<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 333-14477
SPORTSNUTS.COM INTERNATIONAL, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 87-0561426
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
The Towers at South Towne II,
Suite 550,
10421 South 400 West,
Salt Lake City, Utah 84095
---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(801) 816-2500
Issuer's telephone number
- --------------------------------------------------------------------------------
(Former name or former address and former fiscal year, if changed
since last report.)
<PAGE> 2
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares of the issuer's classes of common equity, as of the
latest practicable date. As of June 30, 1999, the Company had outstanding
15,724,227 shares of common stock, par value $0.0001 per share.
Transitional Small Business Disclosure Format (check one) [ ] Yes [X] No
<PAGE> 3
PART I
FINANCIAL INFORMATION
The Financial Statements of the Company are prepared as of June 30, 1999. Due
to the fact that the Company was a dormant public company prior to the
acquisition of SportsNuts.com, Inc. (as described in footnote 3, below) the
condensed financial statements are not comparable for the periods presented.
ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-QSB
SPORTSNUTS.COM INTERNATIONAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,381,771 $ 520
Accounts receivable 206,729 --
Inventory 60,654 --
Other current assets 76,929 --
------------ --------
Total current assets 2,726,083 520
Property and equipment, net 836,137 --
Goodwill, net 6,822,015 --
------------ --------
Total assets $ 10,384,235 $ 520
============ ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 188,088 --
Accrued liabilities 133,875 --
Accrued compensation and other benefits 15,961 --
------------ --------
Total current liabilities 337,924 --
Commitments
Minority interest
Shareholders' equity:
Common stock, 50,000,000 shares authorized,
par value $.0001, 15,724,227 and 2,441,713
issued and outstanding at June 30, 1999
and December 31, 1998 1,572 1,104
Additional paid-in capital 15,741,691 48,534
Accumulated deficit (4,209,452) (49,118)
Subscription receivable (1,487,500) --
------------ --------
Total shareholders' equity 10,046,311 520
Total liabilities and shareholders' equity $ 10,384,235 $ 520
============ ========
</TABLE>
See accompanying notes
<PAGE> 4
SPORTSNUTS.COM INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------------
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Net sales $ 322,137 $ 2,480
Operating Expenses:
Cost of sales 320,803 --
General and administrative 632,632 14,469
Selling and marketing 313,353 --
Research and development 28,945 --
------------ ------------
Total operating expense 1,295,733 14,469
Loss from operations before minority interest (973,596) (11,989)
Minority interest (82,552) --
------------ ------------
Net loss $ (891,044) $ (11,989)
============ ============
Loss per common share - basic and diluted $ (0.06) $ (0.01)
============ ============
Weighted average number of common and common
equivalent shares 14,279,138 1,103,500
============ ============
</TABLE>
See accompanying notes
<PAGE> 5
SPORTSNUTS.COM INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Net sales $ 322,137 $ 2,480
Operating Expenses:
Cost of sales 320,803 --
General and administrative 632,822 17,085
Selling and marketing 313,353 --
Research and development 28,945 --
------------ ------------
Total operating expense 1,295,923 17,085
Loss from operations before minority interest (973,786) (14,605)
Minority interest (82,552) --
------------ ------------
Net loss $ (891,234) $ (14,605)
============ ============
Loss per common share - basic and diluted $ (0.11) $ (0.01)
============ ============
Weighted average number of common and common
equivalent shares 8,201,214 1,103,500
============ ============
</TABLE>
See accompanying notes
<PAGE> 6
SPORTSNUTS.COM INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
------------ --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (973,786) $(14,605)
Adjustments to reconcile net income to net cash used in
operating activities
Depreciation 55,743 544
Amortization of goodwill 359,053 --
Changes in operating assets and liabilities:
Accounts receivable (206,729) 4,077
Inventory (39,667) --
Other current assets (16,909) --
Accounts payable (29,643) --
Other liabilities (32,642) --
------------ --------
Net cash used in operating activities (884,580) (9,984)
Cash flows from investing activities:
Purchases of property and equipment (519,998) --
Acquisition, net of cash acquired 247,929 --
------------ --------
Net cash used in investing activities (272,069) --
Cash flows from financing activities:
Net proceeds from issuance of common stock 3,537,900 --
------------ --------
Net cash provided by financing activities 3,537,900 --
------------ --------
Net increase (decrease) in cash and cash equivalents 2,381,251 (9,984)
Cash and cash equivalents at the beginning of period 520 18,068
------------ --------
Cash and cash equivalents at the end of period $ 2,381,771 $ 8,084
============ ========
</TABLE>
See accompanying notes
<PAGE> 7
SPORTSNUTS.COM INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
SportsNuts.com International, Inc. (formerly Durwood, Inc.) (the "Company") is
an online, personalized sports community offering a comprehensive bundle of
sports, outdoors, and fitness-related products, services, and information in a
club environment. The Company has combined the three powerful forces of sports,
the Internet, and network marketing in an effort to build the largest, targeted
online customer base of global sports enthusiasts. To date, the Company has
derived revenues principally from four sources: (i) proceeds from enrollments of
club members, (ii) recurring monthly purchases of promotional products offered
by the Company, (iii) purchases of sales aids by independent distributors, and
(iv) purchases of sports, outdoors, and fitness-related products and services.
