As filed with the Securities and Exchange Commission on December 8, 2004
An Exhibit List can be found on page II-3
Registration No. 333-114082
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
--------------------------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
MEDIAWORX, INC.
(Name of small business issuer in its charter)
WYOMING 2750 98-0152226
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
- ------------------------------- ---------------------------- -------------------
1895 PRESTON WHITE DRIVE, SUITE 250
RESTON, VIRGINIA 20191
(703) 860-6580
(Address and telephone number of principal executive offices and principal place
of business)
LINDA BROENNIMAN, CHIEF EXECUTIVE OFFICER
MEDIAWORX, INC.
1895 PRESTON WHITE DRIVE, SUITE 250
RESTON, VIRGINIA 20191
(703) 860-6580
(Name, address and telephone number of agent for service)
------------------------------------------
Copies to:
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
------------------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time 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 the earlier effective
registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If 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
======================================================= ================= ==================== ===================== ==============
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED SECURITY(1) PRICE FEE
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of common stock, $.005 par value (2) 15,000,000 $1.35 $2,565.68
$20,250,000
Shares of common stock, $.005 par value (3) 2,504,762 $1.35 $3,381,428.70 $428.43
Shares of common stock, $.005 par value (4) 725,000 $1.35 $978,750 $124.00
Total 18,229,762 $24,610,178.70 $3,118.11 (5)
======================================================= ================= ==================== ===================== ==============
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of
1933, using the average of the high and low price as reported on the
Over-the-Counter Bulletin Board on March 25, 2004.
(2) Represents shares underlying equity line of credit.
(3) Represents shares of common stock.
(4) Represents shares underlying convertible debenture. In addition to the
shares set forth in the table, the amount to be registered includes an
indeterminate number of shares issuable upon conversion of the debentures,
as such number may be adjusted as a result of stock splits, stock dividends
and similar transactions in accordance with Rule 416. The number of shares
of common stock registered hereunder represents a good faith estimate by us
of the number of shares of common stock issuable upon conversion of the
debentures. For purposes of estimating the number of shares of common stock
to be included in this registration statement, we calculated a good faith
estimate of the number of shares of our common stock that we believe will
be issuable upon conversion of the debentures to account for market
fluctuations. Should the conversion ratio result in our having insufficient
shares, we will not rely upon Rule 416, but will file a new registration
statement to cover the resale of such additional shares should that become
necessary. In addition, should a decrease in the exercise price as a result
of an issuance or sale of shares below the then current market price,
result in our having insufficient shares, we will not rely upon Rule 416,
but will file a new registration statement to cover the resale of such
additional shares should that become necessary.
(5) Fee previously paid.
------------------------------------------
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.
================================================================================
PROSPECTUS SUBJECT TO COMPLETION, DATED DECEMBER 8, 2004
The information in this prospectus is not complete and may be changed.
MEDIAWORX, INC.
18,229,762 SHARES OF
COMMON STOCK
This prospectus relates to the sale of up to an aggregate of 18,229,762
shares of common stock by the selling stockholders, including up to 15,000,000
shares of common stock underlying an equity line of credit for $5,000,000, up to
725,000 shares of common stock underlying convertible debentures in a principal
amount of $240,000 and 2,504,762 shares of common stock issued and outstanding.
The convertible debenture in the amount of $24,000 is due and payable, with 5%
interest, three years from the date of issuance, unless sooner converted into
shares of our common stock. The debenture is convertible into shares of our
common stock, subject to a maximum cap of $50,000 per day, at the holder's
option any time up to maturity at a conversion price equal to an amount equal to
one hundred percent (100%) of the lowest closing bid price of the common stock
for the three trading days immediately preceding the conversion date.
The selling stockholders may sell common stock from time to time in the
principal market on which the stock is traded at the prevailing market price or
in negotiated transactions. The selling stockholders may be deemed underwriters
of the shares of common stock, which they are offering. We will pay the expenses
of registering these shares.
We are not selling any shares of common stock in this offering and
therefore will not receive any proceeds from this offering. We will, however,
receive proceeds from the sale of common stock under our equity line of credit
with Cornell Capital Partners, L.P. The purchase price of the shares purchased
under the equity line of credit will be equal to 95% of the lowest closing bid
price of our common stock on the Over-the-Counter Bulletin Board for the 5 days
immediately following the notice to advance funds date. We have agreed to pay
Cornell Capital Partners, L.P. 5% of the proceeds that we receive under the
Equity Line of Credit. We cannot draw more than $53,000 per advance. All costs
associated with this registration will be borne by us.
Our common stock is listed on the Over-The-Counter Bulletin Board under
the symbol "MEWX." The last reported sales price per share of our common stock
as reported by the NASD Over-The-Counter Bulletin Board on December 6, 2004,
was $1.50.
------------------------
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 3.
------------------------
Cornell Capital Partners, L.P. is an "underwriter" within the meaning
of the Securities Act of 1933 in connection with the sale of common stock under
the equity line of credit. Cornell Capital Partner, L.P. will pay a net purchase
price of 95% of our market price as calculated in the equity line of credit
agreement.
With the exception of Cornell Capital Partners, L.P., which is an
"underwriter" within the meaning of the Securities Act of 1933, no other
underwriter or person has been engaged to facilitate the sale of shares of
common stock in this offering. This offering will terminate upon Cornell Capital
Partners having advanced us $5,000,000 under the equity line of credit or 24
months after the accompanying registration statement is declared effective by
the Securities and Exchange Commission. None of the proceeds from the sale of
stock by the selling stockholders will be placed in escrow, trust or any similar
account.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THIS
PROSPECTUS IS INCLUDED IN THE REGISTRATION STATEMENT THAT WAS FILED BY
MEDIAWORX, INC., WITH THE SECURITIES AND EXCHANGE COMMISSION. THE SELLING
STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
The date of this prospectus is ______, 2004.
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "Risk
Factors" section, the financial statements and the notes to the financial
statements.
OUR COMPANY
We only begun our operations as a media production and management
business in July 2003. The services that we provide include print, packaging,
signage, audio/video, digital asset management, graphic design, production and
fulfillment for traditional and web-based marketing and communications products
and services. We also provide our customers with the support and leverage of a
strong customer service culture, in-house pre-press capabilities, e-business
solutions, and a base of production partners that can fulfill the complexity of
any customer order. We are a virtual printing company: we neither own nor have
our capital tied up in printing equipment or facilities but we have access to an
established network of technologically advanced printers and production houses.
Our access to these printers and production houses is based upon our contacts
with and previous business relationships with these printing and production
houses. Before we accept any job, we get an estimate on the cost and a
commitment from the printing and production houses to perform the job as
contracted. Our role is similar to a general contractor, in that we contact with
customers for specified work, and then we contract with the printing and
production houses to fulfill various jobs to fulfill our contract. We do not
have any standing contracts or commitments with any of these printing and
production houses, instead relying on service order contracts based upon our
needs and their availability. We pay the costs associated with the work
performed by the printing and production houses.
We intend to leverage our customer service approach to build solid personal
relationships and develop strong name brand recognition. We currently are
operating in and have developed customer bases in the New York City metropolitan
area, Washington D.C. metropolitan area, Philadelphia metropolitan area and in
the Scranton and Wilkes-Barre areas in Pennsylvania. We intend to expand on a
geographical basis, targeting major metropolitan areas nationwide. We will
further our expansion into specific vertical markets, using those same customer
relationships to build brand awareness with new potential customers within the
same vertical market.
For the year ended December 31, 2003, we generated revenue in the
amount of $128,850 and a net loss of $837,119. For the three and nine months
ended Sepember 30, 2004, we generated revenues in the amount of $666,711 and
$990,938, respectively, and net losses of $165,381 and $1,241,189, respectively.
As a result of recurring losses from operations and a net capital deficiency,
our auditors, in their report dated February 19, 2004, have expressed
substantial doubt about our ability to continue as going concern.
Our principal offices are located at 1895 Preston White Drive, Suite
250, Reston, VA 20191; our telephone number is (703) 860-6580.
THE OFFERING
Common stock offered by selling stockholders .............................. Up to 18,229,762 shares, based on current
market prices and assuming full conversion
of the convertible note. This number
represents 40.0% of our current outstanding
stock and includes 15,000,000 shares of
common stock to be issued under the equity
line of credit agreement and up to 725,000
shares of common stock underlying the
convertible debenture. Assuming the
conversion of the $240,000 debenture on
December 7, 2004, a conversion price of
$1.50 per share, the number of shares
issuable upon conversion of the convertible
debenture would be 160,000. Further, in the
2
event that we draw down $53,000 under the
equity line, which is the maximum permitted
advance of $53,000 within a seven-day
period, we would be required to issue
37,193 shares of common stock on December
7, 2004 based on a conversion price of
$1.425.
Common stock to be outstanding after the offering......................... Up to 48,578,166 shares
Use of proceeds........................................................... We will receive gross proceeds of up to
$5,000,000 from the sale of shares of our
common stock to Cornell Capital Partners,
L.P. under the equity line of credit. The
purchase price of the shares purchased
under the equity line of credit will be
equal to 95% of the lowest closing bid
price of our common stock on the
Over-the-Counter Bulletin Board for the
five days immediately following the notice
to advance funds date. We have agreed to
pay Cornell Capital Partners, L.P. 5% of
the proceeds that we receive under the
Equity Line of Credit. We cannot draw more
than $53,000 per advance. We intend to use
any proceeds from the sale of shares of our
common stock to Cornell Capital Partners,
L.P. under the equity line of credit for
sales and marketing, technology
development, salaries and administrative
expenses and general working capital. See
"Use of Proceeds" for a complete
description.
Over-The-Counter Bulletin Board .......................................... MEWX
The above information is based on 30,348,404 shares of common stock
outstanding as of November 12, 2004.
Equity Line of Credit
- ---------------------
In February 2004, we entered into an equity line of credit with Cornell
Capital Partners, L.P. Pursuant to the equity line of credit, we may, at our
discretion, periodically sell to Cornell Capital Partners shares of common stock
for a total purchase price of up to $5,000,000. For each share of common stock
purchased under the equity line of credit, Cornell Capital Partners will pay 95%
of the lowest closing bid price on the Over-the-Counter Bulletin Board or other
principal market on which our common stock is traded for the five days
immediately following the notice date. Cornell Capital Partners is a private
limited partnership whose business operations are conducted through its general
partner, Yorkville Advisors, LLC. We also paid Cornell Capital Partners a
commitment fee in the form of a compensation debenture in the amount of $240,000
upon execution of the equity line of credit. Further, we have agreed to pay
Cornell Capital Partners, L.P. 5% of the proceeds that we receive under the
Equity Line of Credit. In addition, we engaged Newbridge Securities Corporation,
a registered broker-dealer, to advise us in connection with the equity line of
credit. For its services, Newbridge Securities Corporation received 4,762 shares
of our common stock. We are registering 15,000,000 shares in this offering which
may be issued under the equity line of credit.
Unsecured Convertible Debenture
- -------------------------------
In February 2004, in connection with the equity line of credit with
Cornell Capital Partners, L.P., we paid Cornell Capital Partners, L.P. a
commitment fee in the form of an unsecured convertible debenture in the amount
of $240,000. The convertible debenture is due and payable, with 5% interest,
three years from the date of issuance, unless sooner converted into shares of
our common stock. The debenture is convertible, subject to a maximum cap of
3
$50,000 per day, at the holder's option any time up to maturity at a conversion
price equal to an amount equal to one hundred percent (100%) of the lowest
closing bid price of the common stock for the three trading days immediately
preceding the conversion date. At maturity, we have the option to either pay the
holder the outstanding principal balance and accrued interest or to convert the
debentures into shares of common stock at a conversion price equal to an amount
equal to one hundred percent (100%) of the lowest closing bid price of the
common stock for the three trading days immediately preceding the conversion
date. We are registering in this offering 725,000 shares of common stock
underlying the convertible debenture.
4
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
RISKS RELATING TO OUR COMPANY:
- -----------------------------
WE HAVE A LIMITED HISTORY AND HAVE EXPERIENCED LOSSES, WHICH MAY NEGATIVELY
IMPACT OUR ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES.
We had a net loss for the year ended December 31, 2003 of $837,119,
compared to net income of $$250,648 for the year ended December 31, 2002. We
also had net losses for the three and nine months ended September 30, 2004 of
$165,381 and $1,241,189, respectively. We started business as MediaWorx in July
2003. Such limited operating history and the emerging nature of the market in
which we compete make it difficult to assess the Company's prospects or predict
future operating results. The Company's recent revenue growth is not an
indication of the Company's future rate of revenue growth. The Company's
prospects are subject to the risks and uncertainties frequently encountered in
the establishment of a new business enterprise. Revenues and profits, if any,
will depend on various factors, including whether we will be able to continue
expansion of revenue. We may not achieve our business objectives and the failure
to achieve such goals would have an adverse impact on us.
QUARTERLY RESULTS ARE DIFFICULT TO PREDICT AND LIKELY TO FLUCTUATE.
We compete in the general commercial printing and media sector, where
the business is characterized by individual orders from customers for specific
printing/media projects rather than long-term contracts. Continued engagement
for successive jobs depends on the customers' satisfaction with the services
provided. As a result, the number, size, and profitability of printing/media
jobs in a given period is difficult to predict. Moreover, because of our short
operating history, period-to-period comparisons of operating results are neither
necessarily meaningful nor an indication of future performance.
OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HAS STATED THERE IS
SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN, WHICH MAY
HINDER OUR ABILITY TO OBTAIN FUTURE FINANCING.
In their report dated February 19, 2004 on our consolidated financial
statements as of and for the year ended December 31, 2003, our independent
registered public accounting firm stated that our recurring losses and our net
capital deficiency as of December 31, 2003 raised substantial doubt about our
ability to continue as a going concern. We have incurred losses since emerging
from bankruptcy in 2000. Since December 31, 2003, we have continued to
experience net operating losses. Our ability to continue as a going concern is
subject to our ability to generate a profit and/or obtain necessary funding from
outside sources, including obtaining additional funding from the sale of our
securities, increasing sales or obtaining loans and grants from various
financial institutions where possible. Our continued net operating losses and
stockholders' deficiency increase the difficulty in meeting such goals and there
can be no assurances that such methods will prove successful.
TO OBTAIN NEW CUSTOMERS, WE MUST OVERCOME LONG-STANDING CUSTOMER RELATIONSHIPS
AND LONG SALES CYCLES; FAILURE TO OBTAIN NEW CUSTOMERS COULD RESULT IN INCREASED
EXPENSES AND OPERATING LOSSES.
Many of the potential customers that we pursue through the direct sales
process have long-standing business relationships and personal ties with their
existing printers, which they are reluctant to disrupt. To successfully sell our
products, we generally must educate potential customers on the use and benefits
of our services, which can require significant time and resources. Consequently,
we must incur substantial expenses in acquiring new customers. The period
between initial contact and the purchase of our products is often long and
subject to delays associated with the lengthy approval and competitive
evaluation processes that typically accompany a customer's decision to change
its outsourcing relationships. For typical customers, the sales cycle takes
between two to twelve weeks, but for large customers, the sales cycle may
require more than one year. Furthermore, a substantial majority of revenue will
5
be derived from customers that we obtain through hiring of high-volume sales
representatives and acquisitions of print brokers. There can be no assurance
that acquired customers will transfer all of their business to us. If we are
unable to obtain new customers, it could result in increased operating and
marketing expenses and operating losses.
IF WE ARE UNABLE TO COMPETE SUCCESSFULLY AGAINST TRADITIONAL AND NEW PLAYERS IN
THE INDUSTRY, OUR BUSINESS MAY NOT SUCCEED.
The printing/cross media publishing industry is intensely competitive.
Competitors vary in size and in the scope and breadth of the products and
services offered. We compete primarily with local and regional vendors, which
are either independent or owned by print industry consolidators. The U.S.
commercial printing industry is highly fragmented, with over 31,000 local and
regional commercial printers operating nationwide. These local and regional
printers typically have significant excess production capacity. Therefore, they
compete aggressively for business printing orders in the markets they serve.
Traditional commercial printers often have long-standing relationships
with customers. We face substantial challenges in convincing businesses to
consider alternatives to their traditional printers. In addition, printers
typically have extensive local sales forces that regularly canvass and solicit
businesses in the areas they serve. Commercial printers compete primarily on
product pricing, product and service quality and, to a lesser extent, on
innovation in printing technologies and techniques. To attract new customers and
retain our existing customers, we must compete effectively in each of these
areas.
We also face substantial competition from printing services
brokers-companies that contract with businesses to select and procure printing
services from a variety of printers. Brokers are able to offer customers a
relatively wide variety of products and services, and are often able to obtain
favorable pricing for their customers by soliciting bids from a variety of
printers. Like local and regional printers, printing services brokers often have
long-standing customer relationships and extensive local direct sales forces.
MANY OF OUR COMPETITORS ARE LARGER AND HAVE GREATER FINANCIAL AND OTHER
RESOURCES THAN WE DO AND THOSE ADVANTAGES COULD MAKE IT DIFFICULT FOR US TO
COMPETE WITH THEM.
The media production industry is extremely competitive and includes
several companies which have achieved substantially greater market share than we
have, have longer operating histories, have larger customer bases, and have
substantially greater financial, development and marketing resources than we do.
If overall demand for our products should decrease it could have a materially
adverse affect on our operating results.
TECHNOLOGY DEVELOPMENTS COULD REDUCE THE DEMAND FOR OUR SERVICES OR RENDER OUR
PRODUCTS OBSOLETE AND UNMARKETABLE.
In recent years, the market for business materials has experienced
significant changes due to advances in computer and communication technologies.
Certain products that were once commercially printed are now generated on
computers and disseminated in a digital or electronic format rather than in a
paper format. Although we have anticipated the trend to cross-media publishing,
adding partners in CD, video, and website production, there can be no assurances
that other technology developments will not have an adverse effect on our
business.
To be successful, we must offer products and services that keep pace with
technological developments and emerging industry standards, address the
ever-changing and increasingly sophisticated needs of our customers and achieve
broad market acceptance. In our efforts to develop these types of products and
services, we may:
o be unable to cost-effectively or in a timely manner develop, market or
sell these products and services;
o encounter products, capabilities or technologies developed by other
companies or entities that render our products and services obsolete
or noncompetitive, or that shorten the life cycles of our existing
products and services; or
o experience difficulties that could delay or prevent the successful
development, introduction, and adoption of these new products and
services.
6
WE ARE DEPENDENT ON MANAGEMENT. IF WE ARE NOT ABLE TO ATTRACT AND RETAIN KEY
EMPLOYEES, OUR BUSINESS OPERATIONS WILL BE HARMED.
We are dependent on the expertise and experience of our officers,
directors, key staff, and sales representatives. The implementation of our
business plan is dependent on our ability to attract and retain additional
quality sales represtantives. The loss of any of our current employees or the
inability to attract and retain new employees in the future would have a
material adverse effect on our business.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING OUR BUSINESS OPERATIONS WILL BE
HARMED AND IF WE DO OBTAIN ADDITIONAL FINANCING OUR THEN EXISTING SHAREHOLDERS
MAY SUFFER SUBSTANTIAL DILUTION.
We will require additional funds to sustain and expand our sales and
marketing activities. We anticipate that we will require up to approximately
$1.0 million to fund our continued operations for the next twelve months,
depending on revenue from operations. Additional capital will be required to
effectively support the operations and to otherwise implement our overall
business strategy. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all. In February 2004, we entered
into an equity line of credit with Cornell Capital Partners, L.P. Pursuant to
the equity line of credit, we may, at our discretion, periodically sell to
Cornell Capital Partners shares of common stock for a total purchase price of up
to $5,000,000. Our financing needs are expected to be substantially provided
from the equity line of credit. No assurances can be given that such financing
will be available in sufficient amounts or at all when needed, in part, because
we are limited to a maximum draw down of $53,000 per advance. If we need to draw
down more than we are allowed under the equity line of credit, we may require
additional funds to continue operations.
