As filed with the Securities and Exchange Commission on March 18, 1999
Registration No. 333-67871
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________________________
FORM SB-2
Registration Statement
Under the Securities Act of 1933
__________________________
HOUSTON INTERWEB DESIGN, INC.
(Exact name of Registrant as specified in its charter)
(AMENDMENT NO. 1)
TEXAS 7310 76-0532709
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
HARRY L. WHITE
HOUSTON INTERWEB DESIGN, INC. HOUSTON INTERWEB DESIGN, INC.
1770 ST. JAMES PLACE, SUITE 420 1770 ST. JAMES, SUITE 420
HOUSTON, TEXAS 77056 HOUSTON, TEXAS 77056
(713) 627-9494 (713) 627-9494
(Address and telephone number (Name, address and telephone number
of principal executive offices) of agent for service)
Copies To:
THOMAS C. PRITCHARD
BREWER & PRITCHARD, P.C.
1111 BAGBY, 24TH FLOOR
HOUSTON, TEXAS 77002
PHONE (713) 209-2911
FACSIMILE (713) 209-2921
__________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box
and list the Securities Act registration statement number of earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE BEING OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1)(2) REGISTRATION FEE(3)
Common Stock................... 1,169,300 .0156799 $18,334.51 $100.00
TOTAL.......................... 1,169,300 .0156799 $18,334.51 $100.00
__________________________
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) The book value of the Common Stock, calculated pursuant to Rule 457(f).
(3) Previously paid with the original filing of the Form SB-2 on November 24,
1998.
__________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
SUBJECT TO COMPLETION, DATED MARCH 18, 1999
HOUSTON INTERWEB DESIGN, INC.
DISTRIBUTION OF 750,000 SHARES OF COMMON STOCK HELD BY PINKMONKEY.COM ,INC.
RESALE OF 419,300 SHARES OF COMMON STOCK HELD BY SELLING STOCKHOLDERS
This prospectus relates to the registration of the distribution by
PinkMonkey.com, Inc. of 750,000 shares of company common stock to its
shareholders of record as of February 15, 1999. This prospectus also relates
to the resale of 419,300 shares of company common stock currently outstanding,
which may be sold by the selling stockholders. Shares offered by the selling
stockholders may be sold by one or more of the following methods without
limitation:
- ordinary brokerage-dealer transactions in which a broker solicits
purchases; or
- face to face transactions between the selling stockholders and
purchasers without a broker-dealer.
A current prospectus must be in effect at the time of the sale of the
shares of common stock. Each selling stockholder or dealer effecting a
transaction in the registered securities, whether or not participating in a
distribution, is required to deliver a current prospectus at the time of the
sale. The company will not receive any proceeds from the distribution to
PinkMonkey.com shareholders or the resale of common stock by the selling
stockholders.
As the distribution and the resale of the shares of common stock is
being registered under the Securities Act of 1933, holders who subsequently
resell shares to the public may be deemed to be underwriters. As a result,
they may be subject to certain statutory liabilities if the registration
statement contains a material misstatement or omits a statement of material
fact. The company has not agreed to indemnify any of the PinkMonkey.com
shareholders or the selling stockholders regarding such liability.
Currently, there is no market for the company's shares.
__________________________
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 2.
__________________________
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.
__________________________
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ABOUT THE COMPANY THAT DIFFERS FROM, OR ADDS TO, THE
INFORMATION IN THIS PROSPECTUS OR IN OUR DOCUMENTS THAT WE FILED WITH THE
SEC. ACCORDINGLY, IF ANYONE DOES GIVE YOU DIFFERENT OR ADDITIONAL
INFORMATION YOU SHOULD NOT RELY ON IT. IF YOU ARE IN A JURISDICTION WHERE IT
IS UNLAWFUL TO BUY THE SECURITIES OFFERED BY THIS PROSPECTUS, OR IF YOU ARE A
PERSON TO WHOM IT IS UNLAWFUL TO DIRECT SUCH ACTIVITIES, THEN THE OFFER
PRESENTED BY THIS PROSPECTUS DOES NOT EXTEND TO YOU. THE INFORMATION IN THE
PROSPECTUS SPEAKS ONLY AS OF THIS DATE UNLESS THE INFORMATION SPECIFICALLY
INDICATES THAT ANOTHER DATE APPLIES.
The date of this prospectus is March 18, 1999.
TABLE OF CONTENTS
PAGE
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Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
WE HAVE A LIMITED OPERATING HISTORY WITH A HISTORY OF LOSSES AND
WE ANTICIPATE LOSSES UNTIL AT LEAST THE YEAR 2000. . . . . . . . . . . . . . . . .2
OUR WORKING CAPITAL REQUIREMENTS MAY REQUIRE US TO PURSUE ADDITIONAL
FINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING WE WILL BE ABLE TO
CONTINUE AS A GOING CONCERN . . . . . . . . . . . . . . . . . . . . . . . . . . .2
A VARIETY OF FACTORS MAY CAUSE OUR QUARTERLY OPERATION RESULTS TO FLUCTUATE. . . .3
AS AN ADVERTISING MEDIUM THE INTERNET IS STILL AN EVOLVING MARKET. . . . . . . . .3
OUR BUSINESS MODEL IS UNPROVEN AND DEPENDS on the Market's
ACCEPTANCE OF OUR SITEBLAZER NETWORK . . . . . . . . . . . . . . . . . . . . . . .3
RISK OF SYSTEM FAILURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
OUR ABILITY TO ADAPT TO RAPIDLY CHANGING TECHNOLOGY. . . . . . . . . . . . . . . .4
VARIOUS FACTORS RELATING TO COMPETITION IN THE INTERNET INDUSTRY . . . . . . . . .4
OUR ABILITY TO EFFECTIVELY MANAGE GROWTH IN OUR OPERATIONS . . . . . . . . . . . .5
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL. . . . . . . . . . . . . . . . . . . . .5
WE DEPEND ON THIRD PARTIES TO DISTRIBUTE OUR PRODUCTS AND SERVICES . . . . . . . .5
OUR BUSINESS IS DEPENDENT ON THE MAINTENANCE OF THE INTERNET
INFRASTRUCTURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
WE ARE DEPENDENT ON OUR PROPRIETARY RIGHTS . . . . . . . . . . . . . . . . . . . .6
RISKS OF INFRINGEMENT IN INTERNET-RELATED INDUSTRIES . . . . . . . . . . . . . . .6
POSSIBLE ADDITIONAL TAX BURDENS. . . . . . . . . . . . . . . . . . . . . . . . . .6
GOVERNMENT REGULATION OF INTERNET ACTIVITIES . . . . . . . . . . . . . . . . . . .7
THERE IS NO PUBLIC MARKET FOR OUR COMMON STOCK . . . . . . . . . . . . . . . . . .7
POSSIBLE VOLATILITY OF STOCK PRICE . . . . . . . . . . . . . . . . . . . . . . . .7
SHARES ELIGIBLE FOR FUTURE SALE. . . . . . . . . . . . . . . . . . . . . . . . . .7
CONFLICTS OF INTEREST BETWEEN THE COMPANY AND PINKMONKEY.COM . . . . . . . . . . .8
PINKMONKEY.COM MAY BE DEEMED TO BE AN UNDERWRITER. . . . . . . . . . . . . . . . .8
STATUS OF PINKMONKEY SHAREHOLDERS WHO RESELL COMMON STOCK. . . . . . . . . . . . .8
PENNY STOCK REGULATIONS MAY DECREASE YOUR ABILITY TO SELL OUR COMMON STOCK . . . .8
YEAR 2000 IMPLICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
CONTINUED CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS. . . . . . . .9
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR AMENDED AND
RESTATED ARTICLES OF INCORPORATION AND BY-LAWS AND THE POSSIBLE ISSUANCE OF
PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
LACK OF DISINTERESTED, INDEPENDENT DIRECTORS . . . . . . . . . . . . . . . . . . .9
Note Regarding Forward-looking Statements. . . . . . . . . . . . . . . . . . . . . .9
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Management's Discussion And Analysis of Financial Condition And Results of
Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Divisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Affiliated Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Description of Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Certain Transactions And Organization Within Last Five Years . . . . . . . . . . . 22
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Shares Eligible For Future Sale. . . . . . . . . . . . . . . . . . . . . . . . . . 22
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Interest of Named Experts And Counsel. . . . . . . . . . . . . . . . . . . . . . . 26
Disclosure of Commission Position on Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . 26
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus. It
is not complete and may not contain all of the information that you should
consider. To understand this offering fully, you should read the entire
prospectus carefully, including the risk factors and financial statements.
The company's principal executive office is located at 1770 St. James Place,
Suite 420, Houston, Texas 77056, (713) 627-9494. Unless otherwise indicated,
this prospectus reflects a 165-for-one forward stock split that occurred in
August 1998.
KEY FACTS
The Company . . . . . . . . . . . . Houston Interweb Design is a web site
development company specializing in
the design, creation and marketing of
cost-effective Internet products.
Common Stock to be Distributed . . 750,000 shares to be distributed to
the shareholders of record of
PinkMonkey.com, Inc.("PinkMonkey.com")
as of February 15, 1999.
Common Stock to be Resold . . . . . 419,300 shares by selling
stockholders.
Common Stock Outstanding . . . . . 16,448,300 shares
Risk Factors . . . . . . . . . . . An investment in the shares of common
stock involves a high degree of risk.
Prospective investors should review
carefully the information set forth
under "Risk Factors" beginning on
page 2.
No Proceeds . . . . . . . . . . . . The distribution and resale will
result in no proceeds to the company.
Lack of Market . . . . . . . . . . There is currently no market for the
common stock, and there is no
assurance that any market will
develop. If a market develops for the
company's securities, it will likely
be limited, sporadic and highly
volatile.
SUMMARY FINANCIAL DATA
THE FINANCIAL INFORMATION PRESENTED BELOW IS DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS OF THE COMPANY FOR THE PERIOD FROM INCEPTION (AUGUST 9,
1996) THROUGH JULY 31, 1997, AND FOR THE YEAR ENDED JULY 31, 1998, AND
UNAUDITED INFORMATION FOR THE SIX MONTHS ENDED JANUARY 31, 1998, AS COMPARED
TO THE SIX MONTHS ENDED JANUARY 31, 1999.
AUDITED UNAUDITED
------- ---------
PERIOD ENDED YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JULY 31, 1997 JULY 31, 1998 JANUARY 31, 1998 JANUARY 31, 1999
------------- ------------- ---------------- ----------------
Revenues . . . . . . . . . . . $185,994 $628,070 $262,437 $258,747
Total Expenses . . . . . . . . 225,824 1,402,169 277,069 770,029
------------- ------------- ---------------- ----------------
Income (Loss) Before
Federal Income Tax . . . . . (69,830) (774,099) (14,632) (511,282)
Federal Income Tax (Benefit) . (4,998) 7,496 1,045 2,498
Net Loss . . . . . . . . . . . $(64,832) $(81,595) $(13,587) $(508,784)
------------- ------------- ---------------- ----------------
------------- ------------- ---------------- ----------------
BALANCE SHEET DATA
JULY 31, 1997 JULY 31, 1998 JANUARY 31, 1999
------------- ------------- ----------------
Working Capital Deficits . $(74,061) $(106,092) $(297,219)
Total Assets . . . . . . . 88,338 159,369 113,235
Long-Term Liabilities . . . -- -- --
Shareholders' Deficit . . . (60,832) (92,427) (278,870)
RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE THAT THERE
ARE VARIOUS RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CONSIDER
CAREFULLY THESE RISK FACTORS TOGETHER WITH ALL OF THE OTHER INFORMATION
INCLUDED IN THIS PROSPECTUS BEFORE YOU DECIDE TO PURCHASE SHARES OF OUR
COMMON STOCK. OUR FAILURE TO ADDRESS ANY OF THESE RISKS COULD HAVE AN
ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
WE HAVE A LIMITED OPERATING HISTORY WITH A HISTORY OF LOSSES AND WE ANTICIPATE
LOSSES UNTIL AT LEAST THE YEAR 2000
We were incorporated in August 1996, and our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies with limited operating histories, particularly
companies in the new and rapidly evolving markets for the Internet and
Internet services. We can provide no assurance that we will be successful in
addressing such risks. Although we have experienced revenue growth, growth
rates may not be sustained and are not necessarily indicative of future
operating results. Since our inception, we have had an accumulated deficit
of $1,355,211 and as of January 31, 1999, had cash in the amount of $43,640.
Given the level of planned operating and capital expenditures, we anticipate
that we will continue to incur operating losses at least into the year 2000.
We can provide no assurance that operating losses will not increase in the
future or that we will ever achieve or sustain profitability. If revenues do
not grow at anticipated rates, if increases in operating expenses precede or
are not subsequently followed by commensurate increases in revenues, or if we
are unable to adjust operating expense levels accordingly, our business,
results of operations, and financial condition will be materially and
adversely affected.
OUR WORKING CAPITAL REQUIREMENTS MAY REQUIRE US TO PURSUE ADDITIONAL FINANCING
At January 31, 1999, we had a working capital deficit of $297,219. Our
ability to maintain adequate working capital will be largely dependent upon
our results of operations. Net cash used in the operation of our business
was $275 for the period from inception (August 9, 1996) to July 31, 1997, as
compared to net cash provided by operating activities of $3,169 for the year
ended July 31, 1998. For the six-month period ended January 31, 1998, net
cash provided in the operation of our business was $39,228 and as compared to
net cash used in the operation of our business of $182,992 for the six months
ended January 31, 1999. We may need to raise additional capital to fund
future operations and to satisfy future capital requirements. We can provide
no assurance that we will be able to raise needed capital on favorable terms,
if at all. If we are unable to secure sufficient capital in the future, our
ability to pursue our business strategy will be limited and our results from
operations may be impaired. We can provide no assurance that our estimate of
our liquidity needs is accurate or that new business development or other
unforeseen events will not occur, resulting in the need to raise additional
funds. The failure to raise any needed additional funds will likely have a
material adverse effect on our company. In addition, it is possible that
raising additional funds will result in substantial additional dilution.
OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING WE WILL BE ABLE TO CONTINUE
AS A GOING CONCERN
The financial statements included herein have been prepared assuming the
company will be able to continue as a going concern. The company had a
working capital deficit of $106,092 and a stockholders' deficit of $92,427 at
July 31, 1998, and experienced significant losses in fiscal 1998 which raise
doubts about the Company's ability to generate sufficient cash flow to meet
its obligations on a timely basis, to obtain additional financing or capital
and to refinance its debt and ultimately attain profitable operations.