The Company's strategy is to build and test its business model on a localized
scale, and thereafter deploy the model across the United States and
international markets. The Company was incorporated under the laws of the State
of Delaware on July 12, 1996. Prior to the acquisition of SportsNuts.com, Inc.,
a privately held Delaware corporation ("SportsNuts"), on April 6, 1999, the
Company had not commenced active business operations and was considered a
development stage company.
FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10- QSB and Article 10 of Regulation S-B.
Accordingly, certain information and footnote disclosures normally included in
complete financial statements have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements and
footnotes thereto included in the Company's 1999 filing on Form 8-K/A made on
June 18, 1999. Due to the fact that the Company was a dormant public company,
prior to the acquisition of SportsNuts described below in footnote 3, the
condensed financial statements are not comparable for the periods presented.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of operations for interim periods are not necessarily indicative of
the results of operations to be expected for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements and these accompanying
notes. Actual results could differ from those estimates.
<PAGE> 8
SPORTSNUTS.COM INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
JUNE 30, 1999
(UNAUDITED)
NET LOSS PER COMMON SHARE
Net loss per common share is calculated by dividing the net loss by the weighted
average number of shares of common stock issued and outstanding during the
period. The Company excluded 3,363,098 options and 2,293,694 warrants from the
weighted average shares outstanding computation at June 30, 1999 and 1998,
respectively, because their effect would be antidilutive.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. There have been no items of other comprehensive income to
date.
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. The
Company has sustained significant net losses which have resulted in an
accumulated deficit at June 30, 1999 of approximately $4,209,452 and has
experienced periodic cash flow difficulties, all of which raise substantial
doubt regarding the Company's ability to continue as a going concern.
The net loss for the year ended December 31, 1998 and the six months ended June
30, 1999 was $23,534 and $891,234, respectively. To date the Company has funded
its operations through the issuances of common stock. The Company anticipates a
net loss for the year ended December 31, 1999 and with the expected cash
requirements for the coming year, there is substantial doubt as to the Company's
ability to continue operations.
The Company believes these conditions have resulted from the inherent risks
associated with the small startup technology-oriented companies. Such risks
include, but are not limited to, the ability to (i) generate membership revenues
and sales of its products and services at levels sufficient to cover its costs
and provide a return for investors, (ii) attract additional capital in order to
finance growth, (iii) further develop and successfully market commercial
products and services, and (iv) successfully compete with other comparable
companies having financial, production and marketing resources significantly
greater than those of the Company.
The Company is attempting to improve these conditions by way of financial
assistance through issuances of additional equity and through membership
revenues and sales of products and services. Management is confident that
appropriate funding will be generated and future product
<PAGE> 9
SPORTSNUTS.COM INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
JUNE 30, 1999
(UNAUDITED)
sales will result from these opportunities and that the Company will continue
operations over the next fiscal year.
3. ACQUISITION
On April 6, 1999, the Company acquired (the "Acquisition") from accredited
investors (the "Participating Shareholders") approximately eighty-one percent
(81%) of the outstanding capital stock of SportsNuts.com, Inc., a private
company. In conjunction with the Acquisition, the Company changed its name from
Durwood, Inc. to SportsNuts.com International, Inc. Prior to the Acquisition,
the Company conducted no active business. SportsNuts is an internet based, "on
line" sports club and retail distributor of sports, outdoor, and fitness related
products, services, and information.
In connection with the Acquisition, the Company effected a 2.213 for 1 forward
stock split (the "Forward Split") of all then currently outstanding shares of
its common stock, $0.0001 par value (the "Common Stock"). The Forward Split
resulted in an increase in the outstanding shares of the Company's Common Stock
from 1,103,500 to 2,441,713 shares. Immediately prior to the Acquisition, the
Company sold to accredited investors 1,000,000 post Forward Split shares of
Common Stock at $1.00 per share to raise gross proceeds of $1,000,000 (the
"Private Offering"). As part of the Acquisition, the Company issued 7,651,252
shares of Common Stock to the Participating Shareholders of SportsNuts in
exchange for their collective 11,683,000 shares of SportsNuts common stock. Each
Participating Shareholder of SportsNuts received 0.654904748 shares of the
Company's Common Stock in exchange for each share of common stock of SportsNuts.