In 2003, we engaged an offshore licensed brokerage firm to raise on a
best efforts basis from $1.5 million to $3.0 million, depending on market price,
for 11,000,000 of our common stock. The shares are being offered pursuant to an
exemption from registration afforded by Regulation S to the Securities Act of
1933. Shares sold pursuant to Regulation S are deemed restricted and may not be
sold to any U.S. Person (as that term is defined in the Regulation) for a period
of one (1) year from date of sale. In 2003, we received a total of $634,080
through the offshore offering. We anticipate continued funding from the
Regulation S Offering. The inability to obtain additional capital will restrict
our ability to grow and may reduce our ability to continue to conduct business
operations. If we are unable to obtain additional financing, we will likely be
required to curtail our marketing and development plans and possibly cease our
operations. Any additional equity financing may involve substantial dilution to
our then existing shareholders.
OUR PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS OWN A CONTROLLING INTEREST IN
OUR VOTING STOCK AND INVESTORS WILL NOT HAVE ANY VOICE IN OUR MANAGEMENT.
Our officers and directors beneficially own approximately 80% of our
outstanding common stock. As a result, these officers and directors, acting
together, will have the ability to control substantially all matters submitted
to our stockholders for approval, including:
o election of our board of directors;
o removal of any of our directors;
o amendment of our certificate of incorporation or bylaws; and
o adoption of measures that could delay or prevent a change in control
or impede a merger, takeover, or other business combination involving
us.
As a result of their ownership and positions, our directors and
executive officers collectively are able to influence all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, sales of significant amounts of
shares held by our directors and executive officers, or the prospect of these
sales, could adversely affect the market price of our common stock. Management's
stock ownership may discourage a potential acquirer from making a tender offer
or otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
RISKS RELATING TO OUR COMMON STOCK:
- ----------------------------------
7
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.
As of November 12, 2004, we had 30,348,404 shares of our Common Stock
issued and outstanding of which we believe 26,873,624 shares to be restricted
shares. Rule 144 provides, in essence, that a person holding "restricted
securities" for a period of one year may sell only an amount every three months
equal to the greater of (a) one percent of a company's issued and outstanding
shares or (b) the average weekly volume of sales during the four calendar weeks
preceding the sale. The amount of "restricted securities" which a person who is
not an affiliate of our company may sell is not so limited, since non-affiliates
may sell without volume limitation their shares held for two years if there is
adequate current public information available concerning our company. In such an
event, "restricted securities" would be eligible for sale to the public at an
earlier date. The sale in the public market of such shares of common stock may
adversely affect prevailing market prices of our common stock.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
RISKS RELATING TO OUR CURRENT EQUITY LINE AGREEMENT:
- ---------------------------------------------------
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR EQUITY LINE THAT ARE BEING
REGISTERED IN THIS PROSPECTUS AND THE SALE OF THESE SHARES MAY DEPRESS THE
MARKET PRICE OF OUR COMMON STOCK.
8
The issuance and sale of shares upon delivery of an advance by Cornell
Capital Partners pursuant to the equity line of credit in the amount up to
$5,000,000 are likely to result in substantial dilution to the interests of
other stockholders. There is no upper limit on the number of shares that we may
be required to issue. This will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common stock
and may result in a change of control of our company.
UNDER THE LINE OF CREDIT, CORNELL CAPITAL PARTNERS WILL PAY LESS THAN THE
THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK
The common stock to be issued under the equity line of credit will be
issued at a 5% discount to the lowest closing bid price for the five days
immediately following the notice date of an advance. These discounted sales
could cause the price of our common stock to decline.
THE CONTINUOUSLY ADJUSTABLE PRICE FEATURE OF OUR EQUITY LINE OF CREDIT COULD
REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH WILL CAUSE
DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon receipt of an advance pursuant to
the equity line of credit is essentially limitless. The following is an example
of the amount of shares of our common stock issuable in connection with an
advance of $53,000 under the equity line of credit, based on market prices 25%,
50% and 75% below the closing price as of December 6, 2004 of $1.50:
% Below Price Per With Discount Number of Shares Percentage
market Share of 5% Issuable of Stock*
------ ----- ----- -------- ---------
25% $1.125 $1.06875 49,591 0.2%
50% $0.75 $0.7125 74,386 0.2%
75% $0.375 $0.35625 148,772 0.5%
As illustrated, the number of shares of common stock issuable in
connection with an advance under the equity line of credit will increase if the
market price of our stock declines, which will cause dilution to our existing
stockholders.
THE SALE OF OUR STOCK UNDER OUR EQUITY LINE COULD ENCOURAGE SHORT SALES BY THIRD
PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE OF OUR STOCK PRICE AND
MATERIALLY DILUTE EXISTING STOCKHOLDERS' EQUITY AND VOTING RIGHTS
In many circumstances the provision of an equity line of credit for
companies that are traded on the OTCBB has the potential to cause a significant
downward pressure on the price of common stock. This is especially the case if
the shares being placed into the market exceed the market's ability to take up
the increased stock or if we have not performed in such a manner to show that
the equity funds raised will be used to grow our company. Such an event could
place further downward pressure on the price of common stock. Under the terms of
our equity line we may request numerous draw downs pursuant to the terms of the
equity line. Even if we use the equity line to grow our revenues and profits or
invest in assets which are materially beneficial to us, the opportunity exists
for short sellers and others to contribute to the future decline of our stock
price. If there are significant short sales of stock, the price decline that
would result from this activity will cause the share price to decline more so
which in turn may cause long holders of the stock to sell their shares thereby
contributing to sales of stock in the market. If there is an imbalance on the
sell side of the market for the stock the price will decline. If this occurs,
the number of shares of our common stock that is issuable pursuant to the equity
line of credit will increase, which will materially dilute existing
stockholders' equity and voting rights.
WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE OF CREDIT
WHEN NEEDED
We are to some extent dependent on external financing to fund our
operations. Our financing needs are expected to be substantially provided from
the equity line of credit. No assurances can be given that such financing will
be available in sufficient amounts or at all when needed, in part, because we
are limited to a maximum draw down of $53,000 per advance. Cornell Capital
Partners may not own more than 9.9% of our outstanding common stock at any time.
Although Cornell Capital Partners can repeatedly acquire and sell shares, the
9
9.9% limitation may hinder or delay our ability to draw down additional advances
if such advance would cause Cornell Capital Partners to own more than 9.9% of
our outstanding common stock.
RISKS RELATING TO OUR CONVERTIBLE DEBENTURE ISSUANCE:
- ----------------------------------------------------
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE
DEBENTURES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES,
WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our convertible
debenture is essentially limitless. The following is an example of the amount of
shares of our common stock that are issuable, upon conversion of our $240,000
convertible debentures (excluding accrued interest), based on market prices 25%,
50% and 75% below the market price, as of December 6, 2004 of $1.50.
% Below market Price Per Share Number of Shares Issuable Percentage of Stock*
-------------- --------------- ------------------------- --------------------
25% $1.125 213,334 0.7%
50% $0.75 320,000 1.0%
75% $0.375 640,000 2.1%
As illustrated, the number of shares of common stock issuable upon
conversion of our convertible debentures will increase if the market price of
our stock declines, which will cause dilution to our existing stockholders.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE
DEBENTURES MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON STOCK,
WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The significant downward pressure on the price of the common stock as
the selling stockholder converts and sells material amounts of common stock
could encourage short sales by investors. This could place further downward
pressure on the price of the common stock. The selling stockholder could sell
common stock into the market in anticipation of covering the short sale by
converting their securities, which could cause the further downward pressure on
the stock price. In addition, not only the sale of shares issued upon conversion
or exercise of debentures, warrants and options, but also the mere perception
that these sales could occur, may adversely affect the market price of the
common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE DEBENTURES MAY CAUSE
IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the convertible debentures
and exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. There is no upper limit on the
number of shares that may be issued which will have the effect of further
diluting the proportionate equity interest and voting power of holders of our
common stock, including investors in this offering.
IN THE EVENT THAT OUR STOCK PRICE DECLINES, THE SHARES OF COMMON STOCK ALLOCATED
FOR CONVERSION OF THE CONVERTIBLE DEBENTURES AND REGISTERED PURSUANT TO THIS
PROSPECTUS MAY NOT BE ADEQUATE AND WE MAY BE REQUIRED TO FILE A SUBSEQUENT
REGISTRATION STATEMENT COVERING ADDITIONAL SHARES. IF THE SHARES WE HAVE
ALLOCATED AND ARE REGISTERING HEREWITH ARE NOT ADEQUATE AND WE ARE REQUIRED TO
FILE AN ADDITIONAL REGISTRATION STATEMENT, WE MAY INCUR SUBSTANTIAL COSTS IN
CONNECTION THEREWITH.
Based on our current market price and the potential decrease in our
market price as a result of the issuance of shares upon conversion of the
convertible debentures, we have made a good faith estimate as to the amount of
shares of common stock that we are required to register and allocate for
conversion of the convertible debentures. Accordingly, we have allocated and
registered 725,000 shares to cover the conversion of the convertible debentures.
In the event that our stock price decreases, the shares of common stock we have
allocated for conversion of the convertible debentures and are registering
hereunder may not be adequate. If the shares we have allocated to the
10
registration statement are not adequate and we are required to file an
additional registration statement, we may incur substantial costs in connection
with the preparation and filing of such registration statement.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING CONVERTIBLE
DEBENTURES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE,
OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE CONVERTIBLE DEBENTURES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIAL ASSETS.
In February 2004, in connection with the equity line of credit with
Cornell Capital Partners, L.P., we paid Cornell Capital Partners, L.P. a
commitment fee in the form of an unsecured convertible debenture in the amount
of $240,000. The convertible debenture is due and payable, with 5% interest,
three years from the date of issuance, unless sooner converted into shares of
our common stock. Any event of default such as our failure to repay the
principal or interest when due, our failure to issue shares of common stock upon
conversion by the holder, breach of any covenant, representation or warranty in
the Standby Equity Distribution Agreement, the commencement of a bankruptcy,
insolvency, reorganization or liquidation proceeding against us and the
delisting of our common stock could require the early repayment of the
convertible debentures, if the default is not cured with the specified grace
period. We anticipate that the full amount of the convertible debenture,
together with accrued interest, will be converted into shares of our common
stock, in accordance with the terms of the convertible debenture. If we are
required to repay the convertible debenture, we would be required to use our
limited working capital and raise additional funds.
11
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by Cornell Capital Partners, LP. We will
receive proceeds from the sale of shares of our common stock to Cornell Capital
Partners, L.P. under the equity line of credit. The purchase price of the shares
purchased under the equity line of credit will be equal to 95% of the lowest
closing bid price of our common stock on the Over-the-Counter Bulletin Board for
the 5 days immediately following the notice to advance funds date. We have
agreed to pay Cornell Capital Partners, L.P. 5% of the proceeds that we receive
under the Equity Line of Credit. We cannot draw more than $53,000 per advance.
For illustrative purposes, we have has set forth below our intended use
of proceeds for the range of net proceeds indicated below to be received under
the equity line of credit.
GROSS PROCEEDS $2,000,000 $4,000,000 $5,000,000
NET PROCEEDS (AFTER OFFERING
EXPENSES AND 5% FEE)
$1,848,509 $3,748,509 $4,698,509
USE OF PROCEEDS: AMOUNT AMOUNT AMOUNT
Sales & Marketing $750,000 $2,000,000 $2,750,000
Technology Development $100,000 $200,000 $300,000
Administrative Expenses,
Including Salaries $450,000 $650,000 $750,000
General Working Capital $548,509 $898,509 $898,509
TOTAL $1,848,509 $3,748,509 $4,698,509
12
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders including Cornell Capital Partners, L.P. and Newbridge Securities
Corporation. A description of each selling shareholder's relationship to our
Company and how each selling shareholder acquired the shares to be sold in this
offering is detailed in the information immediately following this table.
PERCENTAGE
OF
PERCENTAGE OUTSTANDING PERCENTAGE
OF SHARES OF
OUTSTANDING SHARES TO TO BE OUTSTANDING
SHARES SHARES BE ACQUIRED SHARES SHARES
BENEFICIALLY BENEFICIALLY ACQUIRED UNDER TO BE BENEFICIALLY
OWNED OWNED UNDER THE THE LINE SOLD IN OWNED
SELLING BEFORE BEFORE LINE OF OF THE AFTER
STOCKHOLDER OFFERING OFFERING CREDIT/NOTE CREDIT/NOTE(1) OFFERING OFFERING(5)
- ---------------- -------------- ------------ ----------- ------------ ----------- ------------
Cornell Capital
Partners, L.P. 160,000 (2) * 3,335,248 9.90% 15,725,000 (3) 0.0%
101 Hudson Street
Suite 3606
Jersey City, NY 07302
Newbridge Securities
Corporation 4,762 * 0 0.0% 4,762 0.0%
1451 Cypress Creek Road
Suite 204
Fort Lauderdale, FL
33309
Diamond Capital L.L.C. 10,750,000 35.42% 0 0.0% 1,250,000 (4) 19.56%
24165 Ih 10 West
Suite 217125
San Antonio, TX 78257
Quest Capital
Resources L.L.C. 10,750,000 35.42% 0 0.0% 1,250,000 (4) 19.56%
24165 Ih 10 West
Suite 217125 San Antonio, TX 78257
* Less than 1%.
(1) Applicable percentage of ownership is based on 30,348,404 shares of common
stock outstanding as of November 12, 2004, together with securities exercisable
or convertible into shares of common stock within 60 days of November 12, 2004
for each stockholder. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject to
securities exercisable or convertible into shares of common stock that are
currently exercisable or exercisable within 60 days of November 12, 2004 are
deemed to be beneficially owned by the person holding such securities for the
purpose of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person.
(2) Represents shares issuable upon conversion of the convertible debenture in
the amount of $240,000. This figure assumes that the $240,000 debenture was
converted on December 7, 2004 at a conversion price of $1.65 per share.
(3) Includes 15,000,000 shares of common stock to be issued under the Equity
Line of Credit Agreement and up to 725,000 shares of common stock underlying the
convertible debenture.
(4) Assumes that all shares registered in this offering will be sold.
13
The following information contains a description of each selling
shareholder's relationship to us and how each selling shareholder acquired the
shares to be sold in this offering is detailed below. None of the selling
stockholders have held a position or office, or had any other material
relationship, with our company:
o CORNELL CAPITAL PARTNERS, L.P. is the investor under the Equity Line of
Credit. All investment decisions of Cornell Capital Partners are made by its
general partner, Yorkville Advisors, LLC. Mark Angelo, the managing member of
Yorkville Advisors, makes the investment decisions on behalf of Yorkville
Advisors. Mr. Angelo does not have voting control over the shares beneficially
owned by Cornell Capital Partners. Cornell Capital Partners acquired all shares
being registered in this offering in a financing transaction with us. This
transaction is explained below:
EQUITY LINE OF CREDIT. In February 2004, we entered into an
Equity Line of Credit with Cornell Capital Partners, L.P.
Pursuant to the Equity Line of Credit, we may, at our
discretion, periodically sell to Cornell Capital Partners
shares of common stock for a total purchase price of up to
$5,000,000. For each share of common stock purchased under the
Equity Line of Credit, Cornell Capital Partners will pay us
95% of the lowest closing bid price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on
which our common stock is traded for the five days immediately
following the notice date. We also paid Cornell Capital
Partners a commitment fee in the form of a compensation
debenture in the amount of $240,000 upon execution of the
equity line of credit. Further, we have agreed to pay Cornell
Capital Partners, L.P. 5% of the proceeds that we receive
under the Equity Line of Credit. We are registering 15,000,000
shares in this offering which may be issued under the equity
line of credit.
UNSECURED CONVERTIBLE DEBENTURE. In February 2004, in
connection with the equity line of credit with Cornell Capital
Partners, L.P., we paid Cornell Capital Partners, L.P. a
commitment fee in the form of an unsecured convertible
debenture in the amount of $240,000. The convertible debenture
is due and payable, with 5% interest, three years from the
date of issuance, unless sooner converted into shares of our
common stock. The debenture is convertible, subject to a
maximum cap of $50,000 per day, at the holder's option any
time up to maturity at a conversion price equal to an amount
equal to one hundred percent (100%) of the lowest closing bid
price of the common stock for the three trading days
immediately preceding the conversion date. At maturity, we
have the option to either pay the holder the outstanding
principal balance and accrued interest or to convert the
debentures into shares of common stock at a conversion price
equal to an amount equal to one hundred percent (100%) of the
lowest closing bid price of the common stock for the three
trading days immediately preceding the conversion date. We are
registering in this offering 725,000 shares of common stock
underlying the convertible debenture.
THERE ARE CERTAIN RISKS RELATED TO SALES BY CORNELL CAPITAL
PARTNERS, INCLUDING:
The outstanding shares are issued based on discount to the
market rate. As a result, the lower the stock price around the
time Cornell is issued shares, the greater chance that it gets
more shares. This could result in substantial dilution to the
interests of other holders of common stock.
To the extent Cornell sells its common stock, the common stock
price may decrease due to the additional shares in the market.
This could allow Cornell to sell greater amounts of common
stock, the sales of which would further depress the stock
price.
The significant downward pressure on the price of the common
stock as Cornell sells material amounts of common stocks could
encourage short sales by Cornell or others. This could place
further downward pressure on the price of the common stock.
o NEWBRIDGE SECURITIES CORPORATION. Newbridge Securities Corporation is
an unaffiliated registered broker-dealer that has been retained by us. Newbridge
provides typical broker-dealer services to us. In addition, in connection with
the Equity Line of Credit, Newbridge reviewed the documents in connection with
the Equity Line of Credit, advised us on the mechanics of the transaction and
explained how the equity line of credit impacts us financially, including the
14
limitations and restrictions on the drawdowns. Mr. Guy S. Amico, Newbridge
Securities Corporation 's President, makes the investment decisions on behalf of
Newbridge Securities Corporation and has voting control over the securities
beneficially owned by Newbridge Securities Corporation. For its services in
connection with the Equity Line of Credit, Newbridge Securities Corporation
received a fee of 4,762 shares of common stock. These shares are being
registered in this offering.
o DIAMOND CAPITAL L.L.C. Diamond Capital L.L.C. is a trust, whereby Gary
L. Cain, our Chairman of the Board of Directors has the right to vote the shares
of the trust.
o QUEST CAPITAL RESOURCES L.L.C. Quest Capital Resources L.L.C. is a
trust, whereby Gary L. Cain, our Chairman of the Board of Directors has the
right to vote the shares of the trust.
15
EQUITY LINE OF CREDIT
SUMMARY. In February 2004, we entered into an equity line of credit
with Cornell Capital Partners, L.P. Pursuant to the equity line of credit, we
may, at our discretion, periodically sell to Cornell Capital Partners shares of
common stock for a total purchase price of up to $5,000,000. For each share of
common stock purchased under the equity line of credit, Cornell Capital Partners
will pay 95% of the lowest closing bid price on the Over-the-Counter Bulletin
Board or other principal market on which our common stock is traded for the five
days immediately following the notice date. Cornell Capital Partners is a
private limited partnership whose business operations are conducted through its
general partner, Yorkville Advisors, LLC. We also paid Cornell Capital Partners
a commitment fee in the form of a compensation debenture in the amount of
$240,000 upon execution of the equity line of credit. Further, we have agreed to
pay Cornell Capital Partners, L.P. 5% of the proceeds that we receive under the
Equity Line of Credit. In addition, we engaged Newbridge Securities Corporation,
a registered broker-dealer, to advise us in connection with the equity line of
credit. For its services, Newbridge Securities Corporation received 4,762 shares
of our common stock.
EQUITY LINE OF CREDIT EXPLAINED. Pursuant to the Equity Line of Credit,
we may periodically sell shares of common stock to Cornell Capital Partners,
L.P. to raise capital to fund our working capital needs. The periodic sale of
shares is known as an advance. We may request an advance every seven trading
days. A closing will be held six trading days after such written notice at which
time we will deliver shares of common stock and Cornell Capital Partners, L.P.
will pay the advance amount.
We may request advances under the equity line of credit once the
underlying shares are registered with the Securities and Exchange Commission.
Thereafter, we may continue to request advances until Cornell Capital Partners
has advanced $5,000,000 or two years after the effective date of the
accompanying registration statement, whichever occurs first.
The amount of each advance is subject to an aggregate maximum advance
amount of $53,000. The amount available under the equity line of credit is not
dependent on the price or volume of our common stock. Cornell Capital Partners
may not own more than 9.9% of our outstanding common stock at any time. Because
Cornell Capital Partners can repeatedly acquire and sell shares, this limitation
does not limit the potential dilutive effect or the total number of shares that
Cornell Capital Partners may receive under the equity line of credit.