2
A VARIETY OF FACTORS MAY CAUSE OUR QUARTERLY OPERATION RESULTS TO FLUCTUATE
Our results of operations may fluctuate significantly in the future as a
result of a variety of factors, many of which are beyond our control. These
factors include:
- our ability to attract new customers at a steady rate,
- our ability to operate at favorable gross margins,
- the level of user traffic on the web sites,
- our licensees and/or independent reseller's ability to generate
revenues,
- the timing and number of new hires,
- demand for and changes in pricing models for Internet development and
design,
- government regulation, and
- general economic conditions and economic conditions specific to the
Internet and online commerce.
For the foreseeable future, our revenues will be directly contingent on
the development and design of web sites, which, due to our limited operating
history, makes future revenues and results of operations difficult to
forecast.
AS AN ADVERTISING MEDIUM THE INTERNET IS STILL AN EVOLVING MARKET
The market for the development and design of web sites has only recently
begun to develop, is rapidly evolving and is characterized by an increasing
number of market entrants. As is typical of a new and rapidly evolving
industry, demand and market acceptance for recently introduced products and
services are subject to a high level of uncertainty. Since we expect to
derive substantially all of our revenues in the foreseeable future from the
development and design of web sites, our future success is highly dependent
on the increased use of the Internet. The Internet as an advertising medium
has not been available for a sufficient period to gauge its effectiveness as
compared with traditional advertising media. The utilization of Internet web
sites, particularly by those entities that have historically relied upon
traditional media for advertising, requires the acceptance of a new way of
conducting business and exchanging information. We can provide no assurance
that the market for the development and design of web sites will continue to
emerge or become sustainable. If the market fails to develop or develops
more slowly than expected, our business, results of operations and financial
condition could be materially and adversely affected. There are no widely
accepted standards for the measurement of the effectiveness of an Internet
web site as an advertising medium.
Further, we can provide no assurance that customers will determine that
SiteBlazer.com and the SITEBLAZER network, the usage of which currently
comprises a large portion of our revenues, is an effective or attractive
medium, and we can provide no assurance that the SITEBLAZER network will
increase sales for our customers.
OUR BUSINESS MODEL IS UNPROVEN AND DEPENDS ON THE MARKET'S ACCEPTANCE OF OUR
SITEBLAZER NETWORK
Our business model is to generate revenues by designing and developing
Internet web sites and placing these web sites in the SITEBLAZER network.
The profit potential of our business model is unproven, and, to be
successful, we must, among other things, develop and market programs that
achieve broad market acceptance and recognition by our customers, Internet
advertisers, commerce partners and Internet users. We can provide no
assurance that the SITEBLAZER network, or SiteBlazer.com, in particular, will
achieve broad market acceptance. Market acceptance of the SITEBLAZER network
will depend, in large part, on the market's acceptance of our search engine.
Our ability to generate significant revenues from SiteBlazer.com will depend,
in part, on the development of the SITEBLAZER network and our ability to
attract search engines and have web sites generate sufficient user traffic
with characteristics that are attractive to such search engines.
Accordingly, we can provide no assurance that our business model will be
successful or that it can sustain revenue growth and maintain sufficient
gross margins.
3
RISK OF SYSTEM FAILURE
The performance of our servers and networking hardware and the Internet
infrastructure is critical to our business and reputation and our ability to
attract web users, new customers and commerce partners to our web sites. Any
system failure that causes an interruption in service or a decrease in
responsiveness of our web sites could result in less traffic on our web sites
and, if sustained or repeated, could impair our reputation and the
attractiveness of our brand name.
Our servers are vulnerable to computer viruses, break-ins, and similar
disruptions from unauthorized tampering. In addition, our operations are
dependent upon our ability to protect our computer systems against damage
from fire, power loss, telecommunications failures, vandalism and other
malicious acts, and similar unexpected adverse events. Finally, to the
extent we do not effectively address any capacity constraints, such
constraints could cause system failure. The occurrence of any of these
events could result in interruptions, delays or cessation in services.
OUR ABILITY TO ADAPT TO RAPIDLY CHANGING TECHNOLOGY
The market in which we compete is characterized by rapidly changing
technology, evolving industry standards, frequent new products and services
and changing customer demands. Accordingly, our success will depend on our
ability to adapt to rapidly changing technologies and industry standards, and
our ability to continually improve the speed, performance, features, ease of
use and reliability of our server and networking system in response to both
evolving demands of the marketplace and competitive service and product
offerings.
We continually strive to incorporate new technology into our web sites
for the benefit of our customers, visitors and commerce partners.
Introducing new technology into our systems involves numerous technical
challenges, substantial amounts of personal resources and often times takes
many months to complete. We can provide no assurance that we will be
successful in integrating new technology into our web sites on a timely basis
or without degrading the responsiveness and speed of our web sites or that,
once integrated, new technology will function as expected. The continuing
and uninterrupted performance of our computer system is critical to the
success of our business.
VARIOUS FACTORS RELATING TO COMPETITION IN THE INTERNET INDUSTRY
The market for customers, visitors and related products and services is
intensely competitive and such competition is expected to continue to
increase. There are no substantial barriers to entry in this market and we
believe that our ability to compete depends upon many factors within and
beyond our control, including:
- the timing and market acceptance of new product and services developed
by us and our competitors,
- customer service and support,
- sales and marketing efforts,
- the ease of use,
- performance,
- price, and
- reliability of our products and services
We also compete with:
- Internet content providers and Internet service providers,
- web directories,
- search engines,
- shareware archives,
- content sites,
4
- commercial online services and sites maintained by Internet service
providers,
- thousands of Internet sites operated by individuals, and
- government and educational institutions.
We believe that the number of Internet companies relying on revenues
from their company web sites will increase substantially in the future.
Accordingly, we will likely face increased competition, resulting in
increased pricing pressures on our web site design rates.
Many of our existing and potential competitors, including web site
designers have longer operating histories in the Internet market, greater
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources. As a result, they may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion
and sale of their products and services. Such competitors are able to
undertake more extensive marketing campaigns for their brands and services,
adopt more aggressive pricing policies and make more attractive offers to
potential employees, distribution partners and commerce companies.
We also expect that competition may increase as a result of industry
consolidation. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
with third parties to increase the comprehensive set of services offered to
customers. Accordingly, it is possible that new competitors or alliances
among existing or potential competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which
would have a material adverse effect on our business, results of operations
and financial condition.
OUR ABILITY TO EFFECTIVELY MANAGE GROWTH IN OUR OPERATIONS
We have experienced rapid growth in our operations. This rapid growth
has placed, and is expected to continue to place, a significant strain on our
managerial, operational and financial resources. We have grown from three
employees as of August 31, 1996, to 21 employees as of March 5, 1999. We
expect that the number of employees will continue to increase for the
foreseeable future, including the hiring of new programmers, graphic
designers and other personnel. Furthermore, we must continue to improve our
financial and management controls, reporting systems and procedures, and
expand, train and manage our work force. We can provide no assurance that
our systems, procedures or controls will be adequate to support our expanding
operations or that our management will be able to achieve the rapid execution
necessary to successfully offer our solutions and implement our business
plan.
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL
Our future success depends, in significant part, upon the continued
service of our key technical, sales and senior management personnel,
particularly Harry L. White, chief executive officer and chairman of the
board of directors, Lee A. Magness, chief financial officer, and Richard J.
Finn, chief technology officer, all of whom have entered into employment
agreements which expire in August 2001. The loss of the services of one or
more of the our key personnel could have a material adverse effect on our
business, results of operations and financial condition. We do not maintain
"key man" life insurance policies for Messrs. White, Magness and Finn. Our
future success also depends on our continuing ability to attract and retain
highly qualified technical, sales and marketing, customer support, financial
and accounting, and managerial personnel. Competition for such personnel in
the Internet industry is intense, and we can provide no assurance that we
will be able to retain our key personnel or that we will attract, assimilate
or retain other highly qualified personnel in the future.
WE DEPEND ON THIRD PARTIES TO DISTRIBUTE OUR PRODUCTS AND SERVICES
We rely on arrangements with independent resellers and licensees to
market and distribute our software products. Under our arrangements with
independent resellers and licensees, we typically grant a non-exclusive
license to distribute our software technology and restrict the
reseller's/licensee's ability to distribute software programs in competition
with us. We can provide no assurance that the sales forces of these
independent resellers and/or licensees will actively pursue this opportunity
to market and distribute our software technology or that significant revenues
will be generated by these relationships. These independent resellers and
licensees have only recently begun to offer our products and, as such, have
extremely limited experience in distributing our software technology. We
currently have agreements with Websource Media, L.L.C. and Harry Bauge. For
the fiscal year ended July 31, 1998, Websource Media and Bauge accounted for
an aggregate of $288,572 or 46% of revenues.
5
The loss of one or more of the licensees or resellers that represent a
material portion of our revenues could have a material adverse effect on our
business, results of operations and financial condition. In addition, the
non-payment or late payment of amounts due by a significant licensee or
reseller could have a material adverse effect on our business. We cannot
accurately predict the timing or the extent of the success of these resellers
and licensees.
OUR BUSINESS IS DEPENDENT ON THE MAINTENANCE OF THE INTERNET INFRASTRUCTURE
Our success will depend, in large part, upon the maintenance of the
Internet infrastructure, such as a reliable network backbone with the
necessary speed, data capacity and security. To the extent that the Internet
continues to experience increased numbers of users, frequency of use or
increased requirements of users, we can provide no assurance that the
Internet infrastructure will continue to be able to support the demands
placed on it or that the performance or reliability of the Internet will not
be adversely affected. Furthermore, the Internet has experienced a variety
of outages and other delays as a result of damage to portions of its
infrastructure, and such outages and delays could adversely affect the web
sites of customers utilizing our programs and the level of traffic on such
web sites. In addition, the Internet could lose its viability as a form of
media due to delays in the development or adoption of new standards and
protocols that can handle increased levels of activity. If the necessary
infrastructure, standards or protocols or complimentary products, services or
facilities are not developed, or if the Internet does not become a viable
commercial medium, our business will be materially and adversely affected.
Even if such infrastructures, standards or protocols or complimentary
products, services or facilities are developed, we can provide no assurance
that we will not be required to incur substantial expenditures in order to
adapt our solutions to changing or emerging technologies.
WE ARE DEPENDENT ON OUR PROPRIETARY RIGHTS
We regard our intellectual property as critical to our success, and we
expect to rely upon trademark, service mark, copyright and trade secret laws
in the United States and other jurisdictions to protect our proprietary
rights. We have applied for the registration for the trademark and service
mark SITEBLAZER with the United States Patent and Trademark Office. We are
in the process of applying for the registration for the trademark Political
Net.com in the United States. We pursue the protection of our trademarks by
applying to register the trademarks in the United States and (based upon
anticipated use) internationally. We are applying for a European Community
Trademark for SITEBLAZER to protect our trademarks in every country in the
European Community. We can provide no assurance that any of our trademark
registrations will be approved or granted and, if they are granted, that they
will not be successfully challenged by others or invalidated through
administrative process or litigation. Further, if our trademark registrations
are not approved or granted due to the prior issuance of trademarks to third
parties or for other reasons, we can provide no assurance that we could enter
into arrangements with such third parties on commercially reasonable terms
allowing the company to continue to use such trademarks. Trademark, copyright
and trade secret protection may not be available in every country in which
our programs are available. In addition, we plan to protect our proprietary
rights through confidentiality agreements with employees, consultants,
advisors, licensees, resellers and others. We can provide no assurance that
the confidentiality agreements will provide adequate protection for our
proprietary rights.
RISKS OF INFRINGEMENT IN INTERNET-RELATED INDUSTRIES
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries are
uncertain and still evolving, and we can provide no assurance as to the
future viability or value of any of our proprietary rights. We can provide
no assurance that the steps taken to protect our proprietary rights will be
adequate or that third parties will not infringe or misappropriate our
proprietary rights. Any such infringement or misappropriation, should it
occur, could have a material adverse effect on our business. Furthermore, we
can provide no assurance that our business activities will not infringe upon
the proprietary rights of others, or that other parties will not assert
infringement claims against us. From time to time we expect to be subject to
claims in the ordinary course of our business, including claims of alleged
infringement of the trademarks and other intellectual property rights of
third parties by us or our commerce partners. We can provide no assurance
that future litigation will not have an material adverse effect on our
business. Claims of infringement and any resultant litigation could subject
us to significant liability for damages and could result in invalidation of
our proprietary rights. Even if not meritorious, claims of infringement
could be time-consuming and expensive to defend, and could result in the
diversion of management time and attention, any of which could have a
material adverse effect on our business.
POSSIBLE ADDITIONAL TAX BURDENS
We do not currently collect sales or other similar taxes in states other
than Texas. However, one or more states may seek to impose sales tax
collection obligations on out-of-state companies which engage in or
facilitate online commerce, and a number of proposals have been made at the
state and local levels that would impose
6
additional taxes on the sale of goods and services through the Internet.
These proposals, if adopted, could substantially impair the growth of
electronic commerce and could adversely affect our opportunity to derive
financial benefit from our activities.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been proposed by Congress. Failure to enact
this legislation could allow various states to impose taxes on Internet-based
commerce and the imposition of taxes could have a material adverse effect on
our business.
GOVERNMENT REGULATION OF INTERNET ACTIVITIES
Due to concerns arising in connection with the increasing popularity and
use of the Internet, a number of laws and regulations may be adopted covering
issues such as: user privacy, pricing, characteristics, acceptable content,
taxation and quality of products and services. Such legislation could dampen
the growth of Internet use generally and decrease the acceptance of the
Internet as a communications and commercial medium. In addition, because the
growing popularity and use of the Internet have burdened the existing
telecommunications infrastructure and many areas with high web use have begun
to experience interruptions in phone service, certain local telephone
carriers have petitioned governmental bodies to regulate Internet service
providers and online service providers in a manner similar to long distance
telephone carriers by imposing access fees. If any of these petitions is
granted, the costs of communicating on the Internet could increase
substantially, potentially adversely affecting the growth in use of the
Internet. Further, due to the global nature of the Internet, it is possible
that, although transmissions relating to our programs originate in the State
of Texas, the governments of other states or foreign countries may attempt to
regulate our transmissions. We can provide no assurance that violations of
local laws will not be alleged or charged by state or foreign governments,
that we might not unintentionally violate such laws or that such laws will
not be modified, or new laws enacted, in the future. Any of the foregoing
developments could have a material adverse effect on our business.