Additionally, the Company issued to holders of warrants in SportsNuts who were
also accredited investors (each a "Participating Warrant Holder") warrants for
the purchase of 3,353,113 shares of the Company's Common Stock. Each
Participating Warrant Holder received the right to purchase 0.654904748 shares
of the Company's Common Stock in exchange for each share of SportsNuts common
stock it was entitled to purchase pursuant to its SportsNuts warrants. In the
future, the Company may issue up to an additional 2,678,993 shares of Common
Stock to acquire the remaining 4,090,660 shares of Common Stock of SportsNuts
that are currently held by the remaining shareholders (other than the Company).
The unaudited pro forma results of operations assuming consummation of this
acquisition for the six month periods ending June 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues $ 463,441 $ 304,383
Net loss (1,783,796) (1,068,837)
Diluted net loss per common share $ (0.22) $ (0.25)
</TABLE>
<PAGE> 10
SPORTSNUTS.COM INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
JUNE 30, 1999
(UNAUDITED)
4. STOCKHOLDERS EQUITY
ISSUANCE OF COMMON STOCK
Effective May 8, 1999, the Company issued 2,870,000 shares and reserved for
issuance 25,000 shares of common stock at a price of $1.00 per share, net of
issuance costs of $271,350. Additionally, in connection with the receipt of
funds pursuant to the issuance of such shares and as compensation for the same,
the Company issued or is obligated to issue (i) an aggregate of 443,500 shares
of Common Stock to certain individuals, and (ii) warrants to certain individuals
to acquire an aggregate of 298,776 shares of Common Stock at an exercise price
of $1.00 per share. The warrants expire two years from the date of grant.
Effective June 15, 1999, the Company accepted subscriptions from certain
investors to purchase 750,000 shares of Common Stock at an exercise price of
$1.95 per share, net of issuance costs of $131,625. In connection with the
receipt of such funds, the Company intends to issue warrants to certain
individuals to acquire an aggregate of 67,500 shares at an exercise price of
$1.95 per share. Such warrants will expire two years from the date of grant.
ISSUANCE OF WARRANTS AND OPTIONS
During the three-month period ended June 30, 1999, the Company issued warrants
to acquire 346,651 shares of Common Stock at a weighted-average exercise price
of $1.00 per share. The warrants were issued primarily in connection with
capital raising efforts undertaken on behalf of the Company by certain
individuals as discussed above. The warrants expire two years from the date of
grant (see "Issuance of Common Stock"). Also during the three-month period ended
June 30, 1999, the Company issued to various employees and service providers
options to purchase 363,098 shares of Common Stock at a weighted-average
exercise price of $4.38 per share. Such options were issued pursuant to the
Company's 1999 Stock Option Plan and expire five years from the date of grant.
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of SportsNuts.com International, Inc. (hereafter, "SportsNuts.com" or
the "Company") should be read in conjunction with the Unaudited Financial
Statements and related Notes thereto included herein. This discussion may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act of 1934, including,
without limitation, statements regarding the Company's expectations, beliefs,
intentions, or future strategies that are signified by the words "expects,"
"anticipates," "intends," "believes," or similar language. Actual results could
differ materially from those projected in the forward looking statements.
Prospective investors should carefully consider the information set forth below
under the caption "Risk Factors" in addition to the other information set forth
herein. The Company cautions investors that its business and financial
performance is subject to substantial risks and uncertainties.
OVERVIEW
SportsNuts.com is an online, personalized sports community offering a
comprehensive bundle of sports, outdoors, and fitness-related products,
services, and information in a club environment. The Company has combined the
three powerful forces of sports, the Internet, and network marketing in an
effort to build the largest, targeted online customer base of global sports
enthusiasts. To date, the Company has derived revenues principally from four
sources: (i) proceeds from enrollments of club members, (ii) recurring monthly
purchases of promotional products offered by the Company, (iii) purchases of
sales aids by independent distributors, and (iv) purchases of sports, outdoors,
and fitness-related products and services. The Company's strategy is to build
and test its business model on a localized scale, and thereafter deploy the
model across the United States and international markets.
INTERNET REVENUE MODEL
Electronic Commerce. The e-commerce revenue model is generally
characterized by four types of Internet retailers: (i) traditional retailers
which possess existing internal fulfillment and customer service capabilities
and have developed their own web site and reporting systems as an additional
venue to market their products and services, (ii) traditional retailers which
possess internal fulfillment and customer service capabilities but have formed
partnerships with Internet-based companies to outsource the Web promotion of
their products and services, (iii) retailers which market their products and
services exclusively through the Internet and have developed internal
fulfillment and customer service capabilities, and (iv) retailers which market
their products and services exclusively through the Internet and have outsourced
fulfillment and customer service obligations to third parties. These four models
suggest that strategic alliances are likely to be formed between retailers
possessing fulfillment and customer service capability without an e-commerce
presence and Internet-based retailers, such as SportsNuts.com, desiring to focus
on site promotion and implementation of systems but outsourcing fulfillment and
customer service obligations. In any event, the complete e-commerce business
model is similar to a traditional retailer inasmuch as Internet retailers
generate a gross profit margin and have incidental expenses related to the
electronic transaction.