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the equity line of credit, in part, because the purchase
price of the shares will fluctuate based on prevailing market conditions and we
have not determined the total amount of advances we intend to draw. Nonetheless,
we can estimate the number of shares of our common stock that will be issued
using certain assumptions. For example, we would need to issue 3,508,772 shares
of common stock in order to raise the maximum amount of $5,000,000 under the
equity line of credit at a purchase price of $1.425 (i.e., 95% of a recent stock
price of $1.50).
The following is an example of the amount of shares of our common stock
issuable in connection with an advance of $53,000 under the equity line of
credit, based on market prices 25%, 50% and 75% below the closing price as
of December 6, 2004 of $1.50.
% Below Price Per With Discount Number of Shares Percentage of
market Share of 5% Issuable Stock*
------ ----- ----- -------- ------
25% $1.125 $1.06875 49,591 0.2%
50% $0.75 $0.7125 74,386 0.2%
75% $0.375 $0.35625 148,772 0.5%
We are registering a total of 15,000,000 shares of common stock for the
sale under the equity line of credit. The issuance of shares under the equity
line of credit may result in a change of control. That is, up to 15,000,000
shares of common stock could be issued under the equity line of credit. If all
or a significant block of these shares are held by one or more stockholders
working together, then such stockholder or stockholders would have enough shares
to assume control of us by electing its or their own directors. This could
happen, for example, if Cornell Capital Partners sold the shares purchased under
the equity line of credit to the same purchaser.
16
Proceeds used under the equity line of credit will be used in the
manner set forth in the "Use of Proceeds" section of this prospectus. We cannot
predict the total amount of proceeds to be raised in this transaction because we
have not determined the total amount of the advances we intend to draw.
We expect to incur expenses of approximately $45,000 consisting
primarily of professional fees incurred in connection with this registration. In
addition, Cornell Capital Partners will retain 5% of each advance. In addition,
we issued 4,762 shares of common stock to Newbridge Securities Corporation, a
registered broker-dealer, as a placement agent fee.
SAMPLE CONVERSION CALCULATION OF THE CONVERTIBLE DEBENTURE
In February 2004, in connection with the equity line of credit with
Cornell Capital Partners, L.P., we paid Cornell Capital Partners, L.P. a
commitment fee in the form of an unsecured convertible debenture in the amount
of $240,000. The convertible debenture is due and payable, with 5% interest,
three years from the date of issuance, unless sooner converted into shares of
our common stock. The debenture is convertible, subject to a maximum cap of
$50,000 per day, at the holder's option any time up to maturity at a conversion
price equal to an amount equal to one hundred percent (100%) of the lowest
closing bid price of the common stock for the three trading days immediately
preceding the conversion date. At maturity, we have the option to either pay the
holder the outstanding principal balance and accrued interest or to convert the
debentures into shares of common stock at a conversion price equal to an amount
equal to one hundred percent (100%) of the lowest closing bid price of the
common stock for the three trading days immediately preceding the conversion
date. We are registering in this offering 725,000 shares of common stock
underlying the convertible debenture.
The number of shares of common stock issuable upon conversion of the
debenture is determined by dividing that portion of the principal of the
debenture to be converted and interest, if any, by the conversion price. For
example, assuming conversion of $240,000 of debentures on December 7, 2004, a
conversion price of $1.50 per share, the number of shares issuable upon
conversion would be:
$240,000/$1.50 = 160,000 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our convertible
debenture in the amount of $240,000, based on market prices 25%, 50% and 75%
below the market price, as of December 6, 2004 of $1.50.
% Below market Price Per Share Number of Shares Issuable Percentage of Stock*
-------------- --------------- ------------------------- --------------------
25% $1.125 213,334 0.7%
50% $0.75 320,000 1.0%
75% $0.375 640,000 2.1%
17
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution
of our common stock owned by the selling stockholders may be effected directly
to purchasers by the selling stockholders or by pledgees, donees, transferees or
other successors in interest, as principals or through one or more underwriters,
brokers, dealers or agents from time to time in one or more transactions (which
may involve crosses or block transactions) (i) on the over-the-counter market or
in any other market on which the price of our shares of common stock are quoted
or (ii) in transactions otherwise than on the over-the-counter market or in any
other market on which the price of our shares of common stock are quoted. Any of
such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at varying prices
determined at the time of sale or at negotiated or fixed prices, in each case as
determined by the selling stockholders or by agreement between the selling
stockholders and underwriters, brokers, dealers or agents, or purchasers. If the
selling stockholders effect such transactions by selling their shares of our
common stock to or through underwriters, brokers, dealers or agents, such
underwriters, brokers, dealers or agents may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders or
commissions from purchasers of our common stock for whom they may act as agent
(which discounts, concessions or commissions as to particular underwriters,
brokers, dealers or agents may be in excess of those customary in the types of
transactions involved). The selling stockholders and any brokers, dealers or
agents that participate in the distribution of the common stock may be deemed to
be underwriters, and any profit on the sale of common stock by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
Cornell Capital Partners, L.P. is an "underwriter" within the meaning
of the Securities Act of 1933 in connection with the sale of common stock under
the equity line of credit. As an underwriter of the equity line common stock,
Cornell Capital Partners, L.P. is subject to the same restrictions as any
underwriter, including the prospectus delivery requirements of Section 5(b)(2)
of the Securities Act and the applicable restrictions of Regulation M, with
respect to short selling activities. Cornell Capital Partners, L.P. and
Newbridge Securities Corporation have agreed that they will not, and that they
will cause its affiliates not to, engage in any short sales of or hedging
transactions with respect to our common stock. Cornell Capital Partners, L.P.
will pay 95% of the lowest closing bid price of our common stock on the
Over-the-Counter Bulletin Board or other principal trading market on which our
common stock is traded for the five days immediately following the advance date.
In addition, Cornell Capital Partners will retain 5% of the proceeds received by
us under the equity line of credit. The 5% discount is an underwriting discount.
In addition, we have engaged Newbridge Securities Corporation, a registered
broker-dealer, to advise us in connection with the equity line of credit. For
its services, Newbridge Securities Corporation received 4,762 shares of our
common stock.
Cornell Capital Partners, L.P. was formed in February 2000 as a
Delaware limited partnership. Cornell Capital Partners is a domestic hedge fund
in the business of investing in and financing public companies. Cornell Capital
Partners does not intend to make a market in our stock or to otherwise engage in
stabilizing or other transactions intended to help support the stock price.
Prospective investors should take these factors into consideration before
purchasing our common stock.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify Cornell Capital Partners and its controlling persons
against certain liabilities, including liabilities under the Securities Act. We
estimate that the expenses of the offering to be borne by us will be
approximately $45,000, as well as retention of 5% of the gross proceeds received
under the equity line of credit. In addition, we engaged Newbridge Securities
Corporation, a registered broker-dealer, to advise us in connection with the
equity line of credit. For its services, Newbridge Securities Corporation
received 4,762 shares of our common stock.
18
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the NASD Over-The-Counter Bulletin Board
under the symbol "MEWX." The Over-The-Counter Bulletin Board is sponsored by the
National Association of Securities Dealers (NASD) and is a network of security
dealers who buy and sell stocks.
For the periods indicated, the following table sets forth the high and
low bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
Low($) High($)
2002
- ----
First Quarter 0.01 0.02
Second Quarter 0.01 0.01
Third Quarter 0.01 0.01
Fourth Quarter 0.00 0.05
2003
- ----
First Quarter 0.05 0.01
Second Quarter (1) 0.01 3.00
Third Quarter 2.02 3.90
Fourth Quarter 2.05 3.00
2004
- ----
First Quarter 1.35 2.50
Second Quarter 1.15 4.50
Third Quarter 1.20 2.75
Fourth Quarter (2) 1.50 1.50
(1) There was a 1:100 stock split on June 25, 2003
(2) As of December 6, 2004
As of August 27, 2004, our shares common of common stock were held by
672 stockholders of record. We believe that the number of beneficial owners is
greater than the number of record holders because a portion of our outstanding
common stock is held of record in broker "street names" for the benefit of
individual investors. The transfer agent of our common stock is Continental
Stock Transfer and Trust Company.
DIVIDEND POLICY
Our board of directors determines any payment of dividends. We do not
expect to authorize the payment of cash dividends in the foreseeable future. Any
future decision with respect to dividends will depend on future earnings,
operations, capital requirements and availability, restrictions in future
financing agreements, and other business and financial considerations.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However,
there may be events in the future that we are not able to accurately predict or
over which we have no control. Our actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
The following discussion should be read in conjunction with our audited
financial statements and notes thereto which appear elsewhere in this report.
GENERAL
We are a media production and management agency. We manage the
production of all of a customer's marketing and communication materials,
including printing, packaging, signage, direct mail, fulfillment, promotional
specialties, audio/video, digital asset management, multi-media and Web
publications. We provide consultative input to insure that concepts are turned
into practical solutions. As a single source solution partner, we simplify the
process for our customers and seek "best fit" solutions. We are targeting
commercial and other organizations with annual media expenditures of $100,000 or
more.
We intend to leverage our customer service approach to build solid
personal relationships and develop strong name brand recognition. We currently
are operating in and have developed customer bases in the New York City
metropolitan area, Washington D.C. metropolitan area, Philadelphia metropolitan
area and in the Scranton and Wilkes-Barre areas in Pennsylvania. We intend to
expand on a geographical basis, targeting major metropolitan areas nationwide.
We will further our expansion into specific vertical markets, using those same
customer relationships to build brand awareness with new potential customers
within the same vertical market.
We recognize that print and media buying encompasses a strong
relationship aspect between the provider and the customer. Our business model is
built on providing our sales representatives with the support and leverage of a
strong customer service culture, in-house pre-press capabilities, e-business
solutions, and a base of production partners that can fulfill the complexity of
any customer order. We are a virtual printing/cross-media publishing company- we
neither own nor has our capital tied up in printing/multi-media equipment or
facilities but work with an established network of the most capable,
technologically advanced printers and production houses. Our customers benefit
by getting superior customer service - an end-to-end, single source solution
from design and pre-press, to production by the most cost-effective and time
efficient production house, through distribution and digital asset management.
Our business strategy is three-fold:
o Concentrate on commercial printing, a $110 billion business in the United
States. This is still a highly fragmented industry with more than 58,000
entities providing printing services. We have identified and work closely
with a network of select printers with specific capabilities, equipment and
technology that can be matched with specific printing jobs.
20
o Hire high volume Account Representatives and acquire Print Brokers with
existing "books" of business. Account Representatives/Brokers recognize the
following benefits of our company: increased sales productivity as we take
on the administrative and client management functions freeing them to sell
more; additional product offerings resulting from the expanded list of
printers available; and additional customer support and customer
continuity. Most importantly these benefits result in increased earning
potential for the Account Representatives/Brokers, as well as the
opportunity to participate in the upside growth of a public company.
o Expand into other media. The processes from design through fulfillment are
similar for electronic media. It is a relatively simple extension for us to
offer other media products and services, thus providing significant
benefits to customers in the management and control of their intangible
assets such as trademarks, logos, and service marks. Such additional media
products and services we intend to expand into include: the production of
videos, CDs, interactive CDs, web enabled publications, e-newsletters, and
websites with such capabilities as electronic shopping carts, inventory
control and other e-commerce capabilities. Furthermore, because we are
maintaining customers' content across various media, we can provide a
central repository or a digital asset library.
RESULTS OF OPERATIONS
We began operations as MediaWorx on July 1, 2003. For the first several
months we largely focused on putting the financing and the infrastructure in
place to support sales growth. The following key elements were put in place:
o The vendor relationship program
We designed and implemented a careful selection process to insure
capability, quality, financial stability, and trustworthiness from each
and every vendor. We identified and contracted with a network of select
printers and media production partners with specific capabilities,
equipment and technology that can be matched with any customer project.
o The enterprise-wide management system
We selected and implemented an enterprise-wide management system.
Further customization is anticipated in 2004.This system allows us to
efficiently handle all transactions. It is expected therefore, that we
will be able to add significant growth without increasing our internal
costs.
We believe this focus has resulted in a strong base to support our
expansion. We have initiated the building of an experienced, direct sales force
and are concentrating our recruiting efforts on sales representatives who have
solid relationships with mid- to large-size organizations who spend $50,000 to
over $10 million per year on printing and other media products.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
REVENUES AND COST OF REVENUES
Revenues for the nine months ending September 30, 2004 were $990,938
compared to $69,415 of revenues in 2003.
Through the first nine months of 2004, we provided our services to 72
customers. The majority of customers are repeat customers, placing multiple
orders through-out the year, depending on their needs. These customers are 56%
commercial, 28% agencies, and 16% associations/government/educational
institutions. Approximately 70% of these customers are in our target category,
spending over $50,000 in printing and cross media products.
Cost of revenues for the nine months ending September 30, 2004 was
$502,705 or 51% of sales. Cost of revenues for the same period in 2003 was
$52,276 or 75% of sales. The 24% point improvement in cost of sales is largely
attributable to revenues being accounted for on a net basis for Sullivan Print
Management.
21
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 2004 were
$1,240,922 compared to $270,797 for the same period in 2003.
In 2004, operating expenses included $591,190 for sales and marketing
expense, $66,589 for printing services (pre-press department), and $583,143 for
general and administrative costs. Sales and marketing expenses included one-time
charges totaling $95,000 associated with acquiring sales representatives and
independent sales agents. General and administrative expenses included one-time
charges totaling $11,544 also associated with acquiring independent sales
agents.
OTHER EXPENSES
In the nine months ending September 30, 2004, other expenses totaled
$488,500. Financing fees were $293,250, including $240,000 expense for a
convertible debenture associated with the Cornell Capital Equity Line of Credit.
Interest expense was $195,250, including a one time charge of $126,000,
associated with the restructure of the private investors' equity debt.
In the nine months ending September 30, 2003, other expense totaled
$294,056. This included other income of $947,637 from the settlement of the note
payable with SDA List Brokers, Inc. previously described.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002.
- ----------------------------------------------------------------------
REVENUES AND COST OF REVENUES
We had revenues of $128,850 in 2003 and cost of revenues of $97,285, or
75.5% of sales. We had no sales in 2002. We made sales to 33 different customers
during the fiscal year ended 2003. This increase in sales is a result of our
sales and operations beginning in July 2003. Prior to that period, we were not
conducting any operations.
Of the 33 customers, 67% were commercial companies, 15% were
advertising agencies, and 18% were non profit organizations, including
associations, government institutions, and educational institutions.
Approximately 67% of those customers were mid- to large-size organizations who
spend over $50,000 on printing and cross media products.
Consistent with our business strategy to hire sales representatives, we
hired four sales representatives in November-December of 2003. We currently have
letters of intent with two additional sales representatives and anticipate
bringing these individuals on board in the first and second quarters of 2004.
OPERATING EXPENSES
Operating expenses were $558,583 compared to $189,586 for 2002.
2003 operating expenses included $112,726 for sales and marketing
expense, $44,105 for printing services (pre-press department), and $401,752 for
general and administrative costs. Approximately $45,000 of the general and
administrative costs were associated with the merger transaction. Our operating
expenses increased significantly during the fiscal year ended 2003 as a result
of our beginning operations in July 2003. These additional expenses included
additional salary for employees and developing infrastructure to support our
operations.
OTHER EXPENSES
Other expenses were ($310,101) in 2003. In 2002, the Company had other
income of $440,234, primarily due to a gain on the forgiveness of debt and a
gain on the settlement of a lawsuit. In 2003, we had a $947,637 gain on the
forgiveness of debt and miscellaneous income of $8,745. However, this was more
than offset by costs of the merger ($1,190,583), a loss on marketable securities
($14,331), and interest expense ($61,766).
LIQUIDITY AND CAPITAL RESOURCES
22
Based upon our recurring losses from operations and our net capital
deficiency, there is substantial doubt as to our ability to continue as a going
concern. We anticipate that we will require up to approximately $1,000,000 to
fund our continued operations for the next twelve months from the date of this
prospectus, depending on revenues from operations.
Our audited and unaudited consolidated financial statements have been
prepared on a basis that contemplates our continuation as a going concern and
the realization of assets and liquidation of liabilities in the ordinary course
of business. Our audited and unaudited consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue as a going concern. If we
fail to raise capital when needed, the lack of capital will have a material
adverse effect on our business, operating results and financial condition, and
could cause us to either reduce or shut down our operations.
The successful implementation of our business plan has required, and
will require on a going forward basis, substantial funds to finance our
continuing operations and further development of our software technologies.
There can be no assurance that we will be successful in raising the necessary
funds.
Our sources of ongoing liquidity include the cash flows of our
operations, potential new credit facilities, and potential additional equity
investments. Consequently, we continue to aggressively pursue additional debt
and equity financing and the reduction of our operating expenses. However, in
order to remain in business, we must raise additional cash in a timely fashion.
On December 31, 2003, we had a cash balance of $101,807. The Company
requires additional capital to continue operations. There is no assurance that
capital will be available or will be available on terms that we can afford.
We engaged an offshore licensed brokerage firm to raise on a best
efforts basis from $1.5 million to $3.0 million, depending on market price, for
11,000,000 of our common stock. During 2003, we completed a placement of
1,794,953 shares of common stock with investors located outside of the United
States in exchange for $634,080. In the first six months ending June 30, 2004,
the Company completed a placement of 1,101,355 shares of common stock with
investors located outside of the United States in exchange for $372,589. In
July, the Company completed a placement of an additional 768,733 shares in
exchange for $156,312. The shares were offered pursuant to an exemption from
registration afforded by Regulation S to the Securities Act of 1933. Shares sold
pursuant to Regulation S are deemed restricted and may not be sold to any U.S.
Person (as that term is defined in the Regulation) for a period of one (1) year
from date of sale. Thereafter, the shares will be subject to the restrictions of
Rule 144.
In February 2004, we entered into an equity line of credit with Cornell
Capital Partners, L.P. Pursuant to the equity line of credit, we may, at our
discretion, periodically sell to Cornell Capital Partners shares of common stock
for a total purchase price of up to $5,000,000. For each share of common stock
purchased under the equity line of credit, Cornell Capital Partners will pay 95%
of bid price on the Over-the-Counter Bulletin Board or other principal market on
which our common stock is traded for the five days immediately following the
notice date. The bid price is defined as the closing bid price, as reported by
Bloomberg L.P., of the common stock on the principal market or if the common
stock is not traded on a principal market, the highest reported bid price as
furnished by the National Association of Securities Dealers, Inc. Cornell
Capital Partners may not own more than 9.9% of our outstanding common stock at
any time. Although Cornell Capital Partners can repeatedly acquire and sell
shares, the 9.9% limitation may hinder or delay our ability to draw down
additional advances if such advance would cause Cornell Capital Partners to own
more than 9.9% of our outstanding common stock. Cornell Capital Partners is a
private limited partnership whose business operations are conducted through its
general partner, Yorkville Advisors, LLC. We also paid Cornell Capital Partners
a commitment fee in the form of a compensation debenture in the amount of
$240,000 upon execution of the equity line of credit. Further, we have agreed to
pay Cornell Capital Partners, L.P. 5% of the proceeds that we receive under the
Equity Line of Credit. In addition, we engaged Newbridge Securities Corporation,
a registered broker-dealer, to advise us in connection with the equity line of
credit. For its services, Newbridge Securities Corporation received 4,762 shares
of our common stock.
The Note Payable to Private Investors' Equity, LLC, was restructured
with the interest payments for the months August 2003 through August 2004
capitalized. The new principal balance is $595,823. Private Investor's Equity
was granted 200,000 warrants in consideration for this restructuring.
23
In May 2004, the Company entered into an agreement with Mercantile
Capital, LP for a $500,000 line of credit secured by the Company's receivables.
Under the terms of the agreement, Mercantile advances the Company eighty percent
of a Customer invoice. The remaining 20% is held in reserve until the receivable
is collected. In the first month of the agreement, the Company factored $112,452
of invoices. As of September 30, 2004, accounts receivable (including factoring
receivables) were $424,707, an increase of $389,194 since December 31, 2003. The
factoring line payable was $204,825.