THERE IS NO PUBLIC MARKET FOR OUR COMMON STOCK
Prior to this prospectus, there has been no public market for our common
stock. Upon the registration statement becoming effective, the common stock
will not be listed on a national securities exchange, Nasdaq, or on the OTC
Electronic Bulletin Board. Our strategy is to list the common stock on the
OTC Electronic Bulletin Board, as soon as practicable, and to develop a
public market for our common stock by soliciting brokers to become market
makers of our shares. However, to date, we have not solicited any brokers to
become market makers or undertaken to list the common stock on the OTC
Electronic Bulletin Board. We can provide no assurance that an active
trading market for the common stock will develop or be sustained upon the
registration statement becoming effective or that the market price of the
common stock will not decline below the initial public trading price. The
initial public trading price will be determined independently by market
makers.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of our common stock could be subject to wide
fluctuations:
- in response to variations in quarterly results of operations,
- the gain or loss of significant web site customers,
- changes in earning estimates by analysts,
- announcements of technological innovations or new solutions by the
company or its competitors,
- general conditions in Internet-related industries,
- and other events or factors, many of which are beyond our control.
In addition, the stock market has usually experienced extreme price and
volume fluctuations which have affected the market price for many companies
in our industry which have been unrelated to the operating performance of
these companies. These market fluctuations may have a material adverse
effect on the market price of our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
As of March 17, 1999, a total of 16,448,300 shares of common stock were
outstanding. The 419,300 shares of common stock held by the selling
shareholders, along with the 750,000 shares of common stock distributed to
7
PinkMonkey.com shareholders will be eligible for immediate resale in the
public market. All of the remaining 15,279,000 shares of common stock
outstanding will be subject to resale pursuant to the provisions of Rule 144.
Sales of common stock in the public market may have an adverse effect on
prevailing market prices for the common stock.
CONFLICTS OF INTEREST BETWEEN THE COMPANY AND PINKMONKEY.COM
Mr. White has served as a director of PinkMonkey.com since May 1998 and
has been issued a warrant to purchase 100,000 shares of PinkMonkey.com common
stock at an exercise price of $0.625 per share expiring April 2001. Mr. White
abstains from voting on all matters involving transactions between
PinkMonkey.com and Houston Interweb. Mr. Magness owns 70,000 shares of
PinkMonkey.com common stock. Mr. Magness will participate in the
distribution of common stock to PinkMonkey.com shareholders. We can provide
no assurance that the ownership of equity securities by the above individuals
will not result in potential conflicts of interest. If conflicts of interest
do arise, such conflicts may have an adverse effect on the company. We
believe the 750,000 share issuance was made in a good-faith, arms-length
transaction.
PINKMONKEY.COM MAY BE DEEMED TO BE AN UNDERWRITER
PinkMonkey.com might be deemed to be an underwriter by reason of its
intent to distribute its 750,000 shares to its shareholders. A consequence
to PinkMonkey.com, should it be deemed to be an underwriter is that any
person who purchases the registered shares within three years after the
distribution could assert a claim against PinkMonkey.com under Section 11 of
the Securities Act. The purchase could be in the open market as long as the
shares purchased can be traced to the shares PinkMonkey.com distributes to
its shareholders. Such a claim, to be successful, must be based upon a
showing that statements in this registration statement were false or
misleading with respect to a material fact or that the registration statement
omitted required material information. We have not agreed to indemnify
PinkMonkey.com regarding this potential liability.
STATUS OF PINKMONKEY.COM SHAREHOLDERS WHO RESELL COMMON STOCK
PinkMonkey.com shareholders who subsequently resell shares of common
stock to the public may be deemed to be underwriters with respect to such
shares for purposes of the Securities Act with the result that they may be
subject to certain statutory liabilities if this registration statement is
defective. We have not agreed to indemnify any of these shareholders
regarding this potential liability. In addition, any profit on the sale of
shares of common stock might be deemed underwriting discounts and commissions
under the Securities Act.
PENNY STOCK REGULATIONS MAY DECREASE YOUR ABILITY TO SELL OUR COMMON STOCK
The SEC has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00. The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document prepared by the SEC that provides information about penny stocks and
the nature and level of risks in the penny stock market. The broker-dealer
also must provide the customer with bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise
exempt from such rules, the broker-dealer must make a special written
determination that a penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in any secondary market for a stock that becomes subject to the
penny stock rules. Our common stock may be currently subject to the penny
stock rules, and accordingly, investors purchasing shares under this
prospectus may find it difficult to sell their shares in the future, if at
all.
YEAR 2000 IMPLICATIONS
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field and cannot
reliably distinguish dates beginning on January 1, 2000 from dates prior to
the year 2000. Many companies' software and computer systems may need to be
upgraded or replaced in order to correctly process dates beginning in 2000
and to comply with the Year 2000 requirements. We have reviewed our internal
programs and have determined that there are no significant Year 2000 issues
within our systems or services. However, although we believe that our
systems are Year 2000 compliant, the equipment and software used by our
licensees, resellers or customers may not be Year 2000 compliant. Failure of
such third-party equipment or software to properly process dates for the year
2000 could result in unanticipated expenses and a loss of revenues, which
could have a material adverse effect on our business.
8
CONTINUED CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
Prior to the distribution, the directors and executive officers and
their affiliates beneficially own approximately 81% of the outstanding common
stock. As a result, these stockholders could exercise control over all
matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. This concentration of
ownership may have the effect of delaying or preventing a change in control.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR AMENDED AND RESTATED
ARTICLES OF INCORPORATION AND BY-LAWS AND THE POSSIBLE ISSUANCE OF PREFERRED
STOCK
Our board of directors has the authority to issue up to 5,000,000 shares
of preferred stock without any further vote or action by the stockholders,
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights of those shares. Since the preferred stock could be
issued with voting, liquidation, dividend and other rights superior to those
of the common stock, the rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of
preferred stock. The issuance of preferred stock could make it more
difficult for a third party to acquire a majority of our outstanding voting
stock.
LACK OF DISINTERESTED, INDEPENDENT DIRECTORS
All of our directors have a direct financial interest in the company.
While we believe that our current directors will be able to exercise their
fiduciary duty, we intend to add independent, disinterested directors to
serve on the board of directors in the near future.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus, in particular in
the "Risk Factors" and "Business sections, discuss future expectations,
contain projections of results of operation or financial condition or state
other "forward-looking" information. These statements are subject to known
and unknown risks, uncertainties, and other factors that could cause the
actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and
is derived using numerous assumptions. In our opinion, important factors
which may cause actual results to differ from projections include:
- the success or failure of our management's efforts to implement their
business strategy;
- our ability to enter into joint ventures or partnerships with
established industry participants;
- our ability to raise sufficient capital to meet operating
requirements;
- the uncertainty of consumer demand for our technology;
- our ability to protect our intellectual property rights;
- our ability to compete with major established companies;
- the effect of changing economic conditions;
- the effect of changing technology;
- our ability to attract and retain quality employees; and
- other risks which may be described in future filings with the SEC.
We do not promise to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could affect
those statements.
USE OF PROCEEDS
The company will not receive any proceeds from the distribution of the
company common stock to PinkMonkey.com shareholders or the resale of common
stock by the selling stockholders.
9
DIVIDEND POLICY
The company has not paid any dividends on its common stock and expects
to retain any future earnings for use in its business. Future dividend
policy will be determined by the board of directors and will depend on a
number of factors, including the company's future earnings, capital
requirements, financial condition and future prospects, restrictions on
dividend payments pursuant to any of the company's future credit or other
agreements, and such other factors as the board of directors may deem
relevant.
CAPITALIZATION
The following table sets forth the capitalization of the company at
January 31, 1999. This table should be read in conjunction with the
company's financial statements and notes included elsewhere in this
prospectus.
JANUARY 31, 1999
Long-term debt................................. $ -
Shareholders deficit:
Common Stock, no par value,
50,000,000 shares authorized; 16,281,633
shares issued and outstanding.............. 1,090,950
Stock subscription receivables............. (14,609)
Accumulated deficit........................ (1,355,211)
-----------
-----------
Total shareholders' equity (deficit)....... $ 278,870)
-----------
-----------
Total capitalization........................... $ (812,080)
____________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the
financial statements and notes contained in this prospectus.
GENERAL
The following analysis compares the financial condition of the company
for the period from inception (August 9, 1996) to July 31, 1997 and the year
ended July 31, 1998, and for the six months ended January 31, 1998, as
compared to the six months ended January 31, 1999.
The company recognizes revenue as services are provided, in accordance
with customer agreements. For the year ended July 31, 1998, approximately
24% and 22% of the company's total revenues were derived from Websource
Media, a company licensee, and Bauge, an independent reseller, respectively.
Royalty income from software licensing agreements is recognized as it is
earned per the individual terms of each royalty agreement, and is generally
comprised of a minimum amount plus a stated percentage of the applicable
licensee's sales. The company uses the direct write-off method in accounting
for bad debts, the results of which are not materially different from the
allowance method.
The company accounts for property and equipment at cost with depreciation
calculated using the straight-line method over its estimated useful lives
ranging from five to ten years. When assets are retired or otherwise removed
from the accounts, any resulting gain or loss is reflected in income for the
period. The cost of maintenance and repairs is charged to expense as
incurred and significant renewals and improvements are capitalized.
10
The company utilizes the liability method in accounting for income
taxes. Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using anticipated tax rates and laws
that will be in effect when the differences are expected to reverse. The
realizability of deferred tax assets are evaluated annually and a valuation
allowance is provided if it is likely that the deferred tax assets will not
give rise to future benefits in the company's tax returns.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE PERIOD FROM INCEPTION TO JULY 31, 1997
COMPARED WITH THE RESULTS OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1998, AND
FOR THE SIX MONTHS ENDED JANUARY 31, 1998 COMPARED WITH THE SIX MONTHS ENDED
JANUARY 31, 1999.
Revenues increased from $185,994 for the period from inception through
July 31, 1997 to $628,070 for the year ended July 31, 1998. The increase of
$442,076 or 238% was primarily due to growth in web sites developed and
SITEBLAZER license sales. Revenues decreased from $262,437 for the six
months ended January 31, 1998, to $258,797 for the six months ended January 31,
1999. The decreased amount is $3,690 and is attributable to decreased dial-up
resales.
Consulting expense increased from $-0- for the period from inception
through July 31, 1997 to $749,990 for the year ended July 31, 1998. The
increase of $749,990 reflects the issuance of common stock to PinkMonkey.com
in exchange for consulting services. The fair value of these issued shares
totaling $749,990 was recorded as a consulting expense by the company in July
1998.
Advertising expense increased from $12,173 for the six months ended
January 31, 1998, to $33,173 for the six months ended January 31, 1999. The
increase of $21,000 or 173% primarily reflects costs of print advertising for
the launch of Political Net.com.
General and administrative expenses increased from $3,605 for the period
from inception through July 31, 1997 to $20,096 for the year ended July 31,
1998. The increase in general and administrative expenses of $16,491 or 457%
primarily reflects the company's emergence from its development stage.
General and administrative expenses increased from $3,152 for the six months
ended January 31, 1998 to $47,803 for the six months ended January 31, 1999.
The increase in general and administrative expenses of $44,651 or 1,417%
primarily reflects the company's emergence from its development stage.
The company had a ($64,832) net loss for the period from inception
through July 31, 1997 compared with a net loss of ($781,595) for the year
ended July 31, 1998. The increased net loss of $716,763 or 1,106% is due
primarily to the promotional expense recorded by the company in July 1998 for
the fair value of common stock issued to PinkMonkey.com. The company had a
($13,587) net loss for the six months ended January 31, 1998 compared with a
net loss of ($508,784) for the six months ended January 31, 1999. The
increased net loss of $495,197 or 3,644% is due primarily to the increase in
professional fees associated with this registration statement and an increase
in salaries of $197,816.
Net loss per share of common stock increased from $(.00) to $(.05) for
the period from inception (August 9, 1996) through July 31, 1997, compared to
the year ended July 31, 1998.
The company may in the future experience significant fluctuations in its
results of operations. Such fluctuations may result in volatility in the
price and/or value of the company's common stock if any market develops.
Results of operations may fluctuate as a result of a variety of factors,
including demand for the company's design and creation of Internet web sites,
the introduction of new products and services, the timing of significant
marketing programs, the success of reseller and license agreements, the
number and timing of the hiring of additional personnel, competitive
conditions in the industry and general economic conditions. Shortfalls in
revenues may adversely and disproportionately affect the company's results of
operations because a high percentage of the company's operating expenses are
relatively fixed. Accordingly, the company believes that period to period
comparisons of results of operations should not be relied upon as an
indication of future results of operations. There can be no assurance that
the company will be profitable. Due to the foregoing factors, it is likely
that in one or more future periods the company's operating results will be
below the expectations of the investor.
The financial statements included herein have been prepared assuming the
company will be able to continue as a going concern. The company has a
working capital deficit of $106,092 and a stockholders' deficit of $92,427 at
July 31, 1998, and experienced significant losses in fiscal 1998 which raise
doubts about the Company's ability to generate sufficient cash flow to meet
its obligations on a timely basis, to obtain additional financing or capital
and to refinance its debt and ultimately attain profitable operations.
11
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1998, the company's primary source of liquidity was
$18,988 of cash and $116,271 of accounts receivable. The company's working
capital deficit and shareholders' deficit was $74,061 and $60,832 at July 31,
1997, as compared to a working capital deficit of $106,092 and a shareholders'
deficit of $92,427 at July 31, 1998. As of January 31, 1999, the company's
primary source of liquidity was $43,640 of cash and $51,246 of accounts
receivable. The company's working capital deficit and shareholders' deficit
was $81,969 and $74,419 at January 31, 1998, as compared to a working capital
deficit of $297,219 and a shareholders' deficit of $278,870 at January 31,
1999.
Net cash provided by operating activities during the year ended July 31,
1998 was $3,169 compared with net cash used in operating activities of $275
for the period from inception through July 31, 1997. The increase in net
cash provided by operating activities was primarily due to the decreased net
loss after backing out the effect of the consulting expenses recorded in July
1999 described herein. Net cash used in operating activities during the six
months ended January 31, 1999 was $182, 992 compared with net cash provided
by operating activities of $39,228 for the six months ended January 31, 1998.
The increase in net cash used in operating activities was primarily due to
the increase in net loss for the six months ended January 31, 1999 of
$495,187, offset by common stock issued as compensation and a decrease in
accounts receivable.