<PAGE> 12
Advertising. Although continuously evolving, the advertising model for
Internet-based companies relies heavily upon user demographics being captured to
provide advertisers return-on-investment feedback. Most Internet-based
advertising comes in the form of banner ads or identifying icons. Banner ads are
usually sold in blocks of 1,000 impressions (referred to as CPMs or "cost per
1,000 impressions"), averaging $30.00 per CPM. Targeted advertising (page
specific or user specific) can typically generate $60.00 per CPM. Advertisers
generally reward originating sites for "click throughs" (users following an
electronic link or pursuing an activity via their Web browser in order to
receive a prescribed economic benefit). Advertisers are constantly developing
new rate determinative criteria that allows advertisers to more precisely gauge
the level of exposure for their ads, including advertisements which appear
immediately while a new page is being loaded in the background of the Web
browser. Of available advertising space, most Internet sites sell less than 20%.
The Company anticipates that its emphasis on Web site development, together with
the increase in membership (in terms of sports enthusiasts and participants in
its network marketing operations) will likely generate advertising revenues
within the next six months.
NETWORK MARKETING REVENUE MODEL
Distributor and Customer Enrollments. Companies which use network
marketing successfully are typically characterized by a sharp increase in
distributor enrollment once these companies achieve a critical mass of active
distributors within a geographic area. The Company's use of an aggressive media
promotion campaign is intended to accelerate the enrollment of distributors and
customers to achieve critical mass at an earlier stage.
Product Sales. Product sales in companies involved in network
marketing are primarily a function of the number of distributors and customers
affiliated with the company. Because a certain level of product sales are
generally required for distributors to receive commissions, revenue projections
can be fairly predictable once an activity rate among all distributors is known.
Sales Aids. Most companies involved in network marketing view
distributor sales aids as a significant profit center. Similar to product sales,
revenue from sales aids is primarily a function of the number of active
distributors affiliated with the company.
RESULTS OF OPERATIONS
Because the Company had no significant operating history prior to
April 6, 1999, the following discussion of results of operations does not
contain a comparative analysis of quarterly results for the periods ended June
30, 1999 and 1998. In the alternative, the following is management's discussion
of the relevant items affecting results of operations during the quarter ended
June 30, 1999, and preceding the filing of this report on Form 10-QSB.
REVENUES. The Company incurred net revenues of $322,137 during the
three month period ended June 30, 1999. This amount was primarily due to
increased spending by the Company in marketing and sales. Using sports radio
programs as a venue to reach prospective members, in April, 1999, the Company
began airing thirty-second radio advertisements in the Phoenix, Arizona
metropolitan area, using a well-known sports personality as a sponsor. The
Company has also begun airing additional advertisements on sports radio stations
in Orange County, California and Salt Lake City, Utah. Approximately $286,322,
or 89% of revenues for the
<PAGE> 13
second quarter were attributable to membership sales from new distributors and
customers. The Company anticipates that membership sales as a percentage of
overall revenues will decline slightly over time as the Company launches its
brokered Internet service and continues to develop its Web site. With respect to
the Web site, over the next six months, the Company expects to begin receiving
sufficient site traffic to generate (i) advertising revenues, (ii) electronic
commerce sales, and (iii) revenues from other paid electronic services.
SELLING AND MARKETING EXPENSES. Selling expenses for the three-month
period ended June 30, 1999 were $313,353. This amount was primarily attributable
to (i) the Company's advertising campaign and (ii) promotional efforts with
respect to the Company's direct sales force in an attempt to increase branding
awareness and promote involvement in the network marketing operations of the
Company. During the second quarter, the Company initiated a system-wide increase
in sales bonuses available to distributors. The sales bonus increases were
intended to create incentives for distributors to enroll additional customers
with the Company in the short-term. Over the long term, the Company anticipates
that costs associated with the promotion and development of its independent
sales force will increase commensurate with the number of distributors enrolled
with the Company. In addition, over the long term, the Company expects that
expenses incurred in connection with its distribution force will constitute a
majority of the Company's selling expenses.
PRODUCT DEVELOPMENT. Product research and development expenditures
were $28,945 during the quarter ended June 30, 1999. Product development
expenses related to the Company's Web site consist primarily of payroll,
software and systems, and related costs for programmers and software developers.
The Company believes that significant investments in product development are
required to remain competitive. Accordingly, the Company expects to incur
increased expenditures with respect to product development in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the three-months ended June 30, 1999 was $632,632. This amount was
principally due to personnel salaries and benefits, professional fees, contract
labor, and rent and occupancy-related expense. Payroll expense and professional
fees accounted for approximately $370,920 and $49,556, respectively, of this
amount during the second quarter. The Company anticipates incurring
approximately $50,000 in general and administrative expenses in the third
quarter of 1999 related to its acquisition of Sportzz.com, Inc. (see "Summary of
Recent Acquisition").