In July 2004, we placed 850,000 newly issued common shares into a
guaranteed investment for a five year term. We expect to receive income from our
investment in the 4th quarter of 2004, and annually thereafter. The stock is
guaranteed to be returned at the end of the investment period. The shares were
offered pursuant to an exemption from registration afforded by Regulation S to
the Securities Act of 1933. Shares sold pursuant to Regulation S are deemed
restricted and may not be sold to any U.S. Person (as that term is defined in
the Regulation) for a period of one (1) year from date of sale. Thereafter, the
shares will be subject to the restrictions of Rule 144.
In September 2004, we signed an agreement with a private investment
company for the purchase by the investment company of $5.2 million of our common
shares in exchange for 2,850,874 shares of the investment company. The
investment company is a newly formed London-based company that has applied for
its shares to be admitted to trading on the London stock exchange as an
investment trust. The investment company has been established specifically to
invest in US micro cap companies with long term growth potential. The investment
company expects its shares to be trading on the London Stock Exchange in the 4th
quarter of 2004. We issued 3,054,295 common shares in connection with this
agreement. The shares were offered pursuant to an exemption from registration
afforded by Regulation S to the Securities Act of 1933. Shares sold pursuant to
Regulation S are deemed restricted and may not be sold to any U.S. Person (as
that term is defined in the Regulation) for a period of one (1) year from date
of sale. Thereafter, the shares will be subject to the restrictions of Rule 144.
INFLATION AND REGULATION
Our operations have not been, and in the near term are not expected to
be, materially affected by inflation or changing prices. We encounter
competition from a variety of companies in our markets. Many of these companies
have long standing customer relationships and are well-staffed and well
financed. We believe that competition is based on customer satisfaction and
production of quality products and services, although the ability, reputation,
and support of management are also significant. We do not believe that any
recently enacted or presently pending proposed legislation will have a material
adverse effect on our operations.
OTHER
Except for historical information contained herein, the matters set
forth above are forward-looking statements that involve certain risks and
uncertainties that could cause actual results to differ from those in the
forward-looking statements. Potential risks and uncertainties include such
factors as the level of business and consumer spending, the amount of sales of
our products, the competitive environment within the print and cross media
publishing industry, our ability to continue to expand our operations, the level
of costs incurred in connection with our expansion efforts, economic conditions
and the financial strength of our customers and suppliers. Investors are
directed to consider other risks and uncertainties discussed in documents filed
by us with the Securities and Exchange Commission.
24
BUSINESS
FORWARD LOOKING STATEMENTS
Certain information contained in this Form SB-2 are forward-looking
statements (within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended).
Factors set forth that appear with the forward-looking statements, or in our
other Securities and Exchange Commission filings, could affect our actual
results and could cause our actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, us in this
Form SB-2. In addition to statements that explicitly describe such risks and
uncertainties, readers are urged to consider statements labeled with the terms
"believes," "belief," "expects," "intends," "anticipates" or "plans" to be
uncertain and forward-looking. The forward-looking statements contained herein
are also subject generally to other risks and uncertainties that are described
from time to time in our reports and registration statements filed with the
Securities and Exchange Commission. In addition, prior financial performance and
customer orders are not necessarily indicative of the results that may be
expected in the future and we believe that such comparisons cannot be relied
upon as indicators of future performance. Additionally, we undertake no
obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
INTRODUCTION AND BACKGROUND
We are a media production and management business. The services that we
provide include print, packaging, signage, audio/video, digital asset
management, graphic design, production and fulfillment for traditional and
web-based marketing and communications products and services. We also provide
our customers with the support and leverage of a strong customer service
culture, in-house pre-press capabilities, e-business solutions, and a base of
production partners that can fulfill the complexity of any customer order. We
are a virtual printing company: we neither own nor have our capital tied up in
printing equipment or facilities but we have access to an established network of
technologically advanced printers and production houses. Our access to these
printers and production houses is based upon our contacts with and previous
business relationships with these printing and production houses. Before we
accept any job, we get an estimate on the cost and a commitment from the
printing and production houses to perform the job as contracted. Our role is
similar to a general contractor, in that we contact with customers for specified
work, and then we contract with the printing and production houses to fulfill
various jobs to fulfill our contract with the customer. We do not have any
standing contracts or commitments with any of these printing and production
houses, instead relying on service order contracts based upon our needs and
their availability. We pay the costs associated with the work performed by the
printing and production houses.
On July 1, 2003, we completed a reverse triangular merger whereby we
acquired the assets of a subsidiary of Solar Satellite Communication, Inc., a
print and cross-media marketing and management company. Effective July 2003, we
changed our name to MediaWorx, Inc. Beginning on July 1, 2003, we began
implementing our business plan and started operations.
MEDIA PRODUCTION AND MANAGEMENT
We are a single source solution for our business customers. Our
products and services are designed with the intent of meeting the needs of our
customer (the print buyer) by customizing the buying experience to each
customer's preferences through:
o A detailed customer service approach through three levels of customer
support, including the Sales Representative, the Customer Service
Representative, and the Digital Service Representative;
o Prepress and technical support facilities where current technology has
been integrated into a seamless system to provide buyers control over
the entire production process; and
o Extensive production capabilities through a network of production
partners, representing every type of production process.
Detailed Customer Service
- -------------------------
25
We have designed our business model and corporate infrastructure to insure
that our customers' needs get top priority. With that in mind, we provide three
levels of customer support, including:
o A sales representative has the primary interaction with the customer.
They visit customers personally and consult with them to define,
strategize, and review projects;
o A customer service representative is assigned to every customer to
provide daily interaction with the customer. They oversee every job,
provide status updates, assist in any problems that may arise, and
insure that the customer is completely satisfied with every job. The
customer service representative allows the sales representatives the
freedom to focus on relationship management and build new business with
new and existing customers; and
o A digital service representative is assigned to every project. The
digital service representative oversees the technical aspects of each
project and insures that the project goes to the optimal print/cross
media production partner. Furthermore the digital service
representative provides technical support via the telephone or
Internet.
On-Site Controlled PrePress Operations
- --------------------------------------
We built a full-service digital and conventional Pre-Press Department.
We have assembled leading technology and equipment, including Apple Macintosh
Computers, high speed Internet access to allow `FTP' transfer of files, and the
latest versions of the most popular desktop publishing programs, such as
PhotoShop, In Design and Quark Express. The Pre-Press Department has also become
an ADOBE Systems certified service provider.
We have assembled advanced software technology and integrated it into a
seamless system to provide high-end buyers complete control over the entire
production process. All orders first go to our on-site prepress operation. Here
every file is preflighted and corrected, converting it to production-ready
status. Each job is optimized for the equipment on which it will be produced.
Through a process of profiling and testing, automated scripts are created for
the optimization process. Critical processes such as color calibration and image
resolution are checked on each job, improving the speed and insuring the quality
of production. The file is then forwarded to the matching print/cross media
production facility.
Extensive Production Capabilities
- ---------------------------------
We work with a network of production partners, representing unlimited
annual production capacity. Each production partner passes through stringent
requirements for quality control, capabilities, technology adoption, and
financial stability. Production partners that have become part of our select
vendor relationship program represent various production process, including:
Printing:
o Sheet-fed offset o Web Offset
>> 1 color, 2 color, 4 color >> Half and Full Web
>> Up to 77" full color press >> Cold and Heatset
o Digital Printing o Letterpress
>> High-speed laser >> Die-Cutting
>> Personalization >> Embossing
>> Digital offset >> Foil Stamping
>> Wide-format inkjet
o Screen Printing o Plastic Printing
Coatings: Mailing and Fulfillment
o Aqueous o List management
o Varnishes o Addressing
o UV o Pick n pack
o Lamination
Bindery and Finishing
26
o Automatic insertion equipment o Perfect binding
o Embossing & foil stamping o Saddle stitching up to 96 pages & cover
o Folding (maps, double-gate, tri, etc) o Binding:
o Fulfillment & custom handwork >> GBC plastic comb
o In line gluing >> Spiral binding
>> Wire-o binding
Specialty Services: Packaging:
o Remoistable Glue o Promotional & product boxes
o Scratch-offs o CD holders
o Label-roll / sheet / singles o VHS sleeves
Multi-Media Point of Purchase Materials:
o CD production & duplication o POP displays with mounted easels
o Video production & duplication o Door & mirror hangers
o Web-site development o Coupon pads
o Email newsletters & broadcasts o Posters - various mounting & laminating
o Cross media publishing, Internet o Vinyl & styrene banners
o Shelf talkers & danglers
Digital Asset Management:
o Storage & Archiving
o Print-on-demand
o Data base personalization
Through our extensive network, customers' projects are matched to the
production house that can best meet their job specifications and any other
requirements or corporate goals. Should multiple vendors be required, we have
the capability to interact with each vendor and yet be a single source of
contact for the customer.
Benefits of MediaWorx's Services
- --------------------------------
Some of the benefits we can provide to customers include:
o SINGLE SOURCING: Customers need only to interact with us. We outsource
all creative and manufacturing work, matching the job specifications
and customer requirements with the vendor best suited to complete the
project, taking into account quality, efficiency and cost. Products
which buyers may be procuring from multiple vendors nationwide can be
consolidated to a single manufacturer ensuring volume pricing and
consistency.
o CONVENIENT ORDER PLACEMENT: Customers place orders and requests for
estimate any time, 24 x 7, through their choice of telephone, fax,
email, or the web browser. Orders for more complex projects, such as
full-color catalogs and direct mail campaigns, can be handled in
person by the customer's sales representative or customer service
representative, if so desired.
o ACCURATE FULFILLMENT: Customers can access their corporate information
online through a color consistent and dimensionally accurate screen
rendering. Customers can order their products from their own digital
online catalog, thus reducing errors associated with data reentry,
typesetting and the use of outdated document versions.
o CONTROL OVER PRODUCTION: Online order entry and job tracking system
allows customers to set milestones and track progress. Changes in job
status are posted by and communicated to all constituent team members.
o INTERNAL FINANCIAL CONTROLS: Our job tracking system allows the
customer to define approval levels and financial limits. Furthermore,
the customer has the capacity to monitor spending, including who is
spending, how much they are spending, and what products are being
purchased.
27
o SCALABILITY: Our tracking systems and controls can scale to a large
number of new employees and new products. It has the ability to handle
unlimited order volume without compromising system integrity and
performance.
o MAINTENANCE OF HISTORY: We provide a central point for the storage,
categorization and retrieval of a customer's corporate documents and
all related digital assets. This both speeds up and simplifies the
preparation and ordering of follow-on materials.
o COST SAVINGS: Through the efficiencies gained by automation and
aggregation, we are able to pass additional savings on to customers.
Furthermore, by streamlining the order and fulfillment process,
customers are typically able to realize internal cost reductions.
In addition to the benefits provided to customers, we provide
significant advantages to our commercial print partners. Some of these benefits
include:
o STREAMLINED MANUFACTURING: We eliminate pre-press manufacturing steps
by providing commercial print partners with print-ready files routed
directly to their printing systems.
o REDUCTION OF ERRORS: Our systems allow significantly improved
communications among all the participants in the print order. This
improved interaction and the ability to send markups and proofs
online, helps to eliminate errors.
o INCREASED CAPACITY UTILIZATION: Vendors receive only those projects
best suited to their own plants and equipment. Thus they are able to
improve the utilization of that equipment.
o INCREASED SALES PRODUCTIVITY: We allow our print partners access to
new customers and markets. If they choose, printers can reduce selling
and marketing costs while extending their reach.
o FOCUS ON CORE COMPETENCIES: The typical printer is focused on
manufacturing. We allow printers to off-load their most inefficient
processes: marketing, customer service, telecommunications, and
technical support. They are able to focus on their core competency:
printing.
o COST SAVINGS: Printers are relieved of the costs associated with sales
& marketing, customer service, and telecommunications. Furthermore, by
eliminating the pre-press process and reducing errors, print partners
are able to realize significant cost savings.
CUSTOMERS AND MARKETS
Marketing and promotional materials are employed throughout business
organizations today. The U.S. commercial printing industry, excluding
publishing, is $110 billion, and is over $365 billion worldwide. We believe that
when one also includes multi-media communications, including web-based
materials, the size of the market is significantly expanded.
Our target customers are mid-to large-size organizations and companies
who spend $50,000 to over $10 million per year on printing and cross media
products. In our first 6 months of business, we provided our services to 33
customers: 67% were commercial companies, 15% were advertising agencies, and the
remaining 18% were non-profit organizations, including associations, government
institutions, and educational institutions. Through the first nine months of
2004, we provided our services to 72 customers. The majority of customers are
repeat customers, placing multiple orders throughout the year, depending on
their needs. These customers are 56% commercial, 28% agencies, and 16%
associations / government/educational institutions. Approximately 70% of these
customers are in our target category, spending over $50,000 in printing and
cross media products.
We intend to leverage our customer service approach to build solid
personal relationships and develop strong name brand recognition. We currently
are operating in and have developed customer bases in the New York City
28
metropolitan area, Washington D.C. metropolitan area, Philadelphia metropolitan
area and in the Scranton and Wilkes-Barre areas in Pennsylvania. We intend to
expand on a geographical basis, targeting major metropolitan areas nationwide.
We will further our expansion into specific vertical markets, using those same
customer relationships to build brand awareness with new potential customers
within the same vertical market.
We recognize that print and media buying encompasses a strong
relationship aspect between the provider and the Customer. Our business model is
built on providing our sales representatives with the support and leverage of a
strong customer service culture, in-house pre-press capabilities, e-business
solutions, and a base of production partners that can fulfill the complexity of
any Customer order. We are a virtual printing company: we neither own nor have
capital tied up in printing equipment or facilities but have access to an
established network of the most capable, technologically advanced printers and
production houses. Before we accept any job, we get an estimate on the cost and
a commitment from the printing and production houses to perform the job as
contracted. Our Customer's benefit by getting superior customer service - an
end-to-end, single source solution from design and pre-press, to production by
the most cost-effective and time efficient printer, through distribution and
digital asset management.
MARKETING AND SALES STRATEGY
Our sales and marketing strategy is centered around the concept of high
customer touch. Our overall approach is to combine the best of old fashioned
hand holding with proprietary customer relationship management technology. We
understand the print buyer needs and have developed an integrated system to
support those needs. We feel that the importance of the personal relationship
side of the business will increase with technological adoption.
Our sales and marketing strategy includes the following elements:
Build an aggressive direct sales force
- --------------------------------------
Experienced, knowledgeable, regional sales representatives with strong
printing or related industry backgrounds will enable us to build long-term
consultative relationships with our clients and prospects. We plan to focus on
recruiting two types of sales people:
o Top producing printing sales people who can bring with them a major
book of business from existing customer relationships.
o Top producing sales people in related industries. They will also be
able to bring with them strong customer relationships, as their
customers will most likely be the same people who buy printing.
However the sales representatives will have to be trained in the
specifics of commercial print marketing and production.
Build a strong customer support team
- ------------------------------------
We are building an infrastructure with customer service representatives
and digital service representatives to provide continued intensive support to
our customers. This structure allows the sales representatives to focus on
generating sales leads, developing strong relationships, and closing sales. In
the last twelve months, we have hired six sales representatives, two customer
service representatives and one digital services representative.
Pursue a focused business to business strategy
- ----------------------------------------------
We are focusing our sales efforts on mid-market and large customers
with annual printing needs of $50,000 to $10 million. In our first 6 months of
business, we provided our services to 33 customers: 67% were commercial
companies, 15% were advertising agencies, and the remaining 18% were non-profit
organizations, including associations, government institutions, and educational
institutions. Through the first six months of 2004, we have provided our
services to 65 customers, adding mostly agencies and commercial accounts. The
new customers are 57% commercial, 25% agencies, and 18%
associations/government/educational institutions.
29
It is our intention to use existing customer relationships to further
penetrate vertical markets. By demonstrating strong customer service, we hope to
gain additional customers. Additionally we intend to attend association and
industry meetings and distribute case studies and promotional literature.
Expand into geographical areas with strong demographics, on a concentric basis
- ------------------------------------------------------------------------------
We currently are operating in and have developed customer bases in the
New York City metropolitan area, Washington D.C. metropolitan area, Philadelphia
metropolitan area and in the Scranton and Wilkes-Barre areas in Pennsylvania. We
intend on extending the geographic presence of our sales force to acquire
customers in new markets. Initially, top producers will be hired in desirable
metropolitan markets. Once we have developed a significant customer base in the
area, an office will be opened with the requisite infrastructure to support the
business. Alternatively, we may consider entering into strategic mergers in
desirable metropolitan markets.
Build brand name recognition
- ----------------------------
We are pursuing marketing programs to promote our brand name and
reputation as a leading e-printer. These programs include trade shows, public
relations, seminars, distribution of marketing materials, and other activities
focused on gaining industry visibility. Our highest profile effort to build our
brand will be through our strategic partnerships. These affiliations will
manifest in trade publication advertisements, seminars, conferences and
promotional videos.
COMPETITION
The market for business materials is very competitive. We primarily
compete with local and regional commercial printers, which are either
independent or owned by print industry consolidators, and with print brokers or
other Internet-based print providers. The U.S. commercial printing industry,
excluding publishing, is $110 billion, and is over $365 billion worldwide. This
large and growing industry has faced considerable change driven by growth of the
Web and new e-business tools, and rapidly changing hard asset technology. There
are an estimated 58,000 local and regional printers, 60,000 related creative
concerns such as advertising agencies, graphic design firms, publishers and
corporate design groups, 13,000 print brokers, and thousands of print-buying
organizations. These printers aggressively compete for business printing orders
in the markets they serve.
Traditional commercial printers often have long standing relationships
with customers. We face challenges in convincing prospective customers to
consider alternatives to their traditional printer. Commercial printers
primarily compete on product pricing, product and service quality and, to a
lesser extent, on innovation in printing technologies and techniques. To attract
new customers and retain our existing customers, we must effectively compete in
each of these areas.
We also face direct competition from printing services brokers who
offer customers a relatively wide variety of products and services and are able
to obtain favorable pricing for their customers by soliciting bids from a
variety of printers. Like local and regional printers, printing services brokers
often have long standing customer relationships.
We also face competition from other Internet-based companies that offer
business printing services, as well as others that may develop such services in
the future. Potential developers of competing electronic commerce services may
include consumer printing service providers, office service providers, equipment
manufacturers and financial printers and publishers.
EMPLOYEES
As of November 30, 2004, we had 11 non-union employees, including five
sales representatives, a customer service manager, a customer service
representative, a digital service manager, an office manager and two executives.
We consider our relations with our employees to be good.
TRANSFER AGENT
Our transfer agent is Continental Stock Transfer and Trust Company, 17
Battery Place, New York New York 10004.
30
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse affect on our business,
financial condition or operating results.
DESCRIPTION OF PROPERTIES
MediaWorx's rents 3,849 sq. ft of office space at 1895 Preston White
Drive, Suite 250, Reston, Virginia 20191 for its corporate headquarters. The
rent is month to month. In November 2003, the Company entered in a lease
agreement for a 216 sq. ft. office in Pittston, Pennsylvania for $190 per month.
The lease expires on November 30, 2004. We believe that our leased property is
sufficient for our current and immediately foreseeable operating needs.
31
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
members of our board of directors and its executive officers as of August 27,
2004:
Name Age Position
---- --- --------
Gary L. Cain 48 Chairman of the Board of Directors
Linda A. Broenniman 48 President, Chief Executive Officer,
Chief Financial Officer and Director
Edward G. Broenniman 68 Secretary and Director
Bruce M. Arinaga 42 Director
Martin A. Burke 51 Director
MR. GARY L. CAIN, CHAIRMAN OF THE BOARD OF DIRECTORS. Mr. Cain has
served as a director since June 2002. From June 2002 until July, 2003, Mr. Cain
was the Chief Executive Officer and Chairman of Advanced Gaming Technology,
Inc., the predecessor company of ours. Since 1994, Mr. Cain has served as CEO
and Director of PowerHouse Management Group, Inc.
MS. LINDA A. BROENNIMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER, CHIEF
FINANCIAL OFFICER AND DIRECTOR. Ms. Broenniman has served as the Chief Executive
Officer, Chief Financial Officer and director of our company since July 2003.