Net cash used in investing activities the year ended July 31, 1998, was
$2,332 compared with net cash used in investing activities of $14,796 for the
period from inception to July 31, 1997, respectively. The decrease in the
net cash used in investing activities is attributed to the decrease in the
purchase of property and equipment. Net cash used in investing activities
was $2,332 and $5,954 for the six months ended January 31, 1998 and the six
months ended January 31, 1999, respectively. The increase in the net cash
used in investing activities was attributed to an increase in purchases of
property and equipment.
Net cash provided by financing activities was $25,275 for the period
from inception (August 9, 1996) through July 31, 1997 compared with net cash
provided by financing activities of $7,947 for the year ended July 31, 1998.
The decrease in net cash provided by financing activities was primarily due
to the repayment of a note. Net cash provided by financing activities was
$5,414 for the six months ended January 31, 1998 compared with net cash
provided by financing activities of $213,598 for the six months ended
January 31, 1999. The increase in net cash provided by financing activities
was primarily due to proceeds from issuance of common stock of $198,200.
The company's internally generated cash flows from operations have
historically been and continue to be insufficient for its cash needs. As of
July 31, 1998, the company's sources of external and internal financing were
limited. It is not expected that the internal source of liquidity will
improve until significant net cash is provided by operating activities, and
until such time, the company will rely upon external sources for liquidity.
The company has an unsecured revolving line of credit in the amount of
$30,000 with Texas Commerce Bank, and as of January 31, 1999, had utilized
approximately $29,200 of this line of credit. There can be no assurance that
the company will be able to obtain additional financing on reasonable terms,
if at all. Until the company can obtain monthly sales levels of approximately
$90,000 which would be sufficient to fund current working capital needs, there
is uncertainty as to the ability of the company to expand its business and
continue its current operations. The company believes that it will be able
to satisfy its cash requirements for the next 12 months. Historically,
revenues have covered costs. Management believes that projected revenues from
licensees will cover costs. There is no assurance that the current working
capital will be sufficient to cover cash requirements for the balance of the
current fiscal year or to bring the company to a positive cash flow position.
Lower than expected earnings resulting from adverse economic conditions or
otherwise, could restrict the company's ability to expand its business as
planned, and if severe enough may shorten the period in which the current
working capital may be expected to satisfy the company's requirements, force
curtailed operations, or cause the company to sell assets. The financial
statements included herein have been prepared assuming the company will be
able to continue as a going concern. The company has a working capital
deficit of $106,092 and a stockholders' deficit of $92,427 at July 31, 1998,
and experienced significant losses in fiscal 1998 which raise doubts about
the Company's ability to generate sufficient cash flow to meet its obligations
on a timely basis, to obtain additional financing or capital and to refinance
its debt and ultimately attain profitable operations.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
12
The company's board of directors has developed a Year 2000 strategy and
has established a committee to determine the extent to which the company's
operations are vulnerable to Year 2000 Issues. The company believes its
operations are Year 2000 compliant. However, variability of definitions of
"compliance" with the Year 2000 and of different combinations of software,
firmware, and hardware may lead to lawsuits against the company. The
outcomes of any such lawsuits and the impact of the company are not estimable
at this time. The Year 2000 may affect the company's internal systems,
however management believes the effect will be minimal as the company
purchased its hardware systems within the last two years from name
manufacturers who have certified the equipment year 2000 compliant in their
manufacturer's warranty. Management believes out of pocket costs associated
with Year 2000 will be minimal. The company has reviewed its internal
programs and has determined there are no significant Year 2000 issues within
its systems or services. However, although the company believes its systems
are Year 2000 compliant, the equipment and software used by its licensees,
resellers or customers may not be Year 2000 compliant. Failure of such
third-party equipment or software to properly process dates for the year 2000
could result in unanticipated expenses and loss of revenues, which could have
an adverse effect on the company's business. There can be no guarantee that
the systems of other companies on which the company's operations rely will be
timely converted. Any Year 2000 compliance problems of the company could
have a material adverse effect on the company's business.
BUSINESS
THE COMPANY
The company was incorporated in the State of Texas in August 1996. The
company is a web development company that specializing in the design,
creation and marketing of cost-effective Internet products. The company
strives to provide businesses, of all sizes, with interactive Internet web
sites along with marketing services, to create long-term value for its
customers worldwide. Some of the company's marketing services include:
- search engine marketing, which is marketing via advertisements that
post findings on the results page of a search on the Internet,
- news group postings,
- custom statistical counters which provide statistical information
about the visitors to a web site,
- web site tracking logs which record the number of visitors to a web
site, and
- other traditional marketing methods.
In addition, the company develops customized software programs, on various
platforms, that are Internet compatible (i.e. accounting/finance interfaces,
online databases and Oracle/Lotus Internet database interfaces). The
company's long-term strategy is to create valuable interactive web sites,
e-commerce interfaces/sites and Intranets and Extranets, which will empower
companies to utilize the super-efficiencies of the Internet worldwide. The
company assists its customers in improving their Internet presence for
products or services offered. The company uses proprietary technology for
the creation of web sites which increases the chances that the company's
customers' web sites are seen by an Internet user irrespective of the search
engine used. Most of the company's custom web sites have password protected
administrative areas that allow the company's customers to update their site
with little or no programming skills. Although the majority of the company's
current revenues are derived from custom web site design and search engine
marketing, the company is expanding its operations to include a wider variety
of interactive databases, electronic commerce sites, and network security.
The company offers instant web presence through SiteBlazer.com by
offering its customers a tool to build customized, updateable web sites. The
company developed SiteBlazer.com as a solution for mass production of
affordable custom/dynamic web sites. Management expects SiteBlazer.com to
provide an avenue for timely web site production at a reduced cost. The
company's business divisions utilize SiteBlazer.com and the company's
proprietary technology. Customers' web sites are included in the
SiteBlazer.net network search engine if the monthly hosting fee is
maintained.
THE INTERNET AND WORLD WIDE WEB
The Internet is a global collection of thousands of computer networks
interconnected to enable commercial organizations, educational institutions,
government agencies and individuals to communicate electronically, access and
share information and conduct business. The Internet was historically used
by a limited number of academic institutions, defense contractors and
government agencies. It was used primarily for remote access to host
13
computers and for sending and receiving electronic mail. Presently,
commercial organizations and individuals are dominating the use of the
Internet. Recent technological advances, improved microprocessor speed and
the development of easy-to-use graphic user interfaces, combined with
cultural and business changes, have enabled the Internet to be integrated
into the operations, strategies, and activities of countless commercial
organizations and individuals.
The Internet and the World Wide Web have introduced fundamental and
structural changes in the way information can be produced, distributed and
consumed, lowering the cost of publishing information and extending its
potential reach. Companies from many industries are publishing product and
company information or advertising materials, collecting customer feedback
and demographic information interactively, and offering their products for
sale on the web. The structure of web documents allows organizations to
publish significant quantities of product information, while simultaneously
allowing each user to view only those elements of the information which are
of particular interest to them. This feature makes possible the dynamic
tailoring of information delivery, to each user's interests, timely and cost
effective. The web, by facilitating the publishing and exchange of
information, is dramatically increasing the amount of information available
to users.
BUSINESS STRATEGY
The mission of each company division is to become one of the predominant
service providers within each division's respective market niche. The critical
success factors are:
- understanding, developing and applying information technology to the
Internet, interactive media markets, and data access and software
tools;
- narrowing market focus while consummating strategic alliances to
complement product and service offerings;
- investing in strategic Internet or interactive media investments or
acquisitions, and
- most importantly, a continued understanding of customers' needs.
Management expects to utilize its expertise in database design/development
and project management to create new database management products, and a
suite of product and service offerings, that will enable sophisticated direct
interactive marketing environments. Management believes these new products
will enable the company to take advantage of the demand for data management
services created from the Internet and interactive media, while continuing to
grow and invest in its design and development of web sites.
The company has adopted a strategy of seeking opportunities to realize
gains through the selective investment in companies whose web sites are
designed and developed by the company. The company believes that this
strategy provides the ability to increase shareholder value, as well as
provide diversification within the company. Additionally, the company plans
to continue to develop and refine the products and services of its
businesses, with the goal of increasing revenue as new products are
commercially introduced.
With respect to its businesses, the company will seek to expand its
participation in Internet, and interactive media industries, and increase its
market share. Key elements of this strategy include:
- UTILIZE THE LATEST TECHNOLOGY AVAILABLE TO THE INTERNET, INCLUDING
JAVA, JAVASCRIPT, NEOWEB SCRIPT, TCL/TK AND SHOCKWAVE, TO ACHIEVE
OPTIMUM INTERNET PRESENCE. The company builds web sites without the
use of editors based on hypertext markup language (HTML), which is an
authoring language used to create documents on the World Wide Web.
Such editors often do not support many new additions to the web and
use codes designed for one particular kind of web server that could
present problems. The company is constantly increasing its
technological capabilities through the enhancement of existing
software and the re-engineering of the company's proprietary database
software in order to allow the company's customers greater ability to
access, analyze and update their own databases through the use of the
company's computer services and software.
- CONTINUE TO ENHANCE AND EXPAND THE COMPANY'S PRODUCTS AND SERVICES.
The company has invested significant resources in new business ideas
or investments which seek to capitalize on opportunities surrounding
the growth of the Internet and the interactive marketing industry.
The company intends to continue to pursue the growth and development
of its technologies and services and to introduce its products
commercially.
14
- PROVIDE THE HIGHEST LEVEL OF CUSTOMER SERVICE. Management plans to
create an Internet presence that adds value to its clients
organizations.
- PURSUE INNOVATIVE ADVERTISING SOLUTIONS. The company is actively
seeking to develop innovative ways for advertisers to effectively
reach their target audiences through the Internet. The company
designs and offers customized packages which include the ability to
change advertisements quickly and frequently, to link a specific
search term to an advertisement, to conduct advertising test campaigns
with rapid result delivery and to track daily usage statistics. The
company is continuing its development of software that will provide it
with the ability to target ads based on demographics and usage
patterns.
- CROSS-SELL PRODUCTS AND SERVICES. The company is involved in many
aspects of the direct marketing sales cycle. The company has
experienced initial success in increasing the number of products and
services purchased by its existing clients and intends to further this
expansion.
DIVISIONS
CUSTOM WEB SITE DEVELOPMENT
The company develops high-end custom web sites, encompassing original
graphics and innovative layouts. The company's business strategy is to
develop and design web sites that achieve growth and organizational
optimization for the company's customers by creating more efficient
navigation, utilizing interactive databases, and by using proprietary
technology to increase the likelihood of being found at or near the top of
search engines. Management believes that its web site pricing is very
competitive. The interactive databases enable customers to self-manage their
web sites internally. Many of the company's proprietary scripting programs
are adapted and included in individual web sites, allowing customers to
manage, modify, and maintain their web sites with little or no programming
knowledge. The company currently hosts one hundred eighty custom we sites
which it has developed.
SITEBLAZER.COM
The focus of SiteBlazer.com is to allow companies to build customized,
updateable web sites, within minutes, at a reduced cost. Management
estimates that Interactive web sites typically cost $3,000 to develop, which
does not include fees for hosting or changes. For approximately $450 plus a
$20 per month hosting fee, SiteBlazer.com offers customers a three page web
site. Also through SiteBlazer.com, the company offers additional options for
customers to purchase and add to their site, i.e., products page, what's new
page, press release page, services page, calendar of events page, interactive
forum page and a wide variety of counters, statistic programs, and shopping
cart or e-commerce solutions. The individual makes changes to the web site,
eliminating any fees for changes. SiteBlazer.com sites also offer an
economic avenue to broaden a client's Internet exposure. SiteBlazer.com
offers hundreds of professional images, templates, and graphic designs.
SiteBlazer.com's templates are constantly replaced, giving web site visitors
an appearance of the site being constantly updated. These changes are
randomly selected from a large collection of templates which are custom
designed for specific business categories. With client-related information
and content, SiteBlazer.com can build a site. SITEBLAZER sites can be built
individually on-line, or data can be collected and uploaded in batches. With
SiteBlazer.com, the company's customers are given a password which allows
them to change information on their site at any time, at no extra charge. In
addition, when web sites are created, description, title, and keyword tags
are automatically embedded in them to attract major search engines.
Management believes SiteBlazer.com's templates and databases are easily
adapted to other SITEBLAZER applications and the company plans to license its
technology with a desire to reach a large number of customers. SiteBlazer.com
has been in existence since January 1998 and was launched May 1998. The
company has developed one thousand five hundred ninety five SiteBlazer.com
web sites. The company's licensees have developed approximately forty-five
thousand SiteBlazer.com web sites.
SITEBLAZER NETWORK
The SITEBLAZER network is a business-to-business web guide/search engine
designed to increase sales for its customers. The SiteBlazer.com program
allows a business to have a stand-alone customized web site and still be part
of the SITEBLAZER network. The company believes that the SITEBLAZER network
contains up-to-date information, as each web site must pay a monthly hosting
fee in order to continue to be on the SITEBLAZER network. The company is
populating the SITEBLAZER network with SiteBlazer.com web sites and expects
to launch the SITEBLAZER network as a search engine. At the time of launch,
the SITEBLAZER network will allow non-SiteBlazer.com web sites to be included
in the SITEBLAZER network search engine for a nominal fee.
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INTERACTIVE DATABASES
The company has developed proprietary technology involving interactive
databases. The interactive databases enable customers to self-manage their
web sites internally. Many of the company's proprietary scripting programs
are adapted and included in individual web sites, allowing customers to
manage and modify their web sites. The company's interactive databases offer
a cost-effective alternative to products and services offered by its
competitors, and have been successfully implemented in a wide range of
applications and by Fortune 500 companies, like Union Carbide and CSX.
POLITICAL NET.COM
The company's Political Net.com provides what management believes will
be a rapidly growing network of political web sites by including links to
existing sites in the database which are updated on an on-going basis.
Visitors can search for politician's sites, participate in online political
discussions, keep up-to-date with the most recent news or political events,
or even cast their vote in weekly polls. Political Net.com also has chat
rooms that focus on topics of interest ranging from family and education
issues to foreign affairs. The company believes that Political Net.com
provides politicians with a tool to build web sites for themselves quickly
and more economically than ever before. Besides offering politicians
inexpensive custom web sites, Political Net.com supplies sites to political
parties at the county level and above, free of charge. Politicians are
already operating sites on Political Net.com.
Political Net.com provides candidates with an opportunity to employ
online questionnaires. Candidates can post up to twenty customized questions
on their site which saves the costs associated with printing and mailing
questionnaires. Potential voters can fill out the questionnaires and submit
them with a keystroke. Candidates receive realtime information on what their
constituents think about the issues, and can tailor their approaches
accordingly. For $500, politicians get a web site with six pages (home page,
more info, newsletter, press releases, a contact form for voters to fill out
for more information, and an interactive forum page where readers can post
their comments or questions) and candidates can post their answers or views.