EXPENSES RELATING TO PRIVATE OFFERINGS. During the second quarter,
1999, the Company conducted three separate private offerings of its Common Stock
solely to accredited investors, receiving commitments for approximately $5.3
million in gross proceeds (the "Offerings") which consisted of $1 million
initial capitalization as of April 6, 1999, $2.8 million in proceeds as of May
8, 1999, and a commitment for $1.5 million which has been reflected in the
Company's Balance Sheet as a subscription receivable. The Company has paid or is
obligated to pay out approximately $402,975 in cash commissions with respect to
the Offerings.
SUMMARY OF RECENT REORGANIZATION
On April 6, 1999, Durwood, Inc., a Delaware corporation approved for
listing on the NASD Electronic Bulletin Board, acquired approximately 81% of the
issued and outstanding shares of SportsNuts.com, Inc., a Delaware corporation
("SNC"). The above-described transaction was the first step in a two-stage
transaction involving the acquisition of all of the
<PAGE> 14
shares of SNC by Durwood, Inc. on the basis of .654904748 shares of Durwood,
Inc. for each share of SNC (hereafter, the "Reorganization"). After the
consummation of the first step of the Reorganization, Durwood, Inc. held
11,683,000 shares of SNC common stock in exchange for 7,651,252 shares of
Durwood, Inc. common stock. In addition, certain warrant holders of SNC also
exchanged their SNC warrants for warrants issued by Durwood, Inc. on the same
conversion basis as the SNC common stock. Also following the first phase of the
Reorganization, Durwood, Inc. changed its name to SportsNuts.com International,
Inc.
Pursuant to the Agreement and Plan of Reorganization entered into by
SNC and the Company, the remaining shares of SNC are anticipated to be acquired
by the Company, together with an exchange of all options and warrants of SNC,
sometime within the twelve-month period following the consummation of the first
step of the Reorganization. As part of the second step of the Reorganization,
the Company intends to issue shares of its Common Stock, options, and warrants
equal to 2,678,993, 9,018,916, and 635,258 shares, respectively. On April 20,
1999, the Company filed with the Securities and Exchange Commission a report on
Form 8-K summarizing the Reorganization, which report was supplemented with the
filing of a Form 8-K/A on June 18, 1999.
SUMMARY OF RECENT ACQUISITION
On July 28, 1999, the Company concluded an Agreement and Plan of
Merger (the "Acquisition Agreement") with Sportzz.com, Inc., a Utah corporation
("Sportzz"), and with a wholly-owned subsidiary of the Registrant, SportsNuts
Merger Sub., Inc., a Utah corporation ("Merger Sub"), ObjectSelect, L.C., a Utah
limited liability company, being the sole shareholder of Sportzz (the
"Shareholder"), and the members thereof, providing for a reverse triangular
merger of Merger Sub into Sportzz (collectively, the "Acquisition"), with the
result that Sportzz became a wholly-owned subsidiary of the Company. Immediately
prior to the Acquisition, Sportzz was engaged in the development of internet
based database management and application development software, and it
maintained an internet web site employing its products for purposes of
inputting, searching, and retrieving local sports information including from
leagues, schools, teams, and their player rosters, game schedules, game results,
photographs, articles, and statistics.
As part of the Acquisition, the Company issued 944,882 shares of its
Common Stock to the Shareholder of Sportzz, in consideration for the 100,000
shares of the issued and outstanding Sportzz common stock. In addition, cash
consideration of $100,000 was paid to the Shareholder. Of this consideration
$10,000 of the cash, and one half of the shares of Common Stock were placed in
escrow pending completion of certain post closing covenants described in the
Acquisition Agreement. The Acquisition is more particularly described in the
Company's Form 8-K filing made with the Commission on August 12, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999. The Company's primary source of liquidity
consisted of $2,381,771 in cash and cash equivalents. The Company holds most of
its cash reserves in commercial sweep accounts with various local financial
institutions. Since inception, SportsNuts.com has financed its operations
through a combination of short and long-term loans, and through the private
placement of its Common Stock. All of SportsNuts.com's loans outstanding have
since been converted to Common Stock as of June 30, 1999.
<PAGE> 15
The Company has sustained significant net losses which have resulted
in an accumulated deficit at June 30, 1999 of approximately $4,209,452 and has
experienced periodic cash flow difficulties, all of which raise substantial
doubt regarding the Company's ability to continue as a going concern. The net
loss for the year ended December 31, 1998 and the six months ended June 30, 1999
was $23,534 and $891,234, respectively. To date the Company has funded its
operations through the issuances of common stock. The Company anticipates a net
loss for the year ended December 31, 1999 and with the expected cash
requirements for the coming year, without additional cash inflows from
investors, there is substantial doubt as to the Company's ability to continue
operations.