From July 2001 to July 2003, Ms. Broenniman was the Managing Director of HFS
Capital LLC and HFS Private Equity Partners LLC and President/CFO of Solar
Satellite Communication, Inc. Prior to July 2001, Ms. Broenniman was CFO of
Optelecom, Inc., a NASDAQ telecommunications equipment manufacturer. Prior to
Optelecom, Ms. Broenniman spent 15 years building entrepreneurial companies as
President/CEO or CFO, including a medial technology company, a health care
information systems company, and a food service company. Ms. Broenniman holds an
MBA from Carnegie Mellon University and a BA from Swarthmore College. Ms.
Broenniman is married to Mr. Edward G. Broenniman.
MR. EDWARD G. BROENNIMAN, SECRETARY AND DIRECTOR. Mr. Broenniman has
served as the Secretary and a director of our company since July 2003. Mr.
Broenniman has served as the Managing Director of The Piedmont Group, a venture
development firm, for over 12 years. He has over 35 years experience as an
operating executive with Fortune 100 firms and privately held technology
companies. Mr. Broenniman holds an MBA from Stanford University and a BA from
Yale University. Mr. Broenniman is married to Ms. Linda A. Broenniman.
MR. BRUCE M. ARINAGA, DIRECTOR. Mr. Arinaga has been a director since
June 2002. From June 2002 to July 2003, Mr. Arinaga was the President, Secretary
and Treasurer of Advanced Gaming Technology, Inc., the predecessor company of
ours. Since January 2003, Mr. Arinaga has run BA Investments, Ltd, a private
consulting firm. From August, 1999 to December 2002, Mr. Arinaga was a founder
and key executive in Zero-G Capital Fund, LLC and from December 1996 through
July 1999 was a key executive at CrossWater Capital, LLC. Mr. Arinaga has also
held investment positions at NHP, Inc. and the Prudential Insurance Company of
America. Mr. Arinaga holds a Bachelor of Science in Business from the University
of Southern California and a Masters in Business Administration and Finance from
New York University.
MR. MARTIN A. BURKE, DIRECTOR. Mr. Burke has served as a director since
August 2003. He is currently Vice President, Business Development, for Adnet
Systems, Inc., where he has served since January 2003. Prior to Adnet, Mr. Burke
was President/COO for First Point Energy Corporation, where he served since
January 2001. From July 1998 through 2000, Mr. Burke was CEO and CFO of FTF
Business Systems, Inc. Mr. Burke holds an MBA from New York University, a JD
from New York Law School, and a BA from New York University.
32
Our directors hold office until the next annual meeting of our
shareholders or until their successors are duly elected and qualified. Our
executive officers serve at the pleasure of the Board of Directors. Set forth
below is a summary description of the principal occupation and business
experience of each of our directors and executive officers for at least the last
five years.
33
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the total compensation
that we have paid or accrued on behalf of our chief executive officer and other
executive officers with annual compensation exceeding $100,000 during the fiscal
periods ending December 31, 2002 and 2003.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION LONG-TERM AWARDS
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING OPTIONS ALL OTHER COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) (#) ($)
- -------- ---- ---------- --------- ---------------- --- ---
Linda A. Broenniman,
President, Chief
Executive Officer and
Chief Financial Officer 2003 $150,000 (1) $0 $0 $0 $0
Daniel H. Scott, Chief
Executive Officer
Advanced Gaming
Technology 2002 $98,125 (2) $0 $0 0 $0
2001 $225,000(2) $0 $0 0 $0
(1) Ms. Broenniman received compensation of $75,000 in 2003, of which $15,000
was deferred and is reflected in accrued expenses.
(2) Mr. Scott elected to defer payment of $98,125 of the 2002 compensation and
$225,000 of the 2001 compensation. These amounts were consolidated into a
secured note payable to Mr. Scott in June of 2001. Mr. Scott received an
annual salary of $225,000. The actual amount of salary paid during 2002 and
2001 was $0. On June 7, 2002, Mr. Scott sold all his shares to PowerHouse
Management and in "Release of Debt and Indemnification Agreement"
abandoned, released, acquitted and discharged us from liability for the
payment of the secured note payable. In June 2003, we issued 1,000,000
shares to Mr. Scott for his services as a consultant to us on behalf of his
efforts in assisting us with our reorganization.
STOCK OPTION PLANS
In 2003, the board of directors and stockholders adopted our 2003
consultant stock plan. We reserved 800,000 shares of common stock for issuance
upon grant of stock or exercise of options granted from time to time under the
2003 consultant stock plan. The 2003 consultant stock plan is intended to assist
us in securing and retaining consultants by allowing them to participate in our
ownership and growth through the grant of stock and stock options.
Under the stock compensation plan, we may grant stock and stock options
only to consultants. The 2003 consultant stock plan is administered directly by
our board of directors.
Subject to the provisions of the stock compensation plan, the board
will determine who shall receive stock or stock options, the number of shares of
common stock that may be granted or purchased under the options, the time and
manner of exercise of options and exercise prices.
On June 30, 2003, the Company issued 800,000 shares of common stock to
the Law Offices of Henry S. Meyer under a legal services and consulting
agreement entered into February 1, 2003. The shares were valued at $.02 and the
Company recorded $16,000 of consulting expenses.
34
DIRECTOR COMPENSATION
Our current directors do not receive any additional compensation for
their services as a director.
EMPLOYMENT AGREEMENTS
The Company does not currently have any employment agreements with any
of its executive officers.
35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company paid $50,000 of professional fees during 2003: $25,000 to
The Piedmont Group, a partnership whose managing partner is Edward G.
Broenniman, a director of the Company, and $25,000 to Martin A. Burke, a
director of the Company. Messrs. Burke and Broenniman were engaged as corporate
advisors to add operating strength and expertise to our management team. Mr.
Burke provided general business, financial and infrastructure planning,
accounting and technology advice. Mr. Broenniman's provided expertise on early
stage technology firms for rapid growth and building sales and marketing
organizations. Both Messrs. Burke and Broenniman also provided extensive
knowledge of the printing industry and the use of technology in media
production.
36
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of November 12, 2004 by the following
o by each person who is known by us to beneficially own more
than 5% of our common stock;
o each of our officers and directors; and
o by all of our officers and directors as a group.
Unless indicated, each person's address is c/o MediaWorx, Inc., 1895
Preston White Drive, Suite 250, Reston, VA 20191.
Number of Shares of Percent of
Common Stock Common Stock
Beneficially Beneficially
Name of Owned or Right Owned or Right
Beneficial Owner (1) to Direct Vote to Direct Vote (2)
- ----------------- ------------------ ------------------
Linda A. Broenniman 0 0%
Edward G. Broenniman 0 0%
Gary L. Cain 21,869,098 (3) 72.06%
Bruce M. Arinaga 0 0%
Martin A. Burke 0 0%
Executive Officers and
Directors as a group
(5 persons) 21,869,098 (3) 72.06%
- -------------
(1) For purposes of this statement "beneficial ownership" of a security exists
when a person directly or indirectly has or shares "investment power", which
includes the power to dispose or direct the disposition of such security, or
"voting power", which includes the power to vote or direct the voting of such
security. Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of November 12, 2004 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Based on 30,348,404 shares of common stock currently outstanding.
(3) Includes 10,750,000 shares held by Diamond Capital LLC and 10,750,000 shares
held by Quest Capital Resources LLC, both of which are trusts that Mr. Cain has
the right to direct.
37
DESCRIPTION OF SECURITIES
The following description of our capital stock is a summary and is
qualified in its entirety by the provisions of our Articles of Incorporation,
with amendments, all of which have been filed as exhibits to our registration
statement of which this prospectus is a part.
COMMON STOCK
We are currently authorized to issue 150,000,000 shares of common stock
with $.005 par value. The holders of our common stock are entitled to one vote
per each share held and have the sole right and power to vote on all matters on
which a vote of stockholders is taken. Voting rights are non-cumulative. The
holders of shares of our common stock are entitled to receive dividends when, as
and if declared by the board of directors, out of funds legally available
therefore and to share pro-rata in any distribution to stockholders. We
anticipate that any earnings will be retained for use in our business for the
foreseeable future. Upon liquidation, dissolution, or our winding up, the
holders of our common stock are entitled to receive the net assets held by us
after distributions to our creditors. The holders of our common stock do not
have any preemptive right to subscribe for or purchase any shares of any class
of stock. The outstanding shares of our common stock and the shares offered
hereby will not be subject to further call or redemption and will be fully paid
and non-assessable.
We currently have 30,348,404 shares of our common stock outstanding.
Such figure does not include (i) up to 15,000,000 shares of our common stock to
be issued to Cornell in connection with our Equity Line Agreement and (ii) up to
725,000 shares issuable to Cornell upon the conversion of the outstanding 5%
convertible debenture in the principal amount of $240,000.
PREFERRED STOCK
We are currently authorized to issue 4,000,000 shares of common stock
with $.10 par value. We currently have no shares of our preferred stock issued
and outstanding.
On July 1, 2003, we issued 3,500,000 shares of series A preferred stock
in connection with the merger between our wholly owned subsidiary, MediaWorx
Company, LLC and Advanced Capital Services, LLC.
Shares of the series A preferred stock are convertible at the option of
the holder on a one-for-five basis, subject to adjustment for dilution, into
shares of common stock. Each share of series A preferred stock will be
automatically converted into common stock upon a sale or transfer of all or
substantially all of our assets for cash or securities, or a statutory share
exchange in which our stockholders may participate.
Each share of series A preferred stock has voting rights equal to the
voting rights of the common stock on an as if converted basis. Upon any
liquidation, dissolution or winding up of us, whether voluntary or involuntary,
the holders of record of shares of series A preferred stock shall be entitled,
before any distribution or payment is made upon outstanding shares of common
stock, to be paid an amount equal to the original issue price. If, upon such
liquidation, the assets to be distributed among the holders of series A
preferred stock shall be insufficient to permit such payment, then our entire
assets to be so distributed shall be distributed ratably among the holders of
series A preferred stock.
On June 30, 2004, all shares of series A preferred stock were converted
into shares of our common stock.
EQUITY LINE OF CREDIT FINANCING
On February 24, 2004, we entered into an equity line of credit with one
investor. Pursuant to the equity line of credit, we may, at our discretion,
periodically sell to the investor shares of common stock for a total purchase
price of up to $5,000,000. For each share of common stock purchased under the
equity line of credit, the investor will pay 95% of the lowest closing bid price
on the Over-the-Counter Bulletin Board or other principal market on which our
common stock is traded for the five days immediately following the notice date.
The investor, Cornell Capital Partners, LP is a private limited partnership
whose business operations are conducted through its general partner, Yorkville
Advisors, LLC. We also paid Cornell Capital Partners a commitment fee in the
form of a compensation debenture in the amount of $240,000 upon execution of the
equity line of credit. Further, Cornell Capital Partners, LP will retain 5% of
38
each advance under the equity line of credit. In addition, we engaged Newbridge
Securities Corporation, a registered broker-dealer, to advise us in connection
with the equity line of credit. For its services, Newbridge Securities
Corporation received 4,762 shares of our common stock. We are obligated to
prepare and file with the Securities and Exchange Commission a registration
statement to register the resale of the shares issued under the equity line of
credit agreement prior to the first sale to the investor of our common stock.
UNSECURED CONVERTIBLE DEBENTURE
In February 2004, in connection with the equity line of credit with
Cornell Capital Partners, L.P., we paid Cornell Capital Partners, L.P. a
commitment fee in the form of an unsecured convertible debenture in the amount
of $240,000. The convertible debenture is due and payable, with 5% interest,
three years from the date of issuance, unless sooner converted into shares of
our common stock. The debenture is convertible, subject to a maximum cap of
$50,000 per day, at the holder's option any time up to maturity at a conversion
price equal to an amount equal to one hundred percent (100%) of the lowest
closing bid price of the common stock for the three trading days immediately
preceding the conversion date. At maturity, we have the option to either pay the
holder the outstanding principal balance and accrued interest or to convert the
debentures into shares of common stock at a conversion price equal to an amount
equal to one hundred percent (100%) of the lowest closing bid price of the
common stock for the three trading days immediately preceding the conversion
date.
The full principal amount of the convertible debentures are due upon
default under the terms of convertible debentures. We are obligated to register
the resale of the conversion shares issuable upon conversion of the debenture
under the Securities Act of 1933, as amended, no later than thirty (30) days
from February 24, 2004.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Bylaws limit the liability of our directors to the maximum extent
permitted by Wyoming law. Thus, our directors are not personally liable for
monetary damages for any action taken, or any failure to take any action, unless
the director has breached or failed to perform the duties of his office and the
breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness. Such limitation does not apply to any responsibility of liability
pursuant to criminal statute or liability for the payment of taxes pursuant to
local, state or federal law. In addition, our Bylaws authorize us to maintain
liability insurance for our directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act" or "Securities Act") may be permitted to directors,
officers or persons controlling us pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be
passed upon for us by Sichenzia Ross Friedman Ference LLP, New York, New York.
EXPERTS
Our financial statements at December 31, 2003 and 2002 appearing in
this prospectus and registration statement have been audited by Robison Hill &
Company, independent certified public accountants, as set forth on their report
thereon appearing elsewhere in this prospectus, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, relating to the shares of common stock being
offered by this prospectus, and reference is made to such registration
statement. This prospectus constitutes the prospectus of MediaWorx, Inc., filed
as part of the registration statement, and it does not contain all information
39
in the registration statement, as certain portions have been omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission.
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C.
20549. Copies of such material can be obtained from the Public Reference Section
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
We furnish our stockholders with annual reports containing audited
financial statements.
INDEX TO FINANCIAL STATEMENTS
MEDIAWORX, INC.
FINANCIAL STATEMENTS
For the Years Ended December 31, 2003 and December 31, 2002
Report of Independent Certified Public Accountants F-1
Balance Sheets F-2
Statement of Income and Retained Earnings F-4
Statement of Cash Flows F-7
Notes to Financial Statements F-9 to
F-16
For the Three and Nine Months Ended September 30, 2004
Consolidated Balance Sheets F-17
Consolidated Statement of Income F-19
Consolidated Statements of Stockholders' Equity (Deficit) F-20
Consolidated Statements of Cash Flows F-24
Notes to Consolidated Financial Statements F-26 to
F-35
40
INDEPENDENT AUDITOR'S REPORT
MEDIAWORX, INC.
We have audited the accompanying consolidated balance sheet of MediaWorx, Inc.
as of December 31, 2003 and 2002, and the related consolidated statements of
operations, cash flows and stockholders' equity for the two years ended December
31, 2003 and 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 MediaWorx, Inc. as of December
31, 2003 and 2002, and the results of its operations and its cash flows for the
two years ended December 31, 2003 and 2002 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Respectfully Submitted,
/s/ Robison Hill & Company
- --------------------------
Robison Hill & Company
CERTIFIED PUBLIC ACCOUNTANTS
Salt Lake City, Utah
February 19, 2004
F-1
MEDIAWORX, INC.
CONSOLIDATED BALANCE SHEET
December 31,
ASSETS: 2003 2002
- ------- --------- ---------
CURRENT ASSETS
Cash and Cash Equivalents $ 101,807 $ 10,759
Accounts Receivable 35,513 --
Prepaid Expenses 793 --
Short-Term Loans - Related Party -- 5,331
Investments in Marketable Securities -- 11,500
--------- ---------
Total Current Assets 138,113 27,590
--------- ---------
PROPERTY AND EQUIPMENT
Furniture, Fixtures, and Equipment 7,362 784,188
Software 12,045
Less Accumulated Depreciation (1,200) (783,001)
--------- ---------
Net Fixed Assets 18,207 1,187
--------- ---------
OTHER ASSETS
Notes Receivable - Related Party 59,171 --
--------- ---------
Total Other Assets 59,171 --
--------- ---------
TOTAL ASSETS $ 215,491 $ 28,777
========= =========
F-2
MEDIAWORX, INC.
CONSOLIDATED BALANCE SHEET
(Continued)
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY: 2003 2002
- ------------------------------------ ----------- -----------
CURRENT LIABILITIES
Accounts Payable $ 41,373 $ 14,148
Accrued Expenses 40,369 --
Accrued Interest 23,408 84,393
Note Payable-Related Party 275,000 --
Short Term Notes Payable 100,000 940,939
----------- -----------
Total Current Liabilities 480,150 1,039,480
----------- -----------
NON-CURRENT LIABILITIES
Long Term Note Payable 544,333 --
----------- -----------
Total Long Term Liabilities 544,333 --
----------- -----------
TOTAL LIABILITIES 1,024,483 1,039,480
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock - 10% Cumulative, $.10 par value,
4,000,000 Authorized; 3,500,000 and 0 Issued and
Outstanding at December 31, 2003 and
December 31, 2002 350,000 --
Common Stock - $.005 par value, 150,000,000
Authorized, 6,819,259 and 214,306 Issued and
Outstanding at December 31, 2003 and
December 31, 2002 34,097 1,072
Common Stock to be Issued, 250,000 and 0 1,250 0
Paid in Capital 763,136 106,081
Accumulated Comprehensive Income -- 2,500
Accumulated Deficit (1,957,475) (1,120,356)
----------- -----------
Total Stockholders' Equity (Deficit) (808,992) (1,010,703)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 215,491 $ 28,777
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
MEDIAWORX, INC.
CONSOLIDATED STATEMENT OF INCOME
For the Year Ending
December 31,
2003 2002
----------- -----------
Revenue $ 128,850 $ --
Cost of Revenues 97,285 --
Operating Expenses
Selling and Marketing 112,726 --
Printing Services 44,105 --
General and Administrative 401,752 189,586
----------- -----------
Total Operating Expenses 558,583 189,586
----------- -----------
Operating Income (Loss) (527,018) (189,586)
----------- -----------
Other Income (Expense)
Miscellaneous Income 8,745 --
Interest Income (Expense) (61,766) (97,292)
Permanent Impairment of
Marketable Securities (14,331) --
Gain from Lawsuit Settlement -- 17,500
Gain on Forgiveness of Debt 947,637 520,026
Gain on Sale of Assets 197 --
Write Down of Investment (1,190,583) --
----------- -----------
Total Other Income (Expense) (310,101) 440,234
----------- -----------
Net Income (Loss) $ (837,119) $ 250,648
=========== ===========
Other Comprehensive Income (Loss)
Marketable Equity Securities Holding Gain -- 2,500
----------- -----------
Comprehensive Loss $ (837,119) $ 253,148
=========== ===========
Basic Earnings Per Share $ (0.26) $ 1.17
=========== ===========
Weighted Average Shares Outstanding 3,230,309 214,306
=========== ===========
The accompanying notes are an integral part of these financial statements
F-4
MEDIAWORX, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated Retained
Preferred Stock Common Stock Paid in Comp. Earnings/
Shares Par Value Shares To be Issued Par Value Capital Income (Deficit)
---------- --------- ---------- ------------ ----------- ----------- ----------- -----------
Balance at December 31, 2001 -- $ -- 21,430,587 $ -- $ 107,153 $ -- $ -- $(1,371,004)
Retroactive Adjustment for
100:1 Reverse Stock Split
June 23, 2003 -- -- (21,216,281) -- (106,081) 106,081 -- --
---------- --------- ---------- ------------ ----------- ----------- ----------- -----------
Restated Balance at
December 31, 2001 -- -- 214,306 -- 1,072 106,081 -- (1,371,004)
Other Comprehensive Income -- -- -- -- -- -- 2,500 --
Net Income -- -- -- -- -- -- -- 250,648
---------- --------- ---------- ------------ ----------- ----------- ----------- -----------
Balance at December 31, 2002 -- -- 214,306 -- 1,072 106,081 2,500 (1,120,356)
Issuance of Stock for Services
June 17, 2003 -- -- 10,000 -- 50 19,950 -- --
Issuance of Stock for Services
June 30, 2003 -- -- 800,000 -- 4,000 12,000 -- --
Issuance of Shares in
Connection with MediaWorx
Merger, July 1, 2003 3,500,000 350,000 4,000,000 1,250 20,000 -- -- --
Shares Issued For Cash
July 31, 2003 -- -- 263,016 -- 1,315 87,987 -- --
Shares Issued For Cash
August 15, 2003 -- -- 160,647 -- 803 62,746 -- --
F-5
MEDIAWORX, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
Accumulated Retained
Preferred Stock Common Stock Paid in Comp. Earnings/
Shares Par Value Shares To be Issued Par Value Capital Income (Deficit)
--------- --------- ---------- ----------- -------- --------- -------- -----------
Shares Issued For Cash
September 2, 2003 -- -- 398,318 -- $ 1,992 $ 145,916 -- --
Shares Issued For Cash
September 17, 2003 -- -- 288,323 -- 1,441 100,811 -- --
Shares Issued for Cash
October 3, 2003 -- -- 73,296 -- 366 24,371 -- --
Shares Issued for Cash
October 15, 2003 -- -- 69,298 -- 347 23,041 -- --
Shares Issued for Cash
November 1, 2003 -- -- 192,309 -- 962 63,942 -- --
Shares Issued for Cash
November 18, 2003 -- -- 105,572 -- 528 35,103 -- --
Shares Issued for Cash
December 1, 2003 -- -- 113,868 -- 569 37,861 -- --
Shares Issued for Cash
December 15, 2003 -- -- 130,306 -- 652 43,327 -- --
Other Comprehensive Loss -- -- -- -- -- -- (2,500)
Net Loss (837,119)
--------- --------- ---------- ----------- -------- --------- -------- -----------
Balance December 31, 2003 3,500,000 $ 350,000 6,819,259 $ 1,250 $ 34,097 $ 763,136 $ -- $(1,957,475)
========= ========= ========== =========== ======== ========= ======== ===========
The accompanying notes are an integral part of these financial statements.