For additional charges, politicians can load up to three pages of their
existing literature or brochures into their sites. They can also have their
own photo gallery of up to 20 pictures or include up to five minutes of video
clips or campaign commercials. Political Net.com's technology is derived from
the adaptability of SiteBlazer.com and the SITEBLAZER network. Political
Net.com provides a gateway for users to search for their local politicians or
candidates and interact with them. Management believes current issues,
on-line voting, news feed and resource links make Political Net.com
attractive to the average Internet user as well as political parties.
Political Net.com has been in existence since July 1998 and was launched in
August 1998. The company has developed one hundred ten Political Net.com web
sites.
ONLINE ACCOUNTING FINANCIAL PACKAGE
The company is currently developing an online accounting financial
package to utilize the Internet to perform accounting work anywhere in the
world. The online accounting financial package will allow a company to
maintain its records online, including receipts and invoices. The online
accounting financial package entails scanning invoices and receipts offsite
by existing employees of the particular company. The online accounting
financial package utilizes the Internet, and its inexpensive costs, to
transmit all of its data throughout the world. All data is archived in a
securable database on a secure Internet server. This system may reduce, or
even eliminate, the traveling expenses of accountants/bookkeepers. Online
accounting has been 30% developed. Expected launch is the fourth quarter of
1999. The company is not aware of any material conditions or uncertainties
which need to be resolved prior to commercialization.
ONLINE AUCTION SYSTEM
The company has developed an online auction system which will allow
traditional sealed bids or bids that can be viewed online. The online
auction system allows dealers to view and bid on items online with products
being sold to the highest bidder. The online auction system is adaptable and
can be altered from a silent auction, to an auction where the highest bid and
bidder are known. In order to utilize the online auction system, a person
will need to be pre-approved by the company based on standards provided by
the entity hosting the auction. Online auction was successfully beta-tested
by CSX in December 1998. Online auction was launched in February 1999.
Online auction needs no additional development prior to commercialization,
and there are no material conditions or uncertainties which need to be
resolved prior to commercialization.
CAMPUS NETWORK
The company developed Campus Network to allow individuals of
organizations to build customized, up-datable web sites. Management expects
to offer Campus Network to alumni, student groups and organizations, and
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fraternities and sororities. Campus Network will allow each individual to
have his own customized web site, and also to be a part of a group web site.
Campus Network utilizes the SiteBlazer.com program and the SITEBLAZER
network. Campus Network was fully beta-tested in November 1998. Campus
Network was launched in January 1999. Campus Network needs no additional
development prior to commercialization, and there are no material conditions
or uncertainties which need to be resolved prior to commercialization.
HUNTING AND FISHING.COM
The company is developing Hunting and Fishing.com and expects it to
become one of the most comprehensive collections of hunting and fishing
resources on the Internet. The company plans to utilize SiteBlazer.com and
the SITEBLAZER network technology for classified advertisements on Hunting
and Fishing.com's searchable catalogs to search for: merchandise, hunting and
fishing equipment, hunting and fishing licenses/leases, locations to visit
and where to stay, state parks and wildlife, hunting seasons and hunting and
fishing regulations. Hunting and Fishing.com will allow users to maintain an
independent web site, while at the same time being part of a network.
Hunting and Fishing.com is 60 % complete. The expected launch date is Fall
1999. The company is not aware of any material conditions or uncertainties
which need to be resolved prior to commercialization.
LEGAL NET
The company is developing a legal network to utilize the technology of
the SITEBLAZER network to offer web sites to attorneys and law firms. The
company expects attorneys and law firms to utilize Legal Net to increase the
exposure of their web sites by targeting specific topics which will raise the
likelihood of placement/selection on search engines. Legal Net is complete,
but has not been beta-tested. The expected launch date is summer 1999. The
company is not aware of any material conditions or uncertainties which need
to be resolved prior to commercialization.
COMMERCE PARTNER
ARFRA
The company owns a 30% interest in ARFRA, an Internet provider of pet
medical records. ARFRA provides documented medical records detailing a pet's
medical history in the event that an unexpected medical emergency should
arise, or simply to provide a more organized record of a pet's medical
history. ARFRA provides all participating veterinarians from anywhere in the
continental United States, timely access to a pet's medical history. With
ARFRA, pet-owners have the ability to offer timely, life-saving information
to all emergency veterinary personnel by presenting an ARFRA access card to
any veterinarian and the pet's medical history will be available twenty-four
hours a day, three hundred and sixty-five days a year. Each record is
securely protected by a personal identification number. The annual
cardmember fee is only $25 per year. Nominal update fees may be assessed
depending upon the veterinarian visited. ARFRA also offers a unique service
called pet-locator. By simply contacting any participating veterinarian,
pet-owners now have the unique ability to immediately post a "Lost Pet"
bulletin to the network. The bulletin will remain a part of the network
records until ARFRA is notified of a pet's recovery. To further assist in
the recovery effort, ARFRA will broadcast a personal e-mail message about a
missing pet to all ARFRA cardmembers in a member's specific area. In
addition, ARFRA allows pet-owners the ability to identify a veterinarian
through "Vet Locator." Vet Locator is a network catalog of licensed
veterinarians throughout the United States that is provided on a
complimentary basis to all members. The company expects to utilize
SITEBLAZER technology, allowing pet owners and prospective pet owners to
design web sites for: the purchase and sale of pets, grooming/breeding and
care of pets, and a pet cemetery. The sites will be indexed in a search
engine specific to ARFRA and with the same restrictions as the SITEBLAZER
network. ARFRA currently does not have any revenues, and has not distributed
any dividends. In addition, other than test participants, there are
currently no participating pets or vets in the ARFRA system. The company can
provide no assurance that ARFRA will become profitable in the future. The
majority shareholder of ARFRA has granted the company an option to purchase
the remaining 70% of ARFRA in exchange for 10,000 shares of company common
stock.
AFFILIATED TRANSACTION
NETTRADE ONLINE, L.L.C.
In November 1997, the company entered into an agreement with NetTrade
Online, L.L.C., a Texas limited liability company, to design, develop,
produce and install a computer program and related materials consisting of an
interactive web site providing real time/on-line trading of various
commodities, incorporating functions commercially available at the time. The
company agreed to provide all system engineering services necessary to
17
design, develop, produce, install, and maintain the program and the hardware.
These services include, but are not limited to, special studies, programming
and application design and development, systems analysis and design,
conversion and implementation planning, and installation evaluation. The
company intends to expand this technology to other commodities. NetTrade
paid the company $80,000 in connection with this agreement. Webvest, Inc., a
company owned by Messrs. White, Magness and Finn, has a 20% ownership
interest in NetTrade.
NetTrade has been fully beta-tested. NetTrade's expected launch is
March 1999. NetTrade needs no additional development prior to
commercialization, and there are no material conditions or uncertainties
which need to be resolved prior to commercialization.
SALES AND MARKETING
The company markets its products and services through a marketing staff
using both telemarketing and direct sales. The company advertises its
products and services through several media sources including trade journals
and radio advertising. The company is in the process of developing a
television media campaign. The company attends numerous trade shows in the
Internet, high technology, and business markets, while further supplementing
its sales efforts with space advertising and product and services listings in
appropriate directories.
COMPETITION
The market for customers, visitors and related products and services are
intensely competitive and such competition is expected to continue to
increase. There are no substantial barriers to entry in this market and the
company believes that its ability to compete depends upon many factors within
and beyond its control, including:
- timing and market acceptance of new products and services developed by
the company and its competitors,
- customer service and support,
- sales and marketing efforts, and
- the ease of use, performance, price and reliability of the company's
products and services.
The company competes with:
- Internet content providers and ISPs, including web directories,
- search engines,
- shareware archives,
- content sites,
- commercial online services and sites maintained by Internet service
providers,
- as well as thousands of Internet sites operated by individuals and
government and educational institutions.
The company believes that the principal competitive factors in attracting
customers include the amount of traffic on its web site, brand recognition,
customer service, the demographics of the company's customers and viewers,
the company's ability to offer targeted audiences and the overall
cost-effectiveness of the products and services offered by the company. The
company believes that the principal competitive factors in attracting search
engines to a customer's web site include the company's design, title, meta
tags descriptions and key words. The company believes that the number of
Internet companies relying on revenues from their company web site will
increase substantially in the future. In turn, the company will likely face
increased competition, resulting in increased pricing pressures on its web
site design rates which could in turn have a material, adverse effect on the
company's business.
RESEARCH AND DEVELOPMENT
The company develops and markets a variety of Internet related products
and services, as well as a number of database software technologies. These
industries are characterized by rapid technological development. The company
believes that its future success will largely depend upon its ability to
continue the enhancement of its existing products and services and the
development of other products and services which complement existing ones.
18
To date, the company has incurred nominal research and development expenses.
In order to respond to rapidly changing competitive and technological
conditions, the company expects to incur significant research and development
expenses during the initial development phase of new products and services as
well as on an on-going basis with established products.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The company regards its technology as proprietary and attempts to
protect it by relying on trademark, service mark, copyright and trade secret
laws and restrictions on disclosure and transferring title and other methods.
The company currently has no patents or patents pending and has not filed
for patent protection, and does not anticipate that patents will become a
significant part of the company's intellectual property in the future.
The company pursues the registration of its trademarks in the United
States and internationally. The company has applied for the registration of
the service mark and trademark SITEBLAZER and is in the process of applying
for the registration of the trademark Politicalnet in the United States. The
company is applying for a European Community Trademark for international
protection of SITEBLAZER in every country in the European Community.
Effective trademark, service mark, copyright and trade secret protection may
not be available in every country in which the company's services are
distributed or made available through the Internet, and policing unauthorized
use of the company's proprietary information is difficult.
The company currently licenses certain technologies to other companies
and utilizes an independent reseller to market and distribute the company's
products and services. The company has entered into the following material
agreements:
- In September 1997, the company entered into an agreement with
Websource Media in which the company agreed to transport Internet
protocol packets from Websource Media to the Internet and from the
Internet to Websource Media. Websource Media paid a setup fee of $480
in connection with this agreement and pays the company fees based on
the number of hits per day. This agreement automatically renews for
successive one-month terms at the company's then month-to-month rates.
- In June 1998, the company entered into a software reseller agreement
with Bauge in which the company granted Bauge a non-exclusive license
to market and distribute software products manufactured and hosted by
the company in return for royalty payments based on gross revenues of
basic web sites and various other royalty payments. In June 1999, the
agreement will automatically renew for successive one-year terms upon
Bauge achieving certain sales levels.
The company enters into confidentiality agreements with respect to its
proprietary technology and limits access to, and distribution of its
proprietary information.
EMPLOYEES
As of March 17, 1999, the company employed approximately 21 persons on a
full-time basis. None of the company's employees are represented by a labor
union. The company has entered into non-disclosure and non-competition
agreements with its key personnel which provide that upon the termination of
employment with the company for any reason, the individual will not compete
with the company for two years. The company believes the non-compete
covenants comply with state law, however, the company can provide you no
assurances that a state court may determine not to enforce or only partially
enforce such covenants. The company believes that its relations with its
employees are good.
DESCRIPTION OF PROPERTY
The company currently leases approximately 6,643 square feet of office
space in Houston, Texas. The lease expires in October 2000 and the monthly
rental is currently $7,196. The company believes that its existing
facilities are adequate to meet its current needs and to accommodate
anticipated growth.
AVAILABLE INFORMATION
The SEC maintains a web site on the Internet that contains reports,
proxy and information statements and other information regarding companies
that file electronically with the SEC. The address of the site is
http:\\www.sec.gov. Visitors to the site may access such information by
searching the EDGAR data base on the site.
19
Prior to the date of this prospectus, the company was not subject to the
information and reporting requirements of the Securities Exchange Act of
1934. As a result, the company will become subject to such requirements and
begin filling periodic reports, proxy materials and other information with
the SEC. The company will provide its shareholders with annual reports
containing audited financial statements and, if determined to be feasible,
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information. The company has filed a registration
statement on Form SB-2 under the Securities Act, with respect to the
securities being registered. This prospectus does not contain all the
information set forth in the registration statement and its exhibits and
schedules, to which reference is made. Copies of the registration statement
and its exhibits are on file at the offices of the SEC and may be obtained
upon payment of the fees prescribed by the SEC or may be examined, without
charge, at the public reference facilities of the SEC, 450 Fifth Street, N.W.,
Washington D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. Upon request,
the company will provide without charge to each person who receives a copy of
the prospectus, a copy of any of the information that is incorporated by
reference in this prospectus (not including exhibits to the information that
is incorporated by reference unless the exhibits are themselves specifically
incorporated by reference). Any request for information should be directed
to the company, attention Harry L. White, at 1770 St. James, Suite 420,
Houston, Texas 77056, (713) 627-9494.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The company's directors and executive officers are:
NAME AGE POSITION
---- --- --------
Harry L. White 40 Chairman, Chief Executive Officer, President,
Treasurer and Secretary
Richard J. Finn 22 Chief Technical Officer and Director
Lee A. Magness 34 Chief Financial Officer, General Counsel and
Director
HARRY L. WHITE has served as chairman, chief executive officer, president,
secretary and treasurer of the company since inception. Since May 1998,
Mr. White has served as a director of PinkMonkey.com, Inc., an Internet
publisher of educational study aids. From December 1986 through February
1997, Mr. White worked at Air Products and Chemicals, a hydrogen production
company, as the senior plant technician from December 1996 to February 1997.
Mr. White also served as an ISO 9000 Manager from January 1994 to February
1997.
RICHARD J. FINN has served as chief technical officer and director of
the company since inception. From December 1995 through February 1997,
Mr. Finn served as the assistant webmaster for Neosoft, Inc., an Internet
service provider. From August 1995 through December 1995, Mr. Finn served as
the assistant network administrator of CyberSin, an Internet service provider.
From October 1994 through August 1995, Mr. Finn served as an assistant network
administrator for Triconex Systems, Inc.
LEE A. MAGNESS has served as chief financial officer, general counsel
and director of the company since inception. Since August 1993, Mr. Magness
has served as a financial consultant to various individuals and corporations.
Prior to receiving his law degree from Thurgood Marshall School of Law,
Mr. Magness served as a senior economic analyst at Transco Energy Corporation.
