
or represent anything not
contained in this Prospectus. 2,693,137 SHARES
You must not rely on any
unauthorized information.
This Prospectus does not offer WORDCRUNCHER INTERNET
to sell or buy any shares in any TECHNOLOGIES, INC.
jurisdiction where it is
unlawful. The information in PROSPECTUS
this Prospectus is current only
as of its date. May 28, 1999
TABLE OF CONTENTS ON PAGE 2
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses Of Issuance And Distribution
The following table sets forth the expenses payable by us in connection
with the sale of the Shares. All the amounts shown are estimates except for
the registration fee:
Securities and Exchange Commission Registration Fee......$ 3,837
National Market Listing Fee.............................. ____
Printing and Engraving Expenses.......................... 10,000
Legal and Accounting Fees and Expenses .................. 50,000
Blue Sky Qualification Fees and Expenses................ 15,000
Transfer Agent and Registrar Fees and Expenses.......... 3,000
Miscellaneous .......................................... 1,500
--------
Total $ 83,337
Item 14. Indemnification of Directors and Officers
Pursuant to Nevada Revised Statutes Section 78.7502 and 78.751, our
Articles of Incorporation and bylaws provide for the indemnification of our
officers and directors. Mandatory indemnification is required for present and
former directors. However, the director must have conducted himself in good
faith and reasonably believed that his conduct was in, or not opposed to, our
best interests. In a criminal action he must not have had a reasonable cause
to believe his conduct was unlawful. Advances for expenses may be made if the
director affirms in writing that he believes he has met the standards and that
he will personally repay the expense if it is determined he did not meet the
standards. We provide permissive indemnification for officers, employees or
agents. Our Board must approve such indemnification and the standards and
limitations are the same as for a director.
We will not indemnify a director or officer adjudged liable due to his
negligence or willful misconduct toward us, adjudged liable to us, or if he
improperly received personal benefit. Indemnification in a derivative action
is limited to reasonable expenses incurred in connection with the proceeding.
Also, we are authorized to purchase insurance on behalf of an individual for
liabilities incurred whether or not we would have the power or obligation to
indemnify him pursuant to our bylaws.
Item 15. Recent Sales of Unregistered Securities
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 Common Stock for $1,500 in
cash to Carol N. Purcell and Wilford Purcell, the founders of Dumanis, Inc.
Beginning on May 15 and ending on June 11, 1997 we sold 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 $12,960,
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. On December 29, 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
$35,000. 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 February 8 and March 15, 1999, we
II-1
issued an aggregate of 6,300 shares of Series A Preferred Stock to eight
persons pursuant to the Purchase Agreement. The Series A Preferred Stock was
issued for an aggregate of $6.3 million.
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
Sections 3(b) and 4(2) of the Securities Act, and the rules and regulations
promulgated thereunder.
Item 16. Exhibits and Financial Statement Schedules
(a) 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
5.1* Opinion of Parsons Behle & Latimer
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
II-2
Exhibit Number Description
- -------------- ------------
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
11.11 Statement re computation of earnings per share
23.1 Consent of Parsons Behle & Latimer
23.2 Consent of Crouch, Bierwolf & Chisholm
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
- ------------------------
* To be filed by amendment
Item 17. Undertakings
Pursuant to Rule 415, the undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 242(b) if, in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective registration
statement:
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Salt
Lake, State of Utah, on May 28, 1999.
WORDCRUNCHER INTERNET TECHNOLOGIES, INC.
a Nevada Corporation
By: /s/ M. Daniel Lunt
--------------------------------------------
M. Daniel Lunt
President, Chief Executive Officer, Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints M. Daniel Lunt and Kenneth W. Bell, and
each of them, his attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him in any and all capacities, to sign
any and all amendments (including posteffective amendments) to this
Registration Statement, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully as to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents, or any of them,
or their or his substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
By: /s/ James W. Johnston
------------------------------- Date: April 29, 1999
James W. Johnston
Chairman of the Board, Executive
Vice President
By: /s/ Kenneth W. Bell
--------------------------------- Date: April 29, 1999
Kenneth W. Bell
Senior Vice President, Chief Financial
Officer, Treasurer, Secretary, Director
By: /s/ M. Daniel Lunt
-------------------------------- Date: April 29, 1999
M. Daniel Lunt
President, Chief Executive Officer,
Director
II-4