The Company believes these conditions have resulted from the inherent
risks associated with the small startup technology-oriented companies. Such
risks include, but are not limited to, the ability to (i) generate membership
revenues and sales of its products and services at levels sufficient to cover
its costs and provide a return for investors, (ii) attract additional capital in
order to finance growth, (iii) further develop and successfully market
commercial products and services, and (iv) successfully compete with other
comparable companies having financial, production and marketing resources
significantly greater than those of the Company.
The Company believes that its capital resources are sufficient to meet
its working capital needs for the next three months. Accordingly, the Company
intends to raise additional funds through a private offering of its common stock
in an amount sufficient to maintain operations until such time as the Company
can sustain operations internally from its revenues. Notwithstanding the
foregoing, the Company's capital needs will depend upon many factors in the
execution of the Company's future strategy, including the Company's future
growth rate, capital equipment needs, the number of distributors and customers
who enroll with the Company, the success of the Company's external marketing
effort, the number of visits (in terms of page views, unique visitors, and
"sticky" time) on its web site, and various other factors.
YEAR 2000 COMPLIANCE
The Company has assessed and will continue to assess the impact of the
Year 2000 on its information technology ("IT") and non-IT systems. The Company
believes it has allocated sufficient resources from its operating capital to
upgrade and test existing systems so that they are Year 2000 compatible. The
Company does not anticipate significant further expenditures in connection with
Year 2000 compliance efforts.
The Company's three servers have all been tested for Year 2000
compliance and each has been found to meet the National Software Testing
Laboratories Standard. Each of the Company's two operating systems has also been
updated for Year 2000 compliance. With respect to the Company's hubs, switches,
and PIX Firewall, each have been found to meet the Information Technology
Association of America standards for Year 2000 compliance. Management believes
that its IT systems are Year 2000 compliant, and intends to work with its
Internet retail affiliates over the coming year in their efforts to become Year
2000 compliant. The Company also intends to continue to test and upgrade its IT
systems throughout the remainder of the year. Nevertheless, significant
uncertainty exists concerning the potential impact of the Year 2000 on computer
systems generally. Any year 2000 compliance problems of the Company or any of
its customers or such affiliates could have a material adverse effect upon the
Company's business, results of operations, or financial condition. (See "Risk
Factors - Year 2000 Compliance").
<PAGE> 16
FORWARD LOOKING STATEMENTS AND RISK FACTORS
FORWARD LOOKING STATEMENTS
To the extent any statement presented herein deals with information
that is not historical, such statement is necessarily forward looking. As such,
it is subject to the occurrence of many events outside of the Company's control
that could cause the Company's results to differ materially from predicted
results. Some of the risks are set forth below.
RISK FACTORS
The risk factors described below are based on the Company following
the Acquisition of SportsNuts.com, with the Company pursuing the business
conducted by SportsNuts.com and so the risk factors should be read in that
light.
LACK OF EXTENSIVE OPERATING HISTORY. The SportsNuts.com business was
formed in 1996 and is subject to all risks inherent in the creation of a new
business and the development of new products and services, including the absence
of a history of significant operations and of proven products and services which
have been produced and sold over a significant period of time. SportsNuts.com is
continuing to establish many functions which are necessary to conduct business,
including without limitation, managerial and administrative structure, marketing
activities, financial systems and personnel recruitment. SportsNuts.com has a
limited operating history and limited sales revenues.
DEVELOPMENT STAGE COMPANY. Since the date of its inception, the
Company has operated on a small scale and has not yet generated a profit. To
achieve any significant measure of profitability, the Company must create
substantial activity through its Web Site to generate advertising revenues,
product sales, and the enrollment of distributors, with each such distributor
attracting additional customers to participate in the SportsNuts.com club or
otherwise purchase products and services from the Company. Although the Company
has generated increased activity on its Web Site and has increased the number of
distributors and customers on a monthly basis over the course of 1999, there can
be no assurance that the Company will continue to do so in the future or that
such increases will ultimately lead to the Company becoming profitable.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends, in large
part, upon the talents and skills of its management and, in particular, Kenneth
Forrest, the founder of the Company and the President and Chief Executive
Officer of SportsNuts.com Network, Inc. the network marketing subsidiary of the
Company. To the extent that any of its key personnel are unable or refuse to
continue their association with the Company, a suitable replacement would have
to be found. In addition, the competition for qualified personnel in the
computer software and Internet markets is intense, and there are limited numbers
of such qualified personnel in the metropolitan Salt Lake City area. There is no
assurance that the Company would be able to find suitable replacements for its
existing management personnel or technical personnel or that such replacements
could be obtained for an amount affordable to the Company.