All executive officers of the company are chosen by the board of
directors and serve at the board's discretion. There are no family
relationships among the company's officers and directors. The company plans
to reimburse directors for any expenses incurred in attending board of
directors and Year 2000 board committee meetings.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the chief
executive officer of the company for the fiscal year ended July 31, 1998 and
from inception (August 9, 1996) through July 31, 1997. No other executive
officers of the company received total annual salary and bonus for the fiscal
years ended July 31, 1998 or July 31, 1997 in excess of $100,000.
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SUMMARY COMPENSATION TABLE
LONG-TERM
NAME AND PRINCIPAL FISCAL OTHER ANNUAL COMPENSATION ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
-------- ---- ------ ----- --------------- ------- ------------
Harry L. White, 1998 $70,000(2)
Chief Executive 1997 $30,000(2)
Officer and President
_______________
(1) The named executive officer did not receive perquisites or other benefits
valued in excess of 10% of the total reported annual salary and bonus.
(2) This amount has not been paid to date and is currently being accrued.
EMPLOYMENT AGREEMENTS
In August 1996, Messrs. White, Finn and Magness entered into five year
written employment contracts that provide for a base salary of $30,000 for
the first year, $70,000 for the second year, and $120,000 annually for years
three through five. In addition, these employment agreements entitle each of
these individuals to an annual bonus of 1% of the company's earnings before
income taxes and depreciation in excess of $5,000,000. In addition to salary,
beginning in August 1998, Messrs. White, Finn and Magness each receive $600
per month as a car allowance and $200 per month for miscellaneous expenses.
If the company terminates an employment contract with cause, such executive
will not engage in certain activities in competition with the company for a
period of six months following such termination.
STOCK OPTIONS
In August 1998, the Board of Directors and stockholders adopted a stock
option plan under which 500,000 shares of common stock have been reserved for
issuance. As of the date of this prospectus, options to purchase 288,000
shares of company common stock have been granted pursuant to the plan. The
company does not have a defined benefit plan or any retirement or long-term
incentive plans.
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the
beneficial ownership of all shares of the company common stock prior to and
upon the completion of the distribution of such shares to PinkMonkey.com
shareholders by (i) each person who owns beneficially more than five percent
of the outstanding shares of common stock, (ii) each director of the company,
(iii) each named executive officer, and (iv) all directors and officers as a
group.
SHARES BENEFICIALLY PERCENTAGE OF SHARE BENEFICIALLY PERCENTAGE OF
OWNED BEFORE VOTING POWER OWNED AFTER VOTING POWER
THE BEFORE THE THE AFTER THE
NAME OF BENEFICIAL OWNER(1) DISTRIBUTION DISTRIBUTION DISTRIBUTION DISTRIBUTION
Harry L. White 4,488,000 27.3% 4,488,000 27.6%
Richard J. Finn 4,488,000 27.3% 4,488,000 27.6%
Lee A. Magness 4,207,500 25.6% 4,210,300(2) 25.6%
All directors and officer as 13,183,500 80.2% 13,186,300 80.2%
a group (3 persons)
_______________
(1) The business address of each individual is the same as the address of the
company's principal executive offices.
(2) Mr. Magness is the beneficial owner of 70,000 shares of PinkMonkey.com
common stock and will receive approximately 2,800 shares of company common
stock in connection with the distribution.
21
CERTAIN TRANSACTIONS AND ORGANIZATION WITHIN LAST FIVE YEARS
In August 1996, the company issued 4,488,000 shares of common stock to
Harry L. White, 4,488,000 shares of common stock to Richard J. Finn,
4,207,500 shares of common stock to Lee A. Magness, 726,000 shares of common
stock to Essitam Capital, Ltd., 709,500 shares of common stock to Sonsonate
Capital, Ltd., and 660,000 shares of common stock to Seyat Capital, Ltd. for
nominal consideration in connection with the company's formation. Peter
Eberly is president and director of Essitam Capital Ltd., Timur Pulatoe is
president and director of Sonsonate Capital, Ltd., and Woodward L. Terry is
president and director of Seyat Capital, Ltd.
In July 1997, Messrs. White and Magness loaned the company $5,378 and
$15,897, respectively. These loans bore interest at the rate of 6% per annum
and were repaid as of July 31, 1998.
In November 1997, the company entered into an agreement with NetTrade
for the design, development, production and installation of a computer
program consisting of an interactive web site on the Internet providing real
time/on-line trading of commodities. The company received $80,000 in
connection with this agreement. Webvest, Inc., a company owned by Messrs.
White, Magness and Finn, has a 20% ownership interest in NetTrade.
In September 1998, the company issued 750,000 shares of common stock to
PinkMonkey.com in consideration for $10, services rendered, and
PinkMonkey.com agreeing to distribute the 750,000 shares to PinkMonkey.com
shareholders. Additionally, the company agreed to file a registration
statement with the SEC registering the common stock distributed to
PinkMonkey.com shareholders. Harry L. White, a director of PinkMonkey.com,
was issued a warrant to purchase 100,000 shares of PinkMonkey.com common
stock at an exercise price of $.625 per share in consideration for services
rendered. Mr. Magness purchased 70,000 shares of PinkMonkey.com common stock
for in a private placement for an aggregate purchase price of $35,000.
DESCRIPTION OF SECURITIES
The company is authorized to issue up to 55,000,000 shares, of which
50,000,000 shares are no par value common stock, and 5,000,000 shares are
preferred stock, par value $.01 per share.
COMMON STOCK
The holders of shares of common stock are entitled to one vote per share
on each matter submitted to a vote of stockholders. In the event of
liquidation, holders of common stock are entitled to share ratably in the
distribution of assets remaining after payment of liabilities, if any.
Holders of common stock have no cumulative voting rights, and, accordingly,
the holders of a majority of the outstanding shares have the ability to elect
all of the directors. Holders of common stock have no preemptive or other
rights to subscribe for shares. Holders of common stock are entitled to such
dividends as may be declared by the board of directors out of legally
available funds. The outstanding common stock is, and the common stock to be
outstanding upon completion of this offering will be, validly issued, fully
paid and non-assessable.
PREFERRED STOCK
The company has authorized the issuance of up to 5,000,000 shares of
preferred stock. The company has no present plans for the issuance of such
preferred stock. The issuance of such preferred stock could adversely affect
the rights of the holders of common stock and, therefore, reduce the value of
the common stock.
TRANSFER AGENT
The company's transfer agent is Continental Stock Transfer & Trust
Company, 2 Broadway, New York, New York 10004.
SHARES ELIGIBLE FOR FUTURE SALE
There are 16,281,633 shares of common stock currently outstanding. Upon
the effectiveness of this registration statement, 1,169,300 shares of common
stock will be eligible for immediate resale in the public market if and when
any market for the common stock develops. Sales of such shares held by
affiliates will, however, be subject to the restrictions of Rule 144
promulgated under the Securities Act. An affiliate of the issuer is any
person who directly or indirectly controls, is controlled by, or is under
common control with, the issuer. Affiliates of the company may include its
directors, executive officers, and persons directly or indirectly owning 10%
or more of the outstanding common stock. Under Rule 144 resales of common
stock for the account of affiliates cannot be made
22
until it has been held for one year from the later of its acquisition from
the company or an affiliate of the company. Thereafter, shares of common
stock may be resold without registration subject to Rule 144's volume
limitation, aggregation, broker transaction, notice filing requirements, and
requirements concerning publicly available information about the company.
The volume limitations provide that a person (or persons who must aggregate
their sales) cannot, within any three-month period, sell more than the
greater of one percent of the then outstanding shares, or the average weekly
reported trading volume during the four calendar weeks preceding each such
sale.
PLAN OF DISTRIBUTION
REASONS FOR THE DISTRIBUTION
The company agreed to distribute the shares to PinkMonkey.com based on
the company's relationship with PinkMonkey.com, including the ongoing and
significant business services supplied to PinkMonkey.com by the company, and
ongoing business and financial advice supplied by principals of PinkMonkey.com
to the company. As a result of the distribution, and upon the effectiveness
of this registration statement, the company will become a reporting company
with a substantial shareholder base, thus enabling it, in the opinion of
management, to more effectively raise money as a public entity. The company
has not agreed to indemnify PinkMonkey.com against any liability arising
under the Securities Act.
CERTAIN RELATIONSHIPS BETWEEN THE COMPANY AND PINKMONKEY.COM
The company has a direct relationship with PinkMonkey.com as the company
hosts, maintains, develops and updates the PinkMonkey.com website.
Harry White, president and director of the company, serves as a director
of PinkMonkey.com. As compensation for his services as a director, Mr. White
was awarded a warrant to purchase 100,000 shares of PinkMonkey.com common
stock. Mr. White has not exercised this warrant, accordingly, he will not
participate in the distribution. Lee Magness, an officer and director of the
company, purchased 70,000 shares of PinkMonkey.com common stock at a purchase
price of $.50 in a private placement pursuant to Section 4(2) of the Securities
Act, and will be entitled to participate in the distribution. Mr. Magness is
not an affiliate of PinkMonkey.com.
The agreement between the company and PinkMonkey.com in which the shares
subject to distribution were issued was negotiated between Messrs. White and
Magness, on behalf of the company, and Patrick R. Greene, on behalf of
PinkMonkey.com. Mr. Greene is the chief executive officer and a shareholder
of PinkMonkey.com and will participate in the distribution of company common
stock.
MANNER OF EFFECTING THE DISTRIBUTION
This prospectus relates to the distribution by PinkMonkey.com of 750,000
shares of company common stock. The company's common stock will be
distributed by American Registrar Transfer Company, the distribution agent,
to PinkMonkey.com shareholders of record as of February 15, 1999, on a pro
rata basis, based on the outstanding number shares of PinkMonkey.com common
stock on the record date, which was 16,817,512 shares of common stock.
However, any PinkMonkey.com shareholder who is entitled to receive ten shares
or less of company common stock will receive a cash dividend in lieu of the
shares of company common stock. All the shares of company common stock
distributed will be fully paid and nonassessable and the holders thereof will
not be entitled to preemptive rights. No consideration will be paid to
PinkMonkey.com or the company by the PinkMonkey.com shareholders for the
shares of company common stock received in the distribution. Following the
distribution, PinkMonkey.com will own no shares of the company common stock
or other securities of the company. The distribution is currently expected
to be effected as soon as practicable after the registration statement, of
which this prospectus is a part, is declared effective. Certificates
representing the shares of company common stock will be mailed to the
PinkMonkey.com shareholders on the distribution date or as soon thereafter as
practicable. The company will not receive any proceeds from the resale of
common stock by the PinkMonkey.com shareholders.
LISTING AND TRADING OF THE COMMON STOCK
The company hopes to list the common stock on the OTC Electronic
Bulletin Board after the registration statement becomes effective. Shares of
common stock distributed to the PinkMonkey.com shareholders will be freely
transferable, except for shares received by persons who may be deemed to be
"affiliates" of the company under the Securities Act. Persons who may be
deemed to be affiliates of the company after the distribution include
individuals or entities that control, are controlled by or are under common
control with the company, and include
23
directors and principal executive officers of the company, as well as any
stockholder owning 10% or more of the total stock issued and outstanding.
Under Rule 144, resales of common stock for the account of affiliates cannot
be made until the common stock has been held for one year from the later of
its acquisition from the company or an affiliate of the company. Thereafter,
shares of common stock may be resold without registration subject to Rule 144's
volume limitation, aggregation, broker transaction, notice filing requirements,
and requirements concerning publicly available information about the company.
The volume limitations provide that a person (or persons who must aggregate
their sales) cannot, within any three-month period, sell more than the
greater of one percent of the then outstanding shares, or the average weekly
reported trading volume during the four calendar weeks preceding each such
sale. The three individuals listed as directors and executive management of
the company are affiliates of the company. The company currently has
approximately 31 record holders. The company believes it will have more than
100 stockholders after the distribution.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The following is a summary of a tax opinion rendered by the accounting
firm of Malone & Bailey, PLLC, describing (1) the material United States
federal income tax considerations affecting holders of PinkMonkey.com common
stock receiving shares of company common stock in the in the distribution,
(2) tax consequences of the distribution to the company, and (3) tax
consequences of the distribution to PinkMonkey.com. This summary does not
discuss all aspects of federal taxation that may be relevant to a particular
investor or to certain types of investors subject to special treatment under
the federal tax laws (for example, banks, dealers in securities, life
insurance companies, tax-exempt organizations, and foreign persons), nor does
it discuss any aspect of state, local or foreign tax laws.
HOLDERS OF PINKMONKEY.COM COMMON STOCK RECEIVING SHARES OF COMMON STOCK
IN THE DISTRIBUTION SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THEIR
INDIVIDUAL TAX CONSEQUENCES OF THE DISTRIBUTION UNDER THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED, AND UNDER ANY APPLICABLE STATE, LOCAL OR FOREIGN
TAX LAWS.
It is the opinion of Malone & Bailey, PLLC that:
- The distribution will be taxable as a capital gain to PinkMonkey.com
shareholders to the extent the fair market value of the company
common stock exceeds the price the PinkMonkey.com shareholders paid
for their PinkMonkey.com stock.
- The distribution qualifies as a deductible expense to the company
for US tax purposes.
- The distribution will be taxed as ordinary income to PinkMonkey.com.
SELLING STOCKHOLDERS
The 419,300 shares offered by the selling stockholders may be sold by
one or more of the following methods, without limitation: (i) ordinary
brokerage transactions and transactions in which the broker-dealer solicits
purchases; and (ii) face-to-face transactions between sellers and purchasers
without a broker-dealer. In effecting sales, brokers or dealers engaged by
the selling stockholders may arrange for other brokers or dealers to
participate. The brokers or dealers may receive commissions or discounts
from the selling stockholders in amounts to be negotiated. The brokers and
dealers and any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the Securities Act, in connection with
such sales. The selling stockholder or dealer effecting a transaction in the
registered securities, whether or not participating in a distribution, is
required to deliver a prospectus. As a result of the shares being registered
under the Securities Act, holders who subsequently resell such shares to the
public may be deemed to be underwriters with respect to such shares of common
stock for purposes of the Securities Act, with the result that they may be
subject to certain statutory liabilities if the registration statement to
which this prospectus relates contains a material misstatement or omits a
statement of material fact. The company has not agreed to indemnify any of
the selling stockholders regarding this liability. The company will not
receive any proceeds from the resale of common stock by the selling
stockholders.
SELLING STOCKHOLDERS
This prospectus relates to the resale of 419,300 shares of common stock
by the selling stockholders. The table below sets forth information with
respect to the resale of shares of common stock by the selling stockholders.
The company will not receive any proceeds from the resale of common stock by
the selling stockholders for shares currently outstanding.