F-6
MEDIAWORX, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ending
December 31,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (837,119) $ 250,648
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation 1,524 66,970
Gain on Forgiveness of Debt (947,637) (520,026)
Gain on Sale of Equipment (197)
Grant of Stock-Based Compensation 36,000 --
Permanent Impairment of Marketable Securities 14,331 --
Write Down of Investment 1,190,583 --
Change in Operating Assets and Liabilities:
(Increase) Decrease in Accounts Receivable (35,513) --
(Increase) Decrease in Prepaid Expenses (793) 1,000
(Increase) Decrease in Related Party Receivable (59,171) --
Increase (Decrease) in Accounts Payable 27,225 102,291
Increase (Decrease) in Accrued Payroll & Taxes 43,548 --
Increase (Decrease) in Accrued Interest 43,594 97,292
----------- -----------
Net Cash Used in Operating Activities (523,625) (1,825)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase (Decrease) Short Term Loan to Related Party 5,331 (5,332)
Purchase of Marketable Securities (5,331) (9,000)
Purchase of Property and Equipment (7,362) (1,294)
Purchase of Software (12,045) --
----------- -----------
Net Cash Used in Investing Activities (19,407) (15,626)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Sale of Common Stock 634,080 --
Proceeds from Loans 105,500 --
Payment on Note Payable (105,500) (17,500)
----------- -----------
Net Cash Used in Financing Activities 634,080 (17,500)
----------- -----------
F-7
MEDIAWORX, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Year Ending
December 31,
2003 2002
Net (Decrease) Increase in Cash and Cash Equivalents $ 91,048 $(34,951)
Cash and Cash Equivalents at Beginning of Period 10,759 45,710
Cash and Cash Equivalents at End of Period $101,807 $ 10,759
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ -- $ --
Franchise and income taxes $ -- $ --
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
None
See accompanying notes to financial statements
F-8
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
This summary of accounting policies for MediaWorx, Inc. is presented to assist
in understanding the Company's financial statements. The accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Organization and Basis of Presentation
- --------------------------------------
Advanced Gaming Technology, Inc. (the Company) was incorporated under the laws
of the State of Wyoming in 1963 under the name MacTay Investment Co. The company
changed its name to Advanced Gaming Technology, Inc. in 1991. The Company's
executive offices were located in San Antonio, TX. In June 2002, the Company
ceased its primary operating activities, developing and marketing technology for
the casino and hospitality industry.
On July 1, 2003, the Company completed a reverse triangular merger involving
Advanced Capital Services, LLC, a Nevada limited liability company, The
MediaWorx, Inc. a wholly owned subsidiary of Solar Satellite Communications,
Inc. and the Company and it's newly formed wholly owned subsidiary MediaWorx
Acquisition Company, LLC. As a result of the merger the Company acquired the
assets of The MediaWorx, Inc., which consisted primarily of a business plan and
the people involved in the management and procurement of print, packaging, and
cross-media services. See Note 12 for detailed description of merger.
Nature of Operations
- --------------------
MediaWorx, Inc. is a media production and management business. The services that
the Company provides include print, audio/video, digital asset management,
graphic design, production and fulfillment for traditional and web-based
marketing and communications products and services. MediaWorx provides the
Company's sales representatives with the support and leverage of a strong
customer service culture, in-house pre-press capabilities, e-business solutions,
and a base of production partners that can fulfill the complexity of any
Customer order. The Company is a virtual printing company- it neither owns nor
has its capital tied up in printing equipment or facilities but has access to an
established network of the most capable, technologically advanced printers and
production houses. Before we accept any job, we get an estimate on the cost and
a commitment from the printing and production houses to perform the job as
contracted.
Principals of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of MediaWorx, Inc and
its wholly owned subsidiary MediaWorx Company, LLC. All significant intercompany
accounts and transactions have been eliminated.
F-9
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- --------------------------------------------------------------------------------
Use of Estimates
- ----------------
The financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America. In preparing the financial
statements, management is required to make estimates and assumptions that effect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the balance sheet and statement of
operations for the year then ended. Actual results may differ from these
estimates. Estimates are used when accounting for allowance for bad debts,
collectibility of accounts receivable, amounts due to services providers,
depreciation, and litigation contingencies, among others.
Cash Equivalents
- ----------------
For the purpose of reporting cash flows, the Company considers all highly liquid
debt instruments purchased with maturity of three months of less to be cash
equivalents to the extent the funds are not being held for investment purposes.
Concentration of Credit Risk
- ----------------------------
The Company has no significant off-balance-sheet concentrations of credit risk
such as foreign exchange contracts, options contracts or other foreign hedging
arrangements.
Revenue Recognition
- -------------------
The Company's revenues are derived from customized printing and cross media
services. Revenue is recognized when earned as the services provided or the
product is delivered in accordance with the underlying purchase order. The
Company recognizes gross revenues under the provision of Emerging Issues Task
Force (EITF) Issue No. 99-19 "Recording Revenue Gross as Principal vs. Net as an
Agent". The Company acts as the principal, takes title to the products and has
the risk and rewards of ownership. The Company has not yet generated any revenue
while acting as an agent or broker. If the Company acts as an agent or broker,
the Company will account for those revenues on a net basis.
Property and Equipment
- ----------------------
Property and equipment is stated at cost. Depreciation is computed on the
straight-line method, based on the estimated useful lives of the assets of
generally three to five years. Expenditures for maintenance and repairs are
charged to operations as incurred. Major overhauls and improvements are
capitalized and depreciated over their useful lives. Upon sale or other
disposition of property and equipment, the cost and related accumulated
depreciation or amortization if removed from the accounts, and any gain or loss
is included in the determination of income or loss.
F-10
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- --------------------------------------------------------------------------------
Net Income (Loss) Per Common Share
- ----------------------------------
Basic earnings per share are computed by dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. The effect of outstanding common stock equivalents would be
anti-dilutive for 2003 and 2002 and are thus not considered.
Reclassifications
- -----------------
Certain reclassifications have been made in the 2002 financial statements to
conform with the December 31, 2003 presentation.
NOTE 2 - INCOME TAXES
- ---------------------
Deferred income taxes (benefits) are provided for certain income and expenses
which are recognized in different periods for tax and financial reporting
purposes. The Company had net operating loss carry forwards for income tax
purposes of approximately $36,459,114, expiring at various dates from December
31, 2015 through December 31, 2023. A loss generated in a particular year will
expire for federal tax purposes if not utilized within twenty years. The
Internal Revenue Code contains provisions that would reduce or limit the
availability and utilization of this net operating loss carry forwards if
certain ownership changes have been or will be taking place. In accordance with
SFAS No. 109, a valuation allowance is provided when it is more likely than not
that all or some portion of the deferred tax asset will not be realized. Due to
the uncertainty with respect to the ultimate realization of the loss carry
forwards, the Company established a valuation allowance for the entire net
deferred income tax asset as of December 31, 2003.
NOTE 3 - PREFERRED STOCK
- ------------------------
The Company has authorized 4,000,000 shares at $.10 par value convertible
preferred stock. Shares of the Series A Preferred Stock are convertible at the
option of the holder on a one-for-five basis, subject to adjustment for
dilution, into shares of common stock. Each share of Series A Preferred Stock
will be automatically converted into common stock upon a sale or transfer of all
or substantially all of MediaWorx's assets for cash or securities, or a
statutory share exchange in which stockholders of MediaWorx may participate.
Each share of Series A Preferred Stock has voting rights equal to the voting
rights of the common stock on an as if converted basis. Upon any liquidation,
dissolution or winding up of MediaWorx, whether voluntary or involuntary, the
holders of record of shares of Series A Preferred Stock shall be entitled,
before any distribution or payment is made upon outstanding shares of common
stock, to be paid an amount equal to the Original Issue Price. If, upon such
liquidation, the assets to be distributed among the holders of Series A
Preferred Stock shall be insufficient to permit such payment, then the entire
F-11
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PREFERRED STOCK (Continued)
- ------------------------------------
assets of MediaWorx to be so distributed shall be distributed ratably among the
holders of Series A Preferred Stock.
On July 1, 2003, the Company issued 3,500,000 shares of preferred stock in
connection with the merger between its wholly owned subsidiary, MediaWorx
Company, LLC and Advanced Capital Services, LLC.
NOTE 4 - COMMON STOCK
- ---------------------
The Company has authorized 150,000,000 shares of $0.005 par value common stock.
On June 17, 2003, the Company issued 1,000,000 shares of common stock (10,000
shares after retroactive adjustment for the 100:1 stock split described below)
to a former officer in exchange for continued consulting for the Company. The
shares were valued at $.02 and the Company recorded $20,000 of consulting
expenses.
On June 23, 2003, the Board of Directors approved a proposal to effectuate a 100
to 1 reverse stock split of the Company's outstanding common shares with no
effect on the par value or on the number of authorized shares. As a result of
this action, the total number of outstanding shares of common stock is reduced
from 22,430,587 to 224,306 shares.
On June 30, 2003, the Company issued 800,000 shares of common stock to the Law
Offices of Henry S. Meyer under a legal services and consulting agreement
entered into February 1, 2003. The shares were valued at $.02 and the Company
recorded $16,000 of consulting expenses.
On July 1, 2003, the Company issued 4,000,000 shares of common stock in
connection with the merger between its wholly owned subsidiary, MediaWorx
Company, LLC and Advanced Capital Services, LLC.
Between July 31, 2003 and December 31, 2003, the Company issued 1,794,953 shares
of common stock in connection with a regulation S offering. The shares were
issued from $.34 to $.40 per share.
NOTE 5 - CHANGE IN CONTROL
- --------------------------
On June 12, 2002, PowerHouse Management, Inc., of San Antonio, Texas, purchased
approximately 56% of the issued and outstanding shares of common stock of the
Company. At the same time, all former officers and directors resigned after
electing new directors who appointed new officers.
F-12
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE
- ----------------------
A note payable to SDA List Brokers, Inc. (SDA), in the amount of
$940,939, accrued interest at 9%, and was due in monthly payments of $6,200
beginning March 1, 2000. On June 25, 2003,as part of the negotiations for the
purchase and triangular merger described in Note 1 and Note 12 with Advanced
Gaming, the Company received a release and cancellation of this note and the
accrued interest totaling $1,046,504 in return for issuing a promissory note to
SDA in the amount of $25,000, with 2% interest per annum, and a warrant to
purchase up to 100,000 shares of common stock of the Company. If the warrant is
not exercised by the expiration date of June 25, 2004 then the Company shall pay
SDA $75,000. As a result of this transaction, debt forgiveness income in the
amount of $946,504 was recognized during the year ended December 31, 2003.
As of December 31, 2003 and 2002, the following amounts are due:
December 31,
2003 2002
Current Note Payable-Related Party
Note Payable,
Interest at 2%, payable to shareholder
of Company upon request $ 275,000 $ -
========= =========
Note Payable, Interest at 12%, Due May 2008 $ 544,333 $ -
========= =========
NOTE 7 - MARKETABLE EQUITY SECURITIES
- -------------------------------------
During 2002, the Company purchased 100,000 shares of Solar Satellite
Communications, Inc. an OTCBB listed company as a short-term investment in the
amount of $14,332. As of September 30, 2003, this investment has been written
down to $0 with a loss of $14,331.
NOTE 8 - LEASE EXPENSE
- ----------------------
The Company has entered into a lease agreement for an office in Pennsylvania.
The rental charges are approximately $190 per month. The lease expires in
November 30, 2004. In addition, the Company rents additional office space for
its headquarters in Reston, Virginia, on a month by month basis for $6,600 per
month.
Total rental expense for the Company for the year ended December 31, 2003 was
$39,545 and for the same period in 2002 was $0, respectively, including rent
under month-to month leases.
F-13
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
The Company filed for reorganization under Chapter 11 of the US Bankruptcy Code
in Las Vegas, Nevada on August 26, 1998. Under Chapter 11, certain claims
against the Debtor in existence prior to the filing of the petitions for relief
under the Federal Bankruptcy Laws are stayed while the Debtor continues business
operations as Debtor-in-possession. These claims were reflected in the March 31,
1999 balance sheet as "liabilities subject to compromise". The bankruptcy plan
was approved June 29, 1999 and became effective on August 19, 1999. On February
15, 2000, the Bankruptcy Court in the District of Las Vegas approved the final
decree of the Company closing the Chapter 11 bankruptcy case of the Company.
The Company accounted for the reorganization using fresh-start reporting.
Accordingly, all assets and liabilities were restated to reflect their
reorganization value, which approximates fair value at the date of
reorganization.
NOTE 10 - GOING CONCERN
- -----------------------
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States, which
contemplates the Company as a going concern. However, the Company has sustained
substantial operating losses in recent years and has used substantial amounts of
working capital in its operations. Realization of a major portion of the assets
reflected on the accompanying balance sheet is dependent upon continued
operations of the Company, which, in turn, is dependent upon the Company's
ability to meet its financing requirements and succeed in its future operations.
Management believes that actions presently being taken to revise the Company's
operating and financial requirements provide them with the opportunity for the
Company to continue as a going concern.
NOTE 11 - ACCOUNTS PAYABLE
- --------------------------
Management negotiated with a vendor to settle a $5,133 account payable for
$4,000, which was paid during the three-month period ending June 30, 2003. Debt
forgiveness income in the amount of $1,133 was recognized.
NOTE 12 - MERGER
- ----------------
On July 1, 2003, the Company completed a reverse triangular merger ("the
Merger") whereby the Company acquired the assets a subsidiary of Solar Satellite
Communication, Inc. ("SSCI"), a print and cross-media marketing and management
company. The Merger involved Advanced Capital Services, LLC, a Nevada limited
liability company ("ACLLC"), MediaWorx Acquisition Company, LLC, a newly formed
Nevada limited liability company and wholly owned subsidiary of the Company
("MWAC"), and the Company.
F-14
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - MERGER (Continued)
- ----------------------------
ACLLC, owned by Diamond Capital LLC and Quest Capital Resources, LLC, purchased
the assets of The MediaWorx, Inc., a wholly owned subsidiary of Solar Satellite
Communication, Inc., a Colorado corporation, for 3,000,000 ACLLC membership
interests. The assets of SSCI were primarily the business plan and people
involved in the management and procurement of print, packaging, and cross-media
services.
On July 1, 2003, as part of the Merger, ACLLC was merged pursuant to Nevada law
into MWAC. As a consequence of the Merger, MWAC became the surviving entity and
continues to be a wholly owned subsidiary of the Company. A copy of the
associated Plan of Merger was filed with a Schedule 14C Information Statement on
July 1, 2003.
In the exchange, as described above, the original members of ACLLC received
4,000,000 of the Company's common shares and 3,500,000 preferred shares
convertible 1 to 5 into common shares with voting rights as if converted, i.e.,
17,500,000 common shares, and SSCI received 250,000 of the Company's shares. As
of December 31, 2003, the 250,000 common shares have not been issued to SSCI.
Additionally, ACLLC purchased a convertible promissory note held by Private
Investors Equity, LLC that was originated when SSCI received $500,000 from
Private Investors Equity, LLC. In lieu of exercising the default provisions,
ACLLC converted the Note and accrued interest into 27,216,650 SSCI common shares
and converted 250,000 Preferred C shares into shares with conversion rights of 1
to 40 into shares having conversion and voting rights of 1 to 360. These shares
were partially distributed to ACLLC and to the owners of ACLLC, Diamond Capital
LLC and Quest Capital Resources, LLC. As a result, MWAC now has 49% voting
control of SSCI and Diamond and Quest respectively each own 23% voting control
of SSCI. Furthermore as a result of this transaction, MWAC holds the note
payable of $500,000 and accrued interest due to Private Investors Equity, LLC.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition. The allocation of the
purchase price is subject to refinement when the valuation of certain intangible
assets are adjusted.
F-15
NOTE 12 - MERGER (CONTINUED)
2003
---------------
Assets:
Investments in SSCI $1,191,333
===============
Liabilities:
Accrued Expenses $ 46,333
Long Term Debt 775,000
---------------
Total Liabilities 821,333
Equity:
Preferred Stock 350,000
Common Stock 20,000
---------------
Total Equity 370,000
===============
Total Liabilities and Equity $ 1,191,333
===============
The results of operations for MWAC have been included in the consolidated
financial statements since the inception of MWAC. The aggregate purchase price
was 4,000,000 common shares and 3,500,000 preferred shares at par value.
The acquired intangible assets of $1,199,333 was assigned to research and
development assets that were written off at the date of the acquisition in
accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2
to Business Combinations Accounted for by the Purchase Method. Those write-offs
are included in Other Expense-Write Down of Investment.
F-16
MEDIAWORX, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31,
ASSETS: 2004 2003
- ------- ----------- -----------
CURRENT ASSETS
Cash and Cash Equivalents $ -- $ 101,807
Accounts Receivable 424,707 35,513
Inventory 6,058 --
Prepaid Expenses 10,645 793
Other Receivables 7,377,087 --
----------- -----------
Total Current Assets 7,818,497 138,113
----------- -----------
FIXED ASSETS
Furniture, Fixtures, and Equipment 20,415 7,362
Software 25,968 12,045
Less Accumulated Depreciation . (11,109) (1,200)
----------- -----------
Net Fixed Assets 35,274 18,207
----------- -----------
OTHER ASSETS
Notes Receivable - Related Party 62,385 59,171
----------- -----------
Total Other Assets 62,385 59,171
----------- -----------
TOTAL ASSETS $ 7,916,156 $ 215,491
=========== ===========
F-17
MEDIAWORX, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Continued)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY: 2004 2003
- ------------------------------------ ----------- -----------
CURRENT LIABILITIES
Accounts Payable $ 279,574 $ 41,373
Factoring Line Payable 204,825 --
Bank Overdraft 12,638 --
Accrued Expenses 77,140 40,369
Accrued Interest 33,514 23,408
Notes Payable - Related party 375,000 275,000
Short Term Notes Payable 100,000 100,000
Current Portion Long Term Note Payable 148,956 --
----------- -----------
Total Current Liabilities 1,231,647 480,150
----------- -----------
NON-CURRENT LIABILITIES
Convertible Debenture 240,000 --
Long Term Note Payable 446,867 544,333
----------- -----------
Total Long Term Liabilities 686,867 544,333
----------- -----------
TOTAL LIABILITIES 1,918,514 1,024,483
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock - 10% Cumulative, $.10 par value,
4,000,000 Authorized; 0 and 3,500,000 Issued and
Outstanding at September 30, 2004 and
December 31, 2003 -- 350,000
Common Stock - $.005 par value, 150,000,000
Authorized, 30,098,404 and 6,819,259 Issued and
Outstanding at September 30, 2004 and
December 31, 2003 150,492 34,097
Common Stock to be Issued, 250,000 and 250,000 1,250 1,250
Paid in Capital 9,044,564 763,136
Accumulated Deficit (3,198,664) (1,957,475)
----------- -----------
Total Stockholders' Equity (Deficit) 5,997,642 (808,992)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,916,156 $ 215,491
=========== ===========
See accompanying notes to financialstatements.