DEPENDENCE ON MARKET AWARENESS OF BRAND. If the Company fails to
successfully promote its brand name or if the Company incurs significant
expenses promoting and maintaining its brand name, there could be a material
adverse effect on the Company's business, results of operations, and financial
condition. Due in part to the emerging nature of the market for Internet
<PAGE> 17
management solutions and the substantial resources available to many of the
Company's competitors, there may be a time-limited opportunity to achieve and
maintain a significant market share. Developing and maintaining awareness of the
"SportsNuts" brand name is critical to achieving widespread acceptance of the
Company's management and reporting systems. Furthermore, the importance of brand
recognition will increase as competition in the market for the Company's
products increases. Successfully promoting and positioning the SportsNuts brand
will depend largely on the effectiveness of the Company's marketing efforts and
ability to promote a sufficient variety and high quality of useful Products at
competitive prices. Consequently, the Company may need to increase its financial
commitment to creating and maintaining brand awareness among potential
customers.
ADDITIONAL FINANCING REQUIREMENTS. The Company may require additional
capital in the future for expansion, additional marketing, computer software and
systems, overhead, administrative, and other expenses. There is no assurance
that the Company will be able to raise additional funds or that financing will
be available on acceptable terms. Lack of additional funds could significantly
affect the Company and its business. Further, funds raised through future equity
financing could be dilutive to holders of the Shares.
RELIANCE UPON INDEPENDENT DISTRIBUTORS. The Company's principal sales
force consists of independent distributors ("Distributors") who are not
employees of the Company. Relationships with Distributors are voluntarily
terminable by the Distributors, or the Company at any time. The Company's
revenue is substantially dependent upon the efforts of the Distributors, and any
growth in future sales volume will require an increase in the productivity of
existing Distributors and/or growth in the total number of Distributors. As is
typical in the direct selling industry, there is turnover in distributors from
year to year, which requires the sponsoring and training of new distributors by
existing distributors to maintain or increase the overall distributor force and
motivate new and existing distributors. With respect to the Company, the size of
the distribution force can also be particularly impacted by general economic and
business conditions and a number of intangible factors such as adverse publicity
regarding the Company, or the public's perception of products and services sold
through the Company or its Web Site, the content of the material and the overall
theme of the Web Site, product ingredients or components, the Distributors
themselves, the Internet or Internet-based companies in general, or network
marketing. Because of the number of factors that impact the sponsoring of new
Distributors, and the fact that the Company has little or no control over the
level of sponsorship of new Distributors, the Company cannot predict the timing
or degree of those fluctuations. There can be no assurance that the number or
productivity of the distributors will be sustained at current levels or
increased in the future. In addition, the number of Distributors as a percent of
the population in a given market could theoretically reach levels that become
difficult to exceed due to the finite number of persons inclined to pursue a
network marketing business opportunity. Since Distributors are independent
contractors, the Company is not in a position to provide the same level of
direction, motivation and oversight as it would with respect to its own
employees.
SEASONALITY. While neither seasonal nor cyclical variations have
materially affected the Company's results of operations in the past, the
Company's short operating history may have suppressed these factors. For
example, with respect to product sales, the use of sports, outdoor, and fitness
equipment and apparel is generally seasonal and therefore demand for these items
can fluctuate greatly depending upon the time of year. There can be no assurance
that seasonal or cyclical variations will not materially adversely affect the
Company's results of operations in the future.
<PAGE> 18
RELIANCE UPON MANUFACTURER-SUPPLIERS. The Company produces only a
small number of products sold from its Internet Web Site, and therefore relies
upon its electronic commerce retail vendors ("Affiliates") which sell products
and services through the Web Site to manufacture and/or supply all of the
products and services to SportsNuts.com customers. These Affiliates are
primarily manufacturer's representatives. The Company's profit margins and the
ability for consumers to receive existing Products on a timely basis are
substantially dependent upon these Affiliates. The development of additional new
Products in the future will likewise be dependent in part on the services of
suitable Affiliates. The failure of any one of the Company's Affiliates to
produce and deliver quality products and services in a timely manner on a
consistent basis could negatively affect the sale of Products from the Company's
Web Site and could have a material adverse affect on the Company's financial
condition and results of operations.
POTENTIAL EFFECTS OF ADVERSE PUBLICITY. The size of the distribution
force and the results of the Company's operations can be particularly impacted
by adverse publicity regarding the Company, including publicity regarding the
content of material displayed on the Web Site, activities and events sponsored
by the Company, the legality of the Company's distribution system, the quality
of the products distributed through the Company's Web Site, regulatory
investigations of the Company and the products distributed by Affiliates who
sell such Products through the Web Site, actions by certain Distributors, and
the public's perception of the Distributors as representatives of the Company
and of direct selling and network marketing-based businesses generally.