24
RESALE OF COMMON STOCK BY SELLING STOCKHOLDERS
SHARES CURRENTLY OUTSTANDING
SHARE BENEFICIALLY AMOUNT OFFERED SHARES BENEFICIALLY
OWNED BEFORE (ASSUMING ALL SHARES OWNED AFTER
STOCKHOLDER RESALE IMMEDIATELY SOLD) RESALE PERCENTAGE
Ashraf K. Abadir 10,000 10,000 0% 0%
Jeffrey A. Ballenger 7,000 7,000 0% 0%
Stephen Bollman 4,000 4,000 0% 0%
Art Chee 100,000 100,000 0% 0%
Andrew B. Doerr(1) 8,366 8,366 0% 0%
Leo Detassis 6,667 6,667 0% 0%
Allen G. Dusek 3,000 3,000 0% 0%
Debbie Esparza(2) 10,000 10,000 0% 0%
Richard A. Finn 5,000 5,000 0% 0%
W.B. Finn 1,000 1,000 0% 0%
Henry Hailes 10,000 10,000 0% 0%
Paul Hailes 10,000 10,000 0% 0%
Arthur Hebron 76,667 76,667 0% 0%
Lucy Hebron 10,000 10,000 0% 0%
Tom Hillman 2,000 2,000 0% 0%
Hannah M. Loev 12,500 12,500 0% 0%
David L. Magness 15,000 15,000 0% 0%
Price Lloyd Magness 5,000 5,000 0% 0%
Walter L. Magness 22,000 22,000 0% 0%
Hungson Van Nguyen 3,000 3,000 0% 0%
True Lam V. Nguyen 1,000 1,000 0% 0%
Dan Nelson 40,000 40,000 0% 0%
Chris Truax 20,000 20,000 0% 0%
Anthony Rahati 5,000 5,000 0% 0%
Steve Reynolds 1,750 1,750 0% 0%
Lora W. Rhein 10,000 10,000 0% 0%
Frank Rhodes 1,800 1,800 0% 0%
Larry Shoemaker 5,000 5,000 0% 0%
Don C. Smith 2,000 2,000 0% 0%
25
Jukka Tolonen 5,800 5,800 0% 0%
Keith Ward 750 750 0% 0%
Kevin Work(3) 5,000 5,000 0% 0%
_______________
(1) Andrew B. Doerr, an employee of the company, was awarded 5,000 shares of
company common stock for services rendered. The remaining shares held be
Mr. Doerr were purchased by him.
(2) Debbie Esparza, an employee of the company, was awarded 10,000 shares of
company common stock for services rendered.
(3) Kevin Work, an employee of the company, was awarded 5,000 shares of company
common stock for services rendered.
LEGAL PROCEEDINGS
The company was a plaintiff in HOUSTON INTERWEB DESIGN, INC. V. LANDRY'S
SEAFOOD RESTAURANTS, INC. filed in the District Court of Harris County,
Texas; 133rd Judicial District. The complaint alleged breach of contract and
the company sought damages of $300,000. Landry's filed a counter-claim
against the company asserting infringement of Landry's federally registered
trademark LANDRY'S SEAFOOD HOUSE. The matter was resolved in the company's
favor and the counter-claim was dropped.
INTEREST OF NAMED EXPERTS AND COUNSEL
Certain legal matters with respect to the issuance of shares of the
company's common stock will be passed upon for the company by Brewer &
Pritchard, P.C., Houston, Texas. Principals of Brewer & Pritchard, P.C. own
185,000 shares of PinkMonkey.com common stock, and will receive shares of
company common stock in the distribution.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business
issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the small business issuer will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Currently, there is no public trading market for the company's securities
and there can be no assurance that any market will develop. If a market
develops for the company's securities, it will likely be limited, sporadic and
highly volatile.
FINANCIAL STATEMENTS
The financial statements of the company appearing in this Form SB-2
Registration Statement for the period from inception (August 9, 1996) to
July 31, 1997, and the year ended July 31, 1998, have been audited by Mann,
Frankfort, Stein and Lipp, P.C.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for the company by Brewer & Pritchard, P. C., Houston, Texas.
26
HOUSTON INTERWEB DESIGN, INC.
FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
C O N T E N T S
Page
----
Independent Auditors' Report ........................................F-2
Balance Sheets ......................................................F-3
Statements of Operations ............................................F-4
Statements of Changes in Stockholders' Deficit ......................F-5
Statements of Cash Flows ............................................F-6
Notes to Financial Statements .......................................F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Houston InterWeb Design, Inc.
We have audited the accompanying balance sheets of Houston InterWeb Design, Inc.
as of July 31, 1998 and 1997, and the related statements of operations,
changes in stockholders' deficit, and cash flows for the year ended July 31,
1998 and for the period from inception (August 9, 1996) to July 31, 1997.
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 financial statements referred to above present fairly in
all material respects, the financial position of Houston InterWeb Design,
Inc. as of July 31, 1998 and 1997, and the results of its operations and its
cash flows for the year ended July 31, 1998 and for the period from inception
(August 9, 1996) to July 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.
As shown in the financial statements, the Company incurred a net loss of
$781,595 for 1998 and has incurred substantial net losses since inception. At
July 31, 1998, current liabilities exceed current assets by $106,092 and
total liabilities exceed total assets by $92,427. These factors, and the
others discussed in Note B, raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classification of liabilities that might
be necessary in the event the Company cannot continue in existence.
MANN FRANKFORT STEIN & LIPP, P.C.
Houston, Texas
September 8, 1998
F-2
HOUSTON INTERWEB DESIGN, INC.
BALANCE SHEETS
July 31,
------------------------ January 31,
1998 1997 1999
--------- -------- -----------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 18,988 $ 10,204 $ 43,640
Accounts receivable - trade - affiliates 55,259 14,611 23,043
Accounts receivable - trade - nonaffiliates 61,012 42,070 28,203
Deferred income tax asset - 4,998 -
Other current assets 10,445 3,226 -
--------- -------- -----------
TOTAL CURRENT ASSETS 145,704 75,109 94,886
PROPERTY AND EQUIPMENT
Office equipment 4,056 2,306 10,010
Furniture and fixtures 13,072 12,490 13,072
--------- -------- -----------
17,128 14,796 23,082
Less: accumulated depreciation 3,463 1,567 4,733
--------- -------- -----------
TOTAL PROPERTY AND EQUIPMENT 13,665 13,229 18,349
INVESTMENT UNDER THE EQUITY METHOD - - -
--------- -------- -----------
TOTAL ASSETS $ 159,369 $ 88,338 $ 113,235
--------- -------- -----------
--------- -------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 220,086 $127,895 $ 307,910
Advances payable - affiliate - - 30,000
Deposits - - 24,976
Deferred income tax liability 2,498 - -
Note payable - line of credit 29,212 - 29,219
Notes payable to stockholders - 21,275 -
--------- -------- -----------
TOTAL CURRENT LIABILITIES 251,796 149,170 392,105
STOCKHOLDERS' DEFICIT
Common stock, no par value, 50,000,000 shares
authorized, 16,029,000 and 15,279,000 shares
issued and outstanding at July 31, 1998 and 1997,
respectively, and 16,281,633 shares issued at
January 31, 1999 754,000 4,000 1,090,950
Stock subscriptions receivable - - (14,609)
Accumulated deficit (846,427) (64,832) (1,355,211)
--------- -------- -----------
TOTAL STOCKHOLDERS' DEFICIT (92,427) (60,832) (278,870)
--------- -------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 159,369 $ 88,338 $ 113,235
--------- -------- -----------
--------- -------- -----------
See accompanying notes to financial statements.
F-3
HOUSTON INTERWEB DESIGN, INC.
STATEMENTS OF OPERATIONS
Period From
Inception
(August 9, Six Months Ended
Year Ended 1996) January 31,
July 31, to July 31, -----------------------------
1998 1997 1999 1998
-------------- ------------- ------------- --------------
(unaudited) (unaudited)
REVENUES
Affiliates $ 110,951 $ 22,830 $ 41,486 $ 80,000
Nonaffiliates 517,119 163,164 217,261 182,437
-------------- ------------- ------------- --------------
TOTAL REVENUES 628,070 185,994 258,747 262,437
EXPENSES
Advertising 32,620 28,215 33,173 12,173
Computer equipment 25,051 38,248 21,528 16,998
Consulting costs 749,990 - - -
Contract labor 68,198 44,755 11,247 21,982
Depreciation 1,896 1,567 1,270 949
General and administrative 20,096 3,605 47,803 3,152
Interest 6,080 2,690 3,082 3,736
Internet service 29,019 8,073 17,932 11,063
Professional fees 15,288 1,228 201,706 -
Rent 21,105 10,450 37,449 8,873
Repairs and maintenance 3,474 3,391 2,773 4,205
Salaries and benefits 384,082 93,188 372,222 174,406
Supplies 26,036 11,461 5,228 11,314
Telephone 11,797 4,806 5,891 5,814
Travel 7,437 4,147 8,725 2,404
-------------- ------------- ------------- --------------
TOTAL EXPENSES 1,402,169 255,824 770,029 277,069
-------------- ------------- ------------- --------------
INCOME (LOSS) BEFORE FEDERAL
INCOME TAXES (774,099) (69,830) (511,282) (14,632)
FEDERAL INCOME TAX EXPENSE
(BENEFIT)
Deferred 7,496 (4,998) (2,498) (1,045)
-------------- ------------- ------------- --------------
NET LOSS $ (781,595) $ (64,832) $ (508,784) $ (13,587)
============== ============= ============= ==============
NET LOSS PER SHARE, BASIC AND
DILUTED $ (0.05) $ - $ (0.03) $ -
============= ============= ============ ==============
AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 15,341,535 15,279,000 16,128,268 15,279,000
============== ============= ============= ==============
See accompanying notes to financial statements.
F-4
HOUSTON INTERWEB DESIGN, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEAR ENDED JULY 31, 1998 AND PERIOD FROM INCEPTION (AUGUST 9, 1996) TO
JULY 31, 1997
Common Stock Stock
----------------------------- Accumulated Subscription
Shares Amount Deficit Receivable Total
------------- -------------- ------------- ------------- --------------
Contributions 15,279,000 $ 4,000 $ - $ - $ 4,000
Net loss, period from inception
(August 9, 1996) to July 31, 1997 - - (64,832) - (64,832)
------------- -------------- ------------- ------------- --------------
Balance, July 31, 1997 15,279,000 4,000 (64,832) - (60,832)
Issuance of common stock, issued
as compensation 750,000 750,000 - - 750,000
Net loss, year ended July 31, 1998 - - (781,595) - (781,595)
------------- -------------- ------------- ------------- --------------
Balance, July 31, 1998 16,029,000 754,000 (846,427) - (92,427)
Net loss, six months ended
January 31, 1999 (unaudited) - - (508,784) - (508,784)
Issuance of common stock
(unaudited) 160,133 198,200 - - 198,200
Issuance of common stock as
compensation (unaudited) 20,000 30,000 - - 30,000
Issuance of common stock for
services rendered (unaudited) 72,500 108,750 - - 108,750
Stock subscription receivable - - - (14,609) (14,609)
------------- -------------- ------------- ------------- --------------
Balance, January 31, 1999
(unaudited) 16,281,633 $ 1,090,950 $ (1,355,211) $ (14,609) $ (278,870)
============= ============== ============= ============= ==============
See accompanying notes to financial statements.
F-5
HOUSTON INTERWEB DESIGN, INC.
STATEMENTS OF CASH FLOWS
Period From
Inception
(August 9, Six Months Ended
Year Ended 1996) January 31,
July 31, to July 31, -------------------------
1998 1997 1999 1998
---------- ----------- ----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(781,595) $(64,832) $(508,784) $(13,587)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 1,896 1,567 1,270 949
Deferred income tax expense (benefit) 7,496 (4,998) (2,498) (1,045)
Common stock issued as compensation 749,990 - 138,750 -
Changes in assets and liabilities:
Accounts receivable (59,590) (56,681) 65,025 (25,451)
Deposits - - 24,976 -
Other current assets (7,219) (3,226) 10,445 2,287
Accounts payable and accrued expenses 92,191 127,895 87,824 76,075
---------- ----------- ----------- -----------
784,764 64,557 325,792 52,815
---------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 3,169 (275) (182,992) 39,228
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,332) (14,796) (5,954) (2,332)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from affiliate - - 30,000 -
Net proceeds (repayments) from notes payable (21,275) 21,275 - (21,275)
Net proceeds from line of credit 29,212 - 7 26,689
Proceeds from issuance of common stock 10 4,000 198,200 -
Increase in stock subscriptions receivable - - (14,609) -
---------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 7,947 25,275 213,598 5,414
---------- ----------- ----------- -----------
NET INCREASE IN CASH 8,784 10,204 24,652 42,310
CASH AT BEGINNING OF PERIOD 10,204 - 18,988 10,204
---------- ----------- ----------- -----------
CASH AT END OF YEAR $ 18,988 $ 10,204 $ 43,640 $ 52,514
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid $ 6,080 $ 2,690 $ 3,082 $ 3,736
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
SUPPLEMENTAL NONCASH FINANCING
ACTIVITIES
July 31, 1998 issuance of 750,000 common
shares in exchange for consulting services $ 749,990 $ - $ - $ -
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
January 31, 1999 issuance of 92,500
common shares as compensation and for
services rendered $ - $ - $ 138,750 $ -
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
See accompanying notes to financial statements.
F-6
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE A - NATURE OF OPERATIONS
Houston InterWeb Design, Inc. (the Company) was incorporated in the State of
Texas in August, 1996. The Company is engaged in the design and creation of
internet websites for customers. The Company uses internally developed
technology for the creation of websites, which it licenses to customers,
which ensures that customers websites are brought up in front of an internet
user irrespective of the search engine used.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements have been prepared
assuming the Company will be able to continue as a going concern. The Company
has a working capital deficit of $106,092 and a stockholders' deficit of
$92,427 at July 31, 1998, and experienced significant losses in fiscal 1998
which raise doubts about the Company's ability to generate sufficient cash
flow to meet its obligations on a timely basis, to obtain additional
financing or capital and to refinance its debt and ultimately attain
profitable operations.
Management's plans include the following:
- - Increasing revenues by attracting new customers by increasing its sales and
market operations to develop an awareness by potential customers of the
Company's ability to create valuable interactive web sites.
- - As described in Note J, the Company recently entered into a contract with a
corporation (reseller) to market and distribute software products
manufactured and hosted by the Company. The amount of revenue, if any, as a
result of the above contract cannot presently be determined.