F-18
MEDIAWORX, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenue $ 666,711 $ 69,415 $ 990,938 $ 69,415
Cost of Revenues 251,290 52,276 502,705 52,276
Operating Expenses
Selling and Marketing 289,189 36,021 591,190 36,021
Printing Services 21,751 21,758 66,589 21,578
General and Administrative 204,002 164,108 583,143 213,198
----------- ----------- ----------- -----------
Total Operating Expenses 514,942 221,707 1,240,922 270,797
----------- ----------- ----------- -----------
Operating Income (Loss) (99,521) (204,568) (752,689) (253,658)
----------- ----------- ----------- -----------
Other Income (Expense)
Miscellaneous Income -- -- -- 8,745
Finance Fees (40,000) (293,250) --
Interest Income (Expense) (25,860) (24,353) (195,250) (45,524)
Permanent Impairment of
Marketable Securities -- -- -- (14,331)
Gain on Forgiveness of Debt -- -- -- 947,637
Write-down of Investment -- (1,190,583) -- (1,190,583)
----------- ----------- ----------- -----------
Total Other Income (Expense) (65,860) (1,214,936) (488,500) (294,056)
----------- ----------- ----------- -----------
Net Income (Loss) $ (165,381) $(1,419,504) $(1,241,189) $ (547,714)
=========== =========== =========== ===========
Basic Earnings Per Shares $ (0.01) $ (0.25) $ (0.08) $ (0.27)
=========== =========== =========== ===========
Diluted Earnings Per Share $ (0.01) $ (0.06) $ (0.08) $ (0.07)
=========== =========== =========== ===========
See accompanying notes to financial statements
F-19
MEDIAWORX, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
-----------
Accumulated Retained
Preferred Stock Common Stock Paid in Comp. Earnings/
Shares Par Value Shares To be Issued Par Value Capital Income (Deficit)
--------- --------- --------- ------------ --------- --------- ----------- -----------
Balance at December 31, 2002 -- $ -- 214,306 -- $ 1,072 $ 106,081 $ 2,500 $(1,120,356)
Issuance of Stock for Services
June 17, 2003 -- -- 10,000 -- 50 19,950 -- --
Issuance of Stock for Services
June 30, 2003 -- -- 800,000 -- 4,000 12,000 -- --
Issuance of Shares in
Connection with MediaWorx
Merger, July 1, 2003 3,500,000 350,000 4,000,000 1,250 20,000 -- -- --
Shares Issued For Cash
July 31, 2003 -- -- 263,016 -- 1,315 87,987 -- --
Shares Issued For Cash
August 15, 2003 -- -- 160,647 -- 803 62,746 -- --
Shares Issued For Cash
September 2, 2003 -- -- 398,318 -- 1,992 145,916 -- --
Shares Issued For Cash
September 17, 2003 -- -- 288,323 -- 1,441 100,811 -- --
Shares Issued For Cash
October 3, 2003 -- -- 73,296 -- 366 24,371 -- --
October 15, 2003 -- -- 69,298 -- 347 23,041 -- --
F-20
MEDIAWORX, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
-----------
(Continued)
Accumulated Retained
Preferred Stock Common Stock Paid in Comp. Earnings/
Shares Par Value Shares To be Issued Par Value Capital Income (Deficit)
----------- ----------- ----------- ------------ ----------- ----------- ----------- ---------
Shares Issued for Cash
November 1, 2003 -- $ -- 192,309 $ -- $ 962 $ 63,942 $ -- $ --
Shares Issued for Cash
November 18, 2003 -- -- 105,572 -- 528 35,103 -- --
Shares Issued for Cash
December 1, 2003 -- -- 113,868 -- 569 37,861 -- --
Shares Issued for Cash
December 15, 2003 -- -- 130,306 -- 652 43,327 -- --
Other Comprehensive Loss
Net Loss -- -- -- -- -- -- (2,500) (837,119)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------
Balance December 31, 2003 3,500,000 350,000 6,819,259 1,250 34,097 763,136 -- (1,957,475)
Shares Issued For Cash
January 7, 2004 -- -- 173,520 -- 867 57,695 -- --
Shares Issued For Cash
January 19, 2004 -- -- 139,601 -- 698 46,417 -- --
Shares Issued For Cash
February 5, 2004 -- -- 207,309 -- 1,037 68,930 -- --
Shares Issued For Cash
February 28, 2004 -- -- 150,452 -- 752 50,026 -- --
Shares Issued for Cash
March 1, 2004 -- -- 8,000 -- 40 3,543 -- --
F-21
MEDIAWORX, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
-----------
(Continued)
Accumulated Retained
Preferred Stock Common Stock Paid in Comp. Earnings/
Shares Par Value Shares To be Issued Par Value Capital Income (Deficit)
----------- ----------- ----------- ------------ --------- ---------- -------- -----------
Shares Issued for Cash
March 2, 2004 -- $ -- 207,309 -- $ 1,037 $ 68,930 $ -- $ --
Shares Issued for Cash
March 15, 2004 -- -- 28,290 -- 141 9,407 -- --
Shares Issued for Cash
April 1, 2004 -- -- 144,215 -- 721 47,951 -- --
Shares Issued for Cash
April 15, 2004 -- -- 6,563 -- 33 2,182 -- --
Warrants Issued April 30, 2004 -- -- -- -- -- 126,000 -- --
Shares Issued for Cash
May 10, 2004 -- -- 20,625 -- 103 6,858 -- --
Shares Issued for Cash
June 9, 2004 -- -- 15,471 -- 77 5,144 -- --
Preferred Stock Converted into
Common Shares June 10, 2004 (3,500,000) (350,000) 17,500,000 -- 87,500 262,500 -- --
Shares Issued for Finance Fees
June 30, 2004 -- -- 4,762 -- 24 9,977 -- --
F-22
MEDIAWORX, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
(Continued)
Accumulated Retained
Preferred Stock Common Stock Paid in Comp. Earnings/
Shares Par Value Shares To be Issued Par Value Capital Income (Deficit)
Shares Issued for Cash
July 1, 2004 -- $ -- 18,733 -- $ 94 $ 6,218 $ -- $ --
Shares Issued in Connection with
Investment Contract
July 1, 2004 -- -- 850,000 4,250 2,333,250 -- --
Shares Issued For Cash
July 16, 2004 -- -- 750,000 3,750 146,250 -- --
Shares Issued in Connection With
Investment Contract
September 10, 2004 3,054,295 15,271 5,024,296 -- -- -- -- --
Net Loss -- -- -- -- -- -- -- (1,241,189)
----------- ----------- ----------- ----------- ----------- ----------- --------- -----------
Balance at September 30, 2004
(Unaudited) -- $ -- 30,098,404 $ 1,250 $ 150,492 $ 9,044,564 $ -- $(3,198,664)
=========== =========== =========== =========== =========== =========== ========= ===========
See accompanying notes to financial statements
F-23
MEDIAWORX, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $(1,241,189) ($ 547,714)
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation 9,909 324
Gain on Forgiveness of Debt -- (947,637)
Grant of Stock Based Compensation -- 36,000
Stock Issued for Payment of Expenses 10,001 --
Stock Issued for Investment 7,377,087 --
Permanent Impairment of Marketable Securities -- 14,331
Write-Down of Investment -- 1,190,583
Change in Operating Assets and Liabilities:
(Increase) Decrease in Accounts Receivable (389,194) (37,126)
(Increase) Decrease in Inventory (6,058) --
(Increase) Decrease in Prepaid Expenses (9,861) (3,778)
(Increase) Decrease in Related Party Receivable (3,214) (40,776)
(Increase) Decrease in Other Receivables (7,377,087) --
Increase (Decrease) in Accounts Payable 238,201 19,653
Increase (Decrease) in Factoring Line Payable 204,825 --
Increase (Decrease) in Accrued Payroll & Taxes 36,771 51,938
Increase (Decrease) in Bank Overdraft 12,638 --
Increase (Decrease) in Accrued Interest 10,106 28,118
----------- -----------
Net Cash Used in Operating Activities (1,127,065) (236,084)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Short Term Loan to Related Party -- 5,331
Purchase of Marketable Securities -- (5,331)
Purchase of Property and Equipment (13,053) --
Purchase of Software (13,923) (10,048)
----------- -----------
Net Cash Used in Investing Activities (26,976) (10,048)
----------- -----------
F-24
MEDIAWORX, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Continued)
For the Nine Months Ended
September 30,
2004 2003
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Convertible Debenture $ 245,854 --
Warrants Issued in Connection with Debt Restructuring 126,000 --
Restructuring of Debt 51,490 --
Proceeds from Related Party 100,000 --
Proceeds from Sale of Common Stock 528,890 403,011
----------- -----------
Net Cash Used in Financing Activities 1,052,234 403,011
----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (101,807) 156,879
Cash and Cash Equivalents at Beginning of Period 101,807 10,759
----------- -----------
Cash and Cash Equivalents at End of Period $ 0 $ 167,638
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ -- $ --
Franchise and income taxes $ 110 $ --
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended June 30, 2003, accrued interest and note payable
of $105,565 and $840,939 respectively, were forgiven as well as a payable of
$1,133.
See accompanying notes to financial statements
F-25
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for MediaWorx, Inc. is presented to assist
in understanding the Company's financial statements. The accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
INTERIM REPORTING
The unaudited financial statements as of September 30, 2004 and for the three
and nine month period then ended, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to fairly state the
financial position and results of operations for the three and nine months.
Operating results for interim periods are not necessarily indicative of the
results which can be expected for full years.
ORGANIZATION AND BASIS OF PRESENTATION
The Company was incorporated under the laws of the State of Wyoming in 1963
under the name MacTay Investment Co. The Company changed its name to Advanced
Gaming Technology, Inc. in 1991. In June 2002, the Company ceased its primary
operating activities, developing and marketing technology for the casino and
hospitality industry.
On July 1, 2003, the Company completed a reverse triangular merger involving
Advanced Capital Services, LLC, a Nevada limited liability company, The
MediaWorx, Inc. a wholly owned subsidiary of Solar Satellite Communications,
Inc. and the Company and it's newly formed wholly owned subsidiary MediaWorx
Acquisition Company, LLC. As a result of the merger the Company acquired the
assets of The MediaWorx, Inc., which consisted primarily of a business plan and
the people involved in the management and procurement of print, packaging, and
cross-media services and changed its name to MediaWorx, Inc. See Note 8 for
detailed description of merger.
NATURE OF OPERATIONS
MediaWorx, Inc. is a media production and management business. The services that
the Company provides include print, audio/video, digital asset management,
graphic design, production and fulfillment for traditional and web-based
marketing and communications products and services. MediaWorx provides the
Company's sales representatives with the support and leverage of a strong
customer service culture, in-house pre-press capabilities, e-business solutions,
and a base of production partners that can fulfill the complexity of any
Customer order. The Company is a virtual media and printing company- it neither
owns nor has its capital tied up in printing equipment or facilities but has
access to an established network of the most capable, technologically advanced
printers and production houses. Before we accept any job, we get an estimate on
the cost and a commitment from the printing and production houses to perform the
job as contracted.
F-26
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America. In preparing the financial
statements, management is required to make estimates and assumptions that effect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the balance sheet and statement of
operations for the year then ended. Actual results may differ from these
estimates. Estimates are used when accounting for allowance for bad debts,
collectibility of accounts receivable, amounts due to services providers,
depreciation, and litigation contingencies, among others.
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of MediaWorx, Inc and
its wholly owned subsidiary MediaWorx Company, LLC. All significant intercompany
accounts and transactions have been eliminated.
CASH EQUIVALENTS
For the purpose of reporting cash flows, the Company considers all highly liquid
debt instruments purchased with maturity of three months or less to be cash
equivalents to the extent the funds are not being held for investment purposes.
CONCENTRATION OF CREDIT RISK
The Company has no significant off-balance-sheet concentrations of credit risk
such as foreign exchange contracts, options contracts or other foreign hedging
arrangements.
REVENUE RECOGNITION
The Company's revenues are derived from customized printing and cross media
services. Revenue is recognized when earned as the services are provided or the
product is delivered in accordance with the underlying purchase order. The
Company recognizes gross revenues under the provision of Emerging Issues Task
Force (EITF) Issue No. 99-19 "Recording Revenue Gross as Principal vs. Net as an
Agent". The Company acts as the principal, takes title to the products and has
the risk and rewards of ownership. When the Company generates revenue while
acting as an agent or broker, it records the revenue on a net basis.
F-27
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SALE OF RECEIVABLES
Effective May 21, 2004, the Company sells the majority of receivables to a third
party for collection. As of September 30, 2004, the Company sold receivables
with a carrying value of $416,800, in which the Company paid $7,596 in fees for
the three months ended September 30, 2004.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed on the
straight-line method, based on the estimated useful lives of the assets of
generally three to five years. Expenditures for maintenance and repairs are
charged to operations as incurred. Major overhauls and improvements are
capitalized and depreciated over their useful lives. Upon sale or other
disposition of property and equipment, the cost and related accumulated
depreciation or amortization if removed from the accounts, and any gain or loss
is included in the determination of income or loss.
RECLASSIFICATIONS
Certain reclassifications have been made in the 2003 financial statements to
conform with the September 30, 2004 presentation.
NET INCOME (LOSS) PER COMMON SHARE
Basic earnings per share are computed by dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock.
The following reconciles amounts reported in the financial statements:
For the Three Months Ended September 30,2004
Income Shares Per-Share
(Numerator) (Denominator) Amount
Loss Available to Common Stockholders $ (165,381) 27,568,209 $ (0.01)
Effect of Dilutive Securities:
Warrants -- 200,000
---------- ----------
Loss Available to Common Stockholders - Diluted
Earnings Per Share $ (165,381) 27,768,209 $ (0.01)
========== ========== ========
F-28
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income (Loss) Per Common Share (Continued)
For the Three Months Ended September 30,2003
Income Shares Per-Share
(Numerator)
(Denominator) Amount
Income Available to Common Stockholders $(1,419,504) 5,695,568 $ (0.25)
Effect of Dilutive Securities:
Warrants - 100,000
Convertible Preferred Stock 17,500,000
--------------------- -----------------------
Income Available to Common Stockholders
- - Diluted Earnings Per Share $(1,419,504) 23,295,568 $(0.06)
===================== ======================= ==================
For the Nine Months Ended September 30,2004
Income Shares Per-Share
(Numerator)
(Denominator) Amount
Loss Available to Common Stockholders $(1,241,189) 15,597,290 $ (0.08)
Effect of Dilutive Securities:
Warrants - 111,800
--------------------- ----------------------- ------------------
Loss Available to Common Stockholders
- - Diluted Earnings Per Share $ (1,241,189) 15,709,090 $ (0.08)
===================== ======================= ==================
For the Nine Months Ended September 30, 2003
Income Shares Per-Share
(Numerator)
(Denominator) Amount
Income Available to Common Stockholders $(547,714) 2,044,837 $ (0.27)
Effect of Dilutive Securities:
Warrants - 35,531
Convertible Preferred Stock 5,833,333
--------------------- ----------------------
Income Available to Common Stockholders
- - Diluted Earnings Per Share $(547,714) 7,913,701 $(0.07)
===================== ======================= ==================
F-29
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - INCOME TAXES
Deferred income taxes (benefits) are provided for certain income and expenses
which are recognized in different periods for tax and financial reporting
purposes. The Company had net operating loss carry forwards for income tax
purposes of approximately $36,459,114, expiring at various dates from December
31, 2015 through December 31, 2023. A loss generated in a particular year will
expire for federal tax purposes if not utilized within twenty years. The
Internal Revenue Code contains provisions that would reduce or limit the
availability and utilization of this net operating loss carry forwards if
certain ownership changes have been or will be taking place. In accordance with
SFAS No. 109, a valuation allowance is provided when it is more likely than not
that all or some portion of the deferred tax asset will not be realized. Due to
the uncertainty with respect to the ultimate realization of the loss carry
forwards, the Company established a valuation allowance for the entire net
deferred income tax asset as of December 31, 2003.
NOTE 3 - PREFERRED STOCK
The Company has authorized 4,000,000 shares at $.10 par value convertible
preferred stock. Shares of the Series A Preferred Stock are convertible at the
option of the holder on a one-for-five basis, subject to adjustment for
dilution, into shares of common stock. Each share of Series A Preferred Stock
will be automatically converted into common stock upon a sale or transfer of all
or substantially all of MediaWorx's assets for cash or securities, or a
statutory share exchange in which stockholders of MediaWorx may participate.
Each share of Series A Preferred Stock has voting rights equal to the voting
rights of the common stock on an as if converted basis. Upon any liquidation,
dissolution or winding up of MediaWorx, whether voluntary or involuntary, the
holders of record of shares of Series A Preferred Stock shall be entitled,
before any distribution or payment is made upon outstanding shares of common
stock, to be paid an amount equal to the Original Issue Price. If, upon such
liquidation, the assets to be distributed among the holders of Series A
Preferred Stock shall be insufficient to permit such payment, then the entire
assets of MediaWorx to be so distributed shall be distributed ratably among the
holders of Series A Preferred Stock.
On July 1, 2003, the Company issued 3,500,000 shares of preferred stock in
connection with the merger between its wholly owned subsidiary, MediaWorx
Company, LLC and Advanced Capital Services, LLC.
On June 10, 2004, the 3,500,000 preferred shares were converted into 17,500,000
common shares. Thus as of September 30, 2004, there are no preferred shares
outstanding.
F-30
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - COMMON STOCK
The Company has authorized 150,000,000 shares of $0.005 par value common stock.
On June 17, 2003, the Company issued 1,000,000 shares of common stock (10,000
shares after retroactive adjustment for the 100:1 stock split described below)
to a former officer in exchange for continued consulting for the Company. The
shares were valued at $.02 and the Company recorded $20,000 of consulting
expenses.
On June 23, 2003, the Board of Directors approved a proposal to effectuate a 100
to 1 reverse stock split of the Company's outstanding common shares with no
effect on the par value or on the number of authorized shares. As a result of
this action, the total number of outstanding shares of common stock was reduced
from 22,430,587 to 224,306 shares.
On June 30, 2003, the Company issued 800,000 shares of common stock to the Law
Offices of Henry S. Meyer under a legal services and consulting agreement
entered into February 1, 2003. The shares were valued at $.02 and the Company
recorded $16,000 of consulting expenses.
On July 1, 2003, the Company issued 4,000,000 shares of common stock in
connection with the merger between its wholly owned subsidiary, MediaWorx
Company, LLC and Advanced Capital Services, LLC.
Between July 31, 2003 and December 31, 2003, the Company issued 1,794,953 shares
of common stock in connection with a Regulation S offering. The shares were
issued from $.34 to $.40 per share.
During the first quarter ended March 31, 2004, the Company issued 914,481 shares
of common stock to various people in connection with a Regulation S offering.
The shares were issued from $.34 to $.45 per share.
During the second quarter ended June 30, 2004, the Company issued 186,874 shares
of common stock to various people in connection with a Regulation S offering.
The shares were issued from $.33 per share to $.40 per share.
On June 10, 2004, 3,500,000 preferred shares were converted into 17,500,000
common shares. On June 30, 2004, the Company issued 4,762 common shares for
finance fees of $10,000.
During the third quarter ended September 30, 2004, the Company issued 768,733
shares of common stock to various people in connection with a Regulation S
offering. The shares were issued between $.20 and $.37 per share.
On July 1, 2004 the Company issued 850,000 shares in connection with an
investment contract. The shares were valued at $2.75.
On September 10, 2004, the Company issued 3,054,295 common shares in connection
with a financing agreement for $1.65 per share.
F-31
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - NOTES PAYABLE
A note payable to SDA List Brokers, Inc. (SDA), in the amount of $940,939,
accrued interest at 9%, and was due in monthly payments of $6,200 beginning
March 1, 2000. On June 25, 2003, as part of the negotiations for the purchase
and triangular merger described in Note 1 and Note 8 with Advanced Gaming
Technology, the Company received a release and cancellation of this note and the
accrued interest totaling $1,046,504 in return for issuing a promissory note to
SDA in the amount of $25,000, with 2% interest per annum, and a warrant to
purchase up to 100,000 shares of common stock of the Company. If the warrant is
not exercised by the expiration date of June 25, 2004 then the Company shall pay
SDA $75,000. As a result of this transaction, debt forgiveness income in the
amount of $946,504 was recognized during the year ended December 31, 2003. As of
September 30, 2004, the warrants were not exercised, thus the Company now owes a
total of $100,000 on the note, which is in default.
On April 30, 2004, the Company restructured its long-term note payable with
Private Investors Equity wherein the Company would pay sixteen quarterly
installments of $46,052.40 beginning August 30, 2004 at an interest rate of 12
percent per annum. In connection with this restructuring the Company issued
200,000 warrants to issue common stock with an exercise price of $0.60,
exercisable anytime through June 25, 2008. Interest expense of $126,000 was
recorded in connection with the issuance of the warrants.
FACTORING LINE OF CREDIT
In May 2004, the Company entered into an agreement with Mercantile Capital, L.P.
wherein Mercantile Capital will purchase the majority of the Company's accounts
receivable. Under the terms of the agreement, the Company would receive 80
percent of the purchase price up front and 20 percent would be held in reserves
until the receivables are collected. Mercantile has extended up to $500,000 of
credit.
EQUITY LINE OF CREDIT
In February 2004, the Company entered into an equity line of credit with Cornell
Capital Partners, L.P. Under the terms of the agreement, the Company may sell up
to $5,000,000 of its common stock. The sale price is 95% of the lowest closing
bid price for the five days immediately following the notice date. The Company
also gave Cornell Capital Partners an unsecured convertible debenture in the
amount of $240,000 as compensation, as well as 5% of any proceeds from the
equity line of credit.
UNSECURED CONVERTIBLE DEBENTURE
During February, 2004 the Company issued an unsecured convertible debenture in
connection with the Equity Line of Credit. The $240,000 is due and payable, with
5% interest, three years from the date of issuance, unless sooner converted into
shares of common stock. The debenture is convertible, subject to a maximum cap
of $50,000 per day any time up to the maturity at a conversion price equal to
100% of the lowest closing bid price of the common stock for the three preceding
trading days. At maturity, the Company has the option to pay the principal
balance and accrued interest in cash or convert the debenture into common shares
at a price equal to 100% of the lowest closing bid price for the three prior
trading days. The debentures have a beneficial conversion feature that resulted
in a debt discount of $5,854. Because the debentures were convertible at the
date of issuance the entire debt discount was charged to interest expense
immediately.
The calculation of beneficial conversion appears below:
Assumptions:
1. 240,000 shares were issued as Convertible Debt
2. Shares are convertible as of date of issuance (50,000 per day)
3. Shares are convertible at $2.05 per share
4. Fair value (FV) of common shares at commitment date was $2.10 per share.
Calculation:
o FV at commitment date $2.10
o Conversion price $2.05
o Intrinsic value of beneficial conversion $5,854
Convertible into (240,000 / 2.05) = 117,073 shares
With an intrinsic value of $.05
(240,000 / 2.05) x (2.10 - 2.05) = 5,854
F-32
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of September 30, 2004 and December 31, 2003 the following amounts are due:
September 30, December 31,
2004 2003
Current Note Payable - Related Party
Note Payable, Interest at 2%, payable to shareholders of Company,
due upon request $ 375,000 $ 275,000
========= =========
Long Term Note Payable
Convertible Debenture $ 240,000 $ --
Note Payable, Interest at 12%, Due in 16 Quarterly payments of
$46,052.40, beginning August 30, 2004 595,823 544,333
--------- ---------
835,823 544,333
Less: Current Portion (148,956) --
--------- ---------
Total Long-Term Notes Payable $ 686,867 $ 544,333
========= =========
F-33
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code in Las Vegas, Nevada on August 26, 1998. Under Chapter 11, certain claims
against the Debtor in existence prior to the filing of the petitions for relief
under the Federal Bankruptcy Laws are stayed while the Debtor continues business
operations as Debtor-in-possession. These claims were reflected in the March 31,
1999 balance sheet as "liabilities subject to compromise". The bankruptcy plan
was approved June 29, 1999 and became effective on August 19, 1999. On February
15, 2000, the Bankruptcy Court in the District of Las Vegas approved the final
decree of the Company closing the Chapter 11 bankruptcy case of the Company.
The Company accounted for the reorganization using fresh-start reporting.
Accordingly, all assets and liabilities were restated to reflect their
reorganization value, which approximates fair value at the date of
reorganization.
NOTE 7 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States, which
contemplates the Company as a going concern. However, the Company has sustained
substantial operating losses in recent years and has used substantial amounts of
working capital in its operations. Realization of a major portion of the assets
reflected on the accompanying balance sheet is dependent upon continued
operations of the Company, which, in turn, is dependent upon the Company's
ability to meet its financing requirements and succeed in its future operations.
Management believes that actions presently being taken to revise the Company's
operating and financial requirements provide them with the opportunity for the
Company to continue as a going concern.
NOTE 8 - MERGER
On July 1, 2003, the Company completed a reverse triangular merger ("the
Merger") whereby the Company acquired the assets of a subsidiary of Solar
Satellite Communication, Inc. ("SSCI"), a print and cross-media marketing and
management company. The Merger involved Advanced Capital Services, LLC, a Nevada
limited liability company ("ACLLC"), MediaWorx Acquisition Company, LLC, a newly
formed Nevada limited liability company and wholly owned subsidiary of the
Company ("MWAC"), and the Company.
ACLLC, owned by Diamond Capital LLC and Quest Capital Resources, LLC, purchased
the assets of The MediaWorx, Inc., a wholly owned subsidiary of Solar Satellite
Communication, Inc., a Colorado corporation, for 3,000,000 ACLLC membership
interests. The assets of SSCI were primarily the business plan and people
involved in the management and procurement of print, packaging, and cross-media
services.
On July 1, 2003, as part of the Merger, ACLLC was merged pursuant to Nevada law
into MWAC. As a consequence of the Merger, MWAC became the surviving entity and
continues to be a wholly owned subsidiary of the Company. A copy of the
associated Plan of Merger was filed with a Schedule 14C Information Statement on
July 1, 2003.
In the exchange, as described above, the original members of ACLLC received
4,000,000 of the Company's common shares and 3,500,000 preferred shares
convertible 1 to 5 into common shares with voting rights as if converted, i.e.,
17,500,000 common shares, and SSCI received 250,000 of the Company's shares. As
of December 31, 2003, the 250,000 common shares have not been issued to SSCI.
F-34
MEDIAWORX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - MERGER (CONTINUED)
Additionally, ACLLC purchased a convertible promissory note held by Private
Investors Equity, LLC that was originated when SSCI received $500,000 from
Private Investors Equity, LLC. In lieu of exercising the default provisions,
ACLLC converted the Note and accrued interest into 27,216,650 SSCI common shares
and converted 250,000 Preferred C shares into shares with conversion rights of 1
to 40 into shares having conversion and voting rights of 1 to 360. These shares
were partially distributed to ACLLC and to the owners of ACLLC, Diamond Capital
LLC and Quest Capital Resources, LLC. As a result, MWAC now has 49% voting
control of SSCI and Diamond and Quest respectively each own 23% voting control
of SSCI. Furthermore as a result of this transaction, MWAC holds the note
payable of $500,000 and accrued interest due to Private Investors Equity, LLC.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition. The allocation of the
purchase price is subject to refinement when the valuation of certain intangible
assets are adjusted.
2003
Assets:
Investment in SSCI $ 1,191,333
================
Liabilities:
Accrued expenses $ 46,333
Long Term Debt 775,000
----------------
Total Liabilities 821,333
----------------
Equity:
Preferred Stock $ 350,000
Common Stock 20,000
---------------
Total Equity 370,000
===============
Total Liabilities and Equity $ 1,191,333
===============
The results of operations for MWAC have been included in the consolidated
financial statements since the inception of MWAC. The aggregate purchase price
was 4,000,000 common shares valued at par value (4,000,000 x $.005) and
3,500,000 preferred shares valued at par value (3,500,000 x $.10). Total value
of $370,000.
The acquired intangible assets of $1,199,333 was assigned to research and
development assets that were written off at the date of acquisition in
accordance with FASB interpretation No. 4, Applicability of FASB Statement No. 2
to Business Combinations Accounted for by the Purchase Method. Those write-offs
are included in Other Expense - Write Down of Investment.
F-35
============================================ ================================
You should rely only on the information
contained in this prospectus. We have not
authorized anyone to provide you with
information different from the information
contained in this prospectus. This document
may only be used where it is legal to sell
the securities. The information in this
document may only be accurate on the date of
this document. UP TO 18,229,762 SHARES
OF OUR
OF COMMON STOCK
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY 2
RISK FACTORS 5
USE OF PROCEEDS 12 MEDIAWORX, INC.
SELLING STOCKHOLDERS 13
PLAN OF DISTRIBUTION 18
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 19
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 20
BUSINESS 25 ________________
MANAGEMENT 32
EXECUTIVE COMPENSATION 34 PROSPECTUS
CERTAIN RELATIONSHIPS AND RELATED ________________
TRANSACTIONS 36
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 37
DESCRIPTION OF SECURITIES 38
INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES 39
LEGAL MATTERS 39 December 8, 2004
EXPERTS 39
AVAILABLE INFORMATION 39
INDEX TO FINANCIAL STATEMENTS 41
============================================ ================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Bylaws limit the liability of our directors to the maximum extent
permitted by Wyoming law. Thus, our directors are not personally liable for
monetary damages for any action taken, or any failure to take any action, unless
the director has breached or failed to perform the duties of his office and the
breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness. Such limitation does not apply to any responsibility of liability
pursuant to criminal statute or liability for the payment of taxes pursuant to
local, state or federal law. In addition, our Bylaws authorize us to maintain
liability insurance for our directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. 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.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated
expenses, all of which we will pay, in connection with the issuance and
distribution of the securities being registered:
NATURE OF EXPENSE AMOUNT
----------------- -----------
SEC Registration fee 3,118.11
Accounting fees and expenses 5,000.00*
Legal fees and expenses 45,000.00*
TOTAL $53,118.11*
* Estimated.
II-I
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth information regarding all sales of our
unregistered securities during the past three years
On June 17, 2003, we issued 1,000,000 shares of common stock to a
former officer in exchange for continued consulting for the company. The shares
were valued at $.02 and we recorded $20,000 of consulting expenses. These shares
were subject to the 100:1 stock split described below.
On June 23, 2003, the Board of Directors approved a proposal to
effectuate a 100 to 1 reverse stock split of our outstanding common shares with
no effect on the par value or on the number of authorized shares. As a result of
this action, the total number of outstanding shares of common stock is reduced
from 22,430,587 to 224,306 shares.
On June 25, 2003, we issued a warrant, excisable for one year, to
purchase shares of common stock SDA List Brokers, Inc. as partial payment in
connection with the retirement of a note payable. The total number of shares
exercisable were equal to $75,000 divided by 75% of the average closing bid
price per share for the five consecutive days trading days immediately prior to
the date of the notice of exercise up to a maximum of 100,000 shares.
On June 30, 2003, we issued 800,000 shares of common stock to the Law
Offices of Henry S. Meyer for legal services and consulting. The shares were
valued at $.02 and we recorded $16,000 of consulting expenses.
On July 1, 2003, we issued 4,000,000 shares of common stock in
connection with the merger between our wholly owned subsidiary, MediaWorx
Acquisition Company, LLC and Advanced Capital Services, LLC. The shares were
issued in a transaction exempt under Rule 506 of Regulation D promulgated under
Section 4(2) of the Securities Act of 1933, as amended.
On July 1, 2003, we issued 3,500,000 shares of preferred stock in
connection with the merger between our wholly owned subsidiary, MediaWorx
Acquisition Company, LLC and Advanced Capital Services, LLC. The shares were
issued in a transaction exempt under Rule 506 of Regulation D promulgated under
Section 4(2) of the Securities Act of 1933, as amended.
Between July 31, 2003 and March 22, 2004, we issued 2,681,144 shares of
common stock in connection with a regulation S offering. The shares were issued
from $.34 to $.40 per share.
On February 24, 2004, we entered into an equity line of credit with one
investor. Pursuant to the equity line of credit, we may, at our discretion,
periodically sell to the investor shares of common stock for a total purchase
price of up to $5,000,000. For each share of common stock purchased under the
equity line of credit, the investor will pay 95% of the lowest closing bid price
on the Over-the-Counter Bulletin Board or other principal market on which our
common stock is traded for the five days immediately following the notice date.
The investor, Cornell Capital Partners, LP is a private limited partnership
whose business operations are conducted through its general partner, Yorkville
Advisors, LLC. We also paid Cornell Capital Partners a commitment fee in the
form of a compensation debenture in the amount of $240,000 upon execution of the
equity line of credit. Further, Cornell Capital Partners, LP will retain 5% of
each advance under the equity line of credit. In addition, we engaged Newbridge
Securities Corporation, a registered broker-dealer, to advise us in connection
with the equity line of credit. For its services, Newbridge Securities
Corporation received 4,762 shares of our common stock. We are obligated to
prepare and file with the Securities and Exchange Commission a registration
statement to register the resale of the shares issued under the equity line of
credit agreement prior to the first sale to the investor of our common stock.
During the second quarter, we completed a placement of 186,874 shares
of common stock with investors located outside of the United States in exchange
for $63,069. The shares were offered pursuant to an exemption from registration
afforded by Regulation S to the Securities Act of 1933. Shares sold pursuant to
Regulation S are deemed restricted and may not be sold to any U.S. Person (as
that term is defined in the Regulation) for a period of one (1) year from date
of sale. Thereafter, the shares will be subject to the restrictions of Rule 144.
In June 2004, Diamond Capital LLC and Quest Capital Resources LLC,
pursuant to the terms of the preferred share agreement, each converted 1.75
million shares of preferred stock into 8.75 million shares of common stock.
II-2
In July 2004, we placed 850,000 newly issued common shares into a
guaranteed investment for a five year term. We expect to receive income from our
investment in the 4th quarter of 2004, and annually thereafter. The stock is
guaranteed to be returned at the end of the investment period. The shares were
offered pursuant to an exemption from registration afforded by Regulation S to
the Securities Act of 1933. Shares sold pursuant to Regulation S are deemed
restricted and may not be sold to any U.S. Person (as that term is defined in
the Regulation) for a period of one (1) year from date of sale. Thereafter, the
shares will be subject to the restrictions of Rule 144.
In September 2004, we signed an agreement with a private investment
company for the purchase by the investment company of $5.2 million of our common
shares in exchange for 2,850,874 shares of the investment company. The
investment company is a newly formed London-based company that has applied for
its shares to be admitted to trading on the London stock exchange as an
investment trust. The investment company has been established specifically to
invest in US micro cap companies with long term growth potential. The investment
company expects its shares to be trading on the London Stock Exchange in the 4th
quarter of 2004. We issued 3,054,295 common shares in connection with this
agreement. The shares were offered pursuant to an exemption from registration
afforded by Regulation S to the Securities Act of 1933. Shares sold pursuant to
Regulation S are deemed restricted and may not be sold to any U.S. Person (as
that term is defined in the Regulation) for a period of one (1) year from date
of sale. Thereafter, the shares will be subject to the restrictions of Rule 144.
During the third quarter, we completed a placement of 768,733 shares of
common stock with investors located outside of the United States in exchange for
$156,312. The shares were offered pursuant to an exemption from registration
afforded by Regulation S to the Securities Act of 1933. Shares sold pursuant to
Regulation S are deemed restricted and may not be sold to any U.S. Person (as
that term is defined in the Regulation) for a period of one (1) year from date
of sale. Thereafter, the shares will be subject to the restrictions of Rule 144.
All of the above offerings and sales were deemed to be exempt under
rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as
amended. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of ours or our
executive officers, and transfer was restricted by us in accordance with the
requirements of the Securities Act of 1933. In addition to representations by
the above-referenced persons, we have made independent determinations that all
of the above-referenced persons were accredited or sophisticated investors, and
that they were capable of analyzing the merits and risks of their investment,
and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to
whom we issued securities as indicated in this section of the registration
statement are unaffiliated with us.
II-3
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2.
References to "the Company" in this Exhibit List mean MediaWorx, a Wyoming
corporation.
3.1 Articles of Incorporation of the Company filed as Exhibit 2.5 to the
Form 10-SB/A filed with the Commission on May 6, 1997 and incorporated herein by
reference.
3.2 Amendment to Articles of Incorporation of the Company, changing the name
of the Company from Mactay Investment Co. to Auto N Corporation and increasing
the authorized shares of common stock, filed as Exhibit 2.4 to the Form 10-SB/A
filed with the Commission on May 6, 1997 and incorporated herein by reference.
3.3 Amendment to Articles of Incorporation of the Company, changing the name
of the Company from Auto N Corporation to Advanced Gaming Technology, Inc. and
creating shares of preferred stock, filed as Exhibit 2.3 to the Form 10-SB/A
filed with the Commission on May 6, 1997 and incorporated herein by reference.
3.4 Amendment to Articles of Incorporation of the Company, decreasing the
authorized shares of common stock, filed as Exhibit 2.1 to the Form 10-SB filed
with the Commission on January 16, 1997 and incorporated herein by reference.
3.5 Amendment to Articles of Incorporation of the Company, increasing
the authorized shares of common stock, filed as Exhibit 2.2 to the Form 10-SB
filed with the Commission on January 16, 1997 and incorporated herein by
reference
3.6 Amendment to Articles of Incorporation of the Company, changing the name
of the Company from Advanced Gaming Technology, Inc. to MediaWorx, Inc., adopted
on June 24, 2003.
3.7 By-laws of the Company filed as Exhibit 2.6 to the Form 10-SB/A filed
with the Commission on May 6, 1997 and incorporated herein by reference.
4.1 Standby Equity Distribution Agreement, dated February 24, 2004, between
Cornell Capital Partners, LP and MediaWorx, Inc., filed as Exhibit 4.1 to the
Form 10-KSB filed with the Commission on March 26, 2004 and incorporated herein
by reference
4.2 Registration Rights Agreement, dated February 24, 2004, between Cornell
Capital Partners, LP and MediaWorx, Inc., filed as Exhibit 4.2 to the Form
10-KSB filed with the Commission on March 26, 2004 and incorporated herein by
reference
4.3 Escrow Agreement, dated February 24, 2004, between Cornell Capital
Partners, LP and MediaWorx, Inc. in connection with the Equity Line of Credit of
Credit Agreement, filed as Exhibit 4.3 to the Form 10-KSB filed with the
Commission on March 26, 2004 and incorporated herein by reference.
4.4 Placement Agent Agreement, dated February 24, 2004, by and among
MediaWorx, Inc., Cornell Capital Partners, LP and Newbridge Securities
Corporation, filed as Exhibit 4.4 to the Form 10-KSB filed with the Commission
on March 26, 2004 and incorporated herein by reference.
4.5 Irrevocable Transfer Agent Instructions, dated February 24, 2004, by
and among MediaWorx, Inc., David Gonzalez, Continental Stock Transfer and Trust
Company and Cornell Capital Partners, LP., filed as Exhibit 4.5 to the Form
10-KSB filed with the Commission on March 26, 2004 and incorporated herein by
reference.
4.6 Unsecured Convertible Debenture with Cornell Capital Partners, L.P.,
filed as Exhibit 4.6 to the Form 10-KSB filed with the Commission on March 26,
2004 and incorporated herein by reference.
II-4
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (filed herewith)
23.1 Consent of Independent Auditors (filed herewith).
23.3 Consent of legal counsel (see Exhibit 5.1).
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of the securities
offered would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act 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 information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
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-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Reston,
Commonwealth of Virginia, on December 8, 2004.
Dated: December 8, 2004 By: /s/ Linda A. Broenniman
----------------------
Linda A. Broenniman
President, Chief Executive Officer,
Principal Accounting Office and
Principal Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/Linda A. Broenniman President, Chief Executive December 8, 2004
- ------------------------- Officer, Chief Financial
Linda A. Broenniman Officer and Director
/s/Edward G. Broenniman Secretary, Treasurer and December 8, 2004
- ------------------------- Director
Edward G. Broenniman
/s/Gary L. Cain Chairman of the Board and December 8, 2004
- ------------------------- Director
Gary L. Cain
/s/Bruce M. Arinaga Director December 8, 2004
- -------------------------
Bruce M. Arinaga
/s/Martin A. Burke Director December 8, 2004
- -------------------------
Martin A. Burke
II-6