- - Obtaining equity capital or debt financing.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost with
depreciation calculated using the straight-line method over its estimated
useful lives ranging from five to ten years. When assets are retired or
otherwise removed from the accounts, any resulting gain or loss is reflected
in income for the period. The cost of maintenance and repairs is charged to
expense as incurred and significant renewals and improvements are capitalized.
REVENUE RECOGNITION: Revenues are recognized as services are provided, in
accordance with customer agreements. For the year ended July 31, 1998,
revenues from significant customers totaled $368,572. Included in this amount
is $80,000 earned from a nonrecurring customer. Royalty income from website
or other related licensing agreements is recognized as it is earned per the
individual terms of each royalty agreement, and is generally comprised of a
minimum amount which varies by customer, plus a stated percentage of the
applicable licensee's sales. The Company uses the direct write-off method in
accounting for bad debts, the results of which are not materially different
from the allowance method.
F-7
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES: The liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using anticipated tax rates and laws that will
be in effect when the differences are expected to reverse. The realizability
of deferred tax assets are evaluated annually and a valuation allowance is
provided if it is more likely than not that the deferred tax assets will not
give rise to future benefits in the Company's tax returns.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM INFORMATION: The accompanying financial information as of
January 31, 1999 and for the six months ended January 31, 1999 and 1998 has
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial
statements reflect all adjustments, consisting of normal recurring accruals
which are, in the opinion of management, necessary to fairly present such
information in accordance with generally accepted accounting principles.
NOTE C - INVESTMENTS UNDER THE EQUITY METHOD
At July 31, 1998, the Company owned a 30% interest in an internet provider of
pet medical records (the investee). The Company obtained this ownership
interest in exchange for providing its internet website search engine
technology to this investee. The Company believes the fair value of these
services provided to this investee to be de minimis, and therefore, has
recorded its 30% ownership interest in this investee at a zero basis on its
balance sheet. Additionally, at July 31, 1998 and January 31, 1999, the
activities of the investee had not commenced.
NOTE D - NOTE PAYABLE
Note payable consist of the following:
July 31,
-------------------
1998 1997
------- -------
Revolving line of credit with a bank, providing for
$30,000 maximum borrowings; uncollateralized,
bearing interest at prime plus 1%; interest payable
monthly, principal payable on demand at the bank's
option. $29,212 $ -
------- -------
------- -------
F-8
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE E - INCOME TAXES
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at July 31, 1998 and
1997 are as follows:
July 31,
-------------------
1998 1997
-------- -------
Deferred tax assets:
Net operating loss carryforward $290,373 $ 5,177
Cash-to-accrual differences - 4,998
-------- -------
Total gross deferred tax assets 290,373 10,175
Less: valuation allowance 290,373 5,177
-------- -------
- 4,998
Deferred tax liabilities:
Tax over book depreciation (371) -
Cash-to-accrual differences (2,127) -
-------- -------
Total gross deferred tax liabilities (2,498) -
-------- -------
Net current deferred tax assets (liability) $ (2,498) $ 4,998
-------- -------
-------- -------
The Company has net operating loss carryforwards of approximately $854,000 as
of July 31, 1998, which expire through the year 2013. Valuation allowances
have been provided for all net operating losses due to lack of evidence of
future recoverability at July 31, 1998.
The difference between the reported income tax expense (benefit) and the
income tax expense (benefit) computed by multiplying the loss before income
taxes by the federal statutory income tax rate is as follows:
Year Ended July 31,
---------------------
1998 1997
--------- --------
Current tax benefit computed at federal
statutory tax rate $(263,194) $(23,742)
Effect of marginal tax brackets - 11,284
Change in valuation allowance 285,196 5,177
Other (14,506) 2,283
--------- --------
Total income tax expense (benefit) $ 7,496 $ (4,998)
--------- --------
--------- --------
F-9
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE F - RELATED PARTY TRANSACTIONS
The Company has notes payable to its stockholders, unsecured, with interest
payable at 6%, maturing July 31, 1998. Interest expense on these notes
totaled approximately $293 in 1998 and $1,660 in 1997. The following is a
summary of notes payable to stockholders:
July 31,
-------------------
1998 1997
------- -------
Lee Magness $ - $15,897
Harry White - 5,378
------- -------
$ - $21,275
------- -------
------- -------
In July 1998, the Company issued 4,545.4545 shares of its common stock to a
publicly traded affiliate (certain officers and stockholders of the Company
are directors and own stock in the affiliate) in exchange for ten dollars
cash consideration and various consulting services provided. After giving
effect to the 165 for 1 common stock split discussed below in Notes H and I,
the amount of shares issued to this affiliate became 750,000. It is
anticipated that this affiliate will subsequently distribute these 750,000
shares to its stockholders. In accordance with Financial Accounting Standards
Board Statement in its Emerging Issues Task Force Issue 96-18, ACCOUNTING FOR
EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR
IN CONJUNCTION WITH SELLING, GOODS OR SERVICES, $749,990 was recognized to
account for the fair value of the consulting services received from this
affiliate.
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company's minimum rental commitments under a noncancelable operating
lease for office space is as follows:
Years Ending July 31,
---------------------
1999 $ 86,360
2000 86,360
2001 21,590
--------
$194,310
--------
--------
Total rental expense for the year ended July 31, 1998 was $21,105 and for the
initial period ended July 31, 1997 was $10,450.
The Company has instituted legal proceedings against a party for breach of
contract seeking damages of $300,000. The party has made a counter claim
against the Company, but has not plead any amount of damages. Management is
of the opinion that the counter claim filed by the party is without basis and
that the Company will prevail. Accordingly, no gain or loss has been accrued
in these financial statements pertaining to these proceedings. In January
1999, in accordance with a confidential and mutual release and settlement
agreement, the Company received nominal consideration in exchange for the
mutual releases of all parties.
F-10
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has employment agreements with three of its stockholders
providing a base annual salary through August, 2001. The base salary may be
increased at the Company's option. In addition, this employment agreement
entitles each of these stockholders to an annual bonus of 1% of the Company's
earnings (before income taxes and depreciation) in excess of $5,000,000.
Minimum annual commitments under these agreements amount to $360,000. Amounts
incurred by the Company related to these employment agreements were $210,000
and $90,000 for the fiscal year ended July 31, 1998, and the initial period
ended July 31, 1997, respectively, and $180,000 and $105,000 for the six
months ended January 31, 1999 and 1998, respectively.
NOTE H - EARNINGS PER SHARE
In accordance with Financial Accounting Standards Board Statement 128,
EARNINGS PER SHARE, basic earnings per common share amounts are calculated
using the average number of common shares outstanding during each period,
retroactively adjusted to give effect to the 165 for 1 common stock split
discussed previously in Note F, and below in Note I. As there were no
dilutive potential common shares outstanding during the year ended July 31,
1998, or during the initial period ended July 31, 1997, basic average shares
outstanding and earnings per share are equal to diluted average shares
outstanding and earnings per share, respectively, for the year ended July 31,
1998, and for the initial period ended July 31, 1997 and for the six month
periods ended January 31, 1999 and 1998.
NOTE I - STOCKHOLDERS' EQUITY
Subsequent to July 31, 1998, in contemplation of the stock split and employee
incentive stock option plan discussed below, the Company amended its articles
of incorporation to increase its authorized capital to 50,000,000 common
shares of no par value, and 5,000,000 preferred shares with $.01 par value.
No preferred shares have been issued to date. All references herein have been
restated to reflect the amended amounts.
On August 19, 1998, the Company effected a stock split on its common stock of
165 for 1 for stockholders of record on August 19, 1998. Subsequent to this
stock split, and prior to October 31, 1998, the Company sold an additional
117,500 shares of its common stock to various individuals at prices ranging
from $1 per share to $1.50 per share. As a result of the stock split and the
subsequent sales of common stock, the total common stock of the Company
issued and outstanding increased to 16,146,500 shares. All references to
shares issued have been restated for the above stock split for all periods
presented.
On August 21, 1998, the Company formed an incentive stock option plan for its
employees under which 500,000 shares of common stock will be awarded to
employees based upon criteria established under the plan. During February
1999, 288,000 options were issued to employees under this plan although no
options have been exercised to date.
F-11
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE J - SUBSEQUENT EVENTS
Subsequent to January 31, 1999, the Company has continued to issue shares of
common stock to individuals for cash at prices ranging from $1.00 per share
to $1.50 per share.
At the end of January 1999, the Company entered into a contract with a
corporation (reseller) to market and distribute software products manufactured
and hosted by the Company. The amount of revenue, if any, as a result of the
above contract cannot presently be determined.
F-12
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Texas law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The amended and
restated articles of incorporation of the company limit the liability of
directors of the company (in their capacity as directors but not in their
capacity as officers) to the company or its stockholders to the fullest
extent permitted by Texas law. Specifically, directors of the company will
not be personally liable for monetary damages for breach of a director's
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the company or its stockholders, (ii) for acts
or omissions not in good faith that constitute a breach of duty of the
director to the company or an act or omission which involves intentional
misconduct or a knowing violation of law, (iii) for an act or omission for
which the liability of a director is expressly provided by an applicable
statute, or (iv) for any transaction from which the director received an
improper personal benefit, whether the benefit resulted from an action taken
within the scope of the director's office. Section 2.41 of the Texas Business
Corporation Act relates to directors' liability for unlawful dividends and
stock issuances.
The inclusion of this provision in the amended and restated articles of
incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefitted the company and its stockholders.
The company's amended and restated articles of incorporation provide for
the indemnification of its executive officers and directors, and the
advancement to them of expenses in connection with any proceedings and
claims, to the fullest extent permitted by the Texas Business Corporation
Act. The amended and restated articles of incorporation include related
provisions meant to facilitate the indemnities' receipt of such benefits.
These provisions cover, among other things: (i) specification of the method
of determining entitlement to indemnification and the selection of independent
counsel that will in some cases make such determination, (ii) specification
of certain time periods by which certain payments or determinations must be
made and actions must be taken, and (iii) the establishment of certain
presumptions in favor of an indemnitee. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the company pursuant to the foregoing
provisions, the company has been informed that, in the opinion of the SEC,
such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant.
SEC Registration Fee................. $ 100.00
Printing and Engraving Expenses...... 2,000.00
Legal Fees and Expenses.............. 40,000.00
Accounting Fees and Expenses......... 35,000.00
Miscellaneous........................ 5,000.00
----------
TOTAL................................ $82,100.00
----------
----------
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In August 1996, the company issued an aggregate of 15,279,000 shares of
common stock to three individuals and three entities for nominal consideration
in connection with the company's formation. The company believes theses
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
From August 1998 through November 1998, the company issued an aggregate
of 160,133 shares of common stock in consideration for an aggregate of
$197,499.50. The Company believes that the foregoing transactions are exempt
from registration as a limited offering pursuant to Rule 504 of Regulation D.
In July 1998, the company issued 750,000 shares of common stock to
PinkMonkey.com for nominal consideration and services rendered. The company
believes theses transactions were exempt from registration pursuant to
Section 4(2) of the Securities Act as transactions by an issuer not involving
a public offering.
In November 1998, the company issued an aggregate of 72,500 shares of
common stock to three individuals in consideration for services rendered.
The company believes theses transactions were exempt from registration pursuant
to Section 4(2) of the Securities Act as transactions by an issuer not
involving a public offering.
In November 1998, the company issued an aggregate of 20,000 shares to
three employees in consideration for services rendered. The company believes
theses transactions were exempt from registration pursuant to Section 4(2) of
the Securities Act as transactions by an issuer not involving a public
offering.
In January 1999, the company issued 66,667 shares of company common
stock to an accredited individual for $100,000.00. The company believes
theses transactions were exempt from registration pursuant to Section 4(2) of
the Securities Act as transactions by an issuer not involving a public
offering.
In February 1999, the company issued 100,000 shares of company common
stock to an accredited individual for $150,000.00. The company believes
theses transactions were exempt from registration pursuant to Section 4(2) of
the Securities Act as transactions by an issuer not involving a public offering.
ITEM 27. EXHIBITS
INDEX TO EXHIBITS
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
- ----------- -------------------------
3.1(1) Amended and Restated Articles of Incorporation
3.2(1) Articles of Amendment to the Articles of Incorporation
3.3(1) By-Laws of the company
3.4(1) Articles of Correction to the Amended and Restated Articles
of Incorporation
3.5(1) Articles of Correction to the Articles of Amendment to the
Articles of Incorporation
4.1(1) Form of Specimen of common stock
5.1(1) Legal Opinion
8.1(3) Tax Opinion
10.1(1) Letter Agreement between the company and
PinkMonkey.com, Inc.
II-2
10.2(1) Software License and Marketing Agreement between the company
and Websource Media, L.L.C.
10.3(1) Software Reseller Agreement between the company and Harry
Bauge
10.4(1) Letter Agreement between the company and Harry Bauge
10.5(1) Agreement between the company and NetTrade Online, L.L.C.
10.6(1) Employment Agreement between the company and Harry White
10.7(1) Employment Agreement between the company and Richard Finn
10.8(1) Employment Agreement between the company and Lee Magness
10.9(3) Lease Agreement
23.1(1) Consent of Mann, Frankfort, Stein and Lipp, P.C.
23.2(2) Consent of Brewer & Pritchard , P.C.
27.1(1) Financial Data Schedule
_______________
(1) Filed as an Exhibit to the company's registration statement on Form SB-2
(File No. 67871) and herein incorporated by reference.
(2) Contained in Exhibit 5.1.
(3) Filed herewith.
ITEM 28. UNDERTAKINGS
(a) 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;
ii. Reflect in the prospectus any facts or events arising after
the effective date of which, individually or together,
represent a fundamental change in the information 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 SEC
pursuant to Rule 424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
iii. Include any additional or changed material on the plan of
distribution.
(2) That, for the purpose of determining any 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.
(4) i. That, for the purpose of determining liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4), or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as
of the time it was declared effective.
II-3
ii. For determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus
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.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on the 18th day of March,
1999.
HOUSTON INTERWEB DESIGN, INC.
By: /s/ HARRY L. WHITE
-----------------------------
HARRY L. WHITE, President and
Chief Executive Officer
_________________________
This registration statement has been signed by the following persons in
the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ HARRY L. WHITE
- ------------------- President, Treasurer, March 18, 1999
HARRY L. WHITE Secretary and Chairman
/s/ RICHARD J. FINN
- ------------------- Chief Technical Officer and March 18, 1999
RICHARD J. FINN Director
/s/ LEE A. MAGNESS
- ------------------- Chief Financial Officer, General March 18, 1999
LEE A. MAGNESS Counsel and Director
II-5