POTENTIAL NEGATIVE IMPACT OF DISTRIBUTOR ACTIONS. Actions by certain
Distributors can negatively impact the Company and its Products. The publicity
resulting from Distributor activities such as inappropriate earnings claims and
Product representations by Distributors can make the sponsoring and retaining of
Distributors more difficult, thereby negatively impacting sales. There can be no
assurance that these or actions of other Distributors will not have a material
adverse effect on the Company's business or results of operations.
MANAGEMENT OF GROWTH. The Company anticipates that it will experience
rapid growth in the next few years of operations. The management challenges
imposed by this growth include entry into new markets, growth in the number of
persons accessing the Web Site, Affiliates, employees, Distributors, and
customers, expansion of facilities and computer systems necessary to accommodate
such growth, and additions and modifications to the Product lines offered
through the Company's Web Site. To manage these changes effectively, the Company
may be required to hire additional management and operations personnel and to
improve its operational, financial, computer, and management systems. If the
Company is unable to manage growth effectively or hire or retain qualified
personnel, the Company's business and results of operations could be materially
adversely affected.
GOVERNMENT REGULATION OF DIRECT SELLING ACTIVITIES. Direct selling
activities are regulated by various governmental agencies. These laws and
regulations are generally intended to prevent fraudulent or deceptive schemes,
often referred to as "pyramid" or "chain sales" schemes, that promise quick
rewards for little or no effort, require high entry costs, use high pressure
recruiting methods and/or do not involve legitimate products. As is the case
with most companies which are involved in network marketing, the Company may
receive inquiries from various government regulatory authorities regarding the
nature of its business and other issues such as compliance with local business
opportunity and securities laws. Although the Company has not received any such
inquiry to date, there can be no assurance that the Company will not face such
<PAGE> 19
inquiries in the future which, either as a result of findings adverse to the
Company or as a result of adverse publicity resulting from the instigation of
such inquiries, could have a material adverse effect on the Company's business
and results of operations. While the regulations governing network marketing are
complex and vary from state to state, based on research conducted to date, the
Company believes that its method of distribution is in compliance in all
material respects with the laws and regulations relating to direct selling
activities of the states in which the Company currently operates, and intends to
modify its network marketing system to comply with various regulatory
authorities. The failure to comply in any one state could cause the Company to
pay fines as well as cease operations in that state, which in turn could
influence the decisions of regulatory authorities in other states and could have
a material adverse effect upon the Company's financial condition and results of
operations.
GOVERNMENTAL REGULATION OF NETWORK MARKETING IN GENERAL. The Company's
network marketing system is or may be subject to or affected by extensive
government regulation of marketing practices and federal and state regulation of
the offer and sale of business franchises, business opportunities, and
securities. In addition, the Internal Revenue Service and state taxing
authorities in any of the states or U.S. territories where the Company has
distributors could classify the distributors as employees of the Company (as
opposed to independent contractors). Any assertion of determination that the
Company's business is not in compliance with government requirements could have
a material adverse effect upon the Company's financial condition and results of
operations.
GOVERNMENT REGULATION OF PRODUCTS AND MARKETING. The Company is
subject to or affected by extensive governmental regulations not specifically
addressed to network marketing. Such regulations govern, among other things, (i)
content of material displayed on the Internet, (ii) product formulation,
labeling, packaging and importation, (iii) product claims and advertising,
whether made by the Company, the Company's Affiliates or Distributors of the
Company, (iv) fair trade and Distributor practices, and (v) taxes. Based on the
Company's experience and research (including assistance from legal counsel), the
Company believes that it is in material compliance with all regulations
applicable to the Company. Despite this belief, the Company could be found not
to be in material compliance with existing regulations as a result of, among
other things, the considerable interpretative and enforcement discretion given
to regulators or misconduct by its Distributors. Any assertion or determination
that the Company or any of its Distributors are not in compliance with existing
laws or regulations could potentially have a material adverse effect on the
Company's business and results of operations. In addition, in any jurisdiction,
the adoption of new laws or regulations or changes in the interpretation of
existing laws or regulations could generate negative publicity and/or have a
material adverse effect on the Company's business and results of operations. The
Company cannot determine the effect, if any, that future governmental
regulations or administrative orders may have on the Company's business and
results of operations. Regulatory action, whether or not it results in a final
determination adverse to the Company, has the potential to create negative
publicity, with detrimental effects on the retention, motivation, and
recruitment of distributors and, consequently, on the Company's sales and
earnings.
GOVERNMENT REGULATION OF THE INTERNET. There are currently few laws or
regulations directly applicable to electronic commerce. Due to the increasing
popularity and use of the Internet, it is possible that a number of laws and
regulations may be adopted with respect to the Internet which could materially
increase the cost of transacting business on the World Wide Web. Although
transmissions from the Company's Web Site will originate from the States of
<PAGE> 20
Utah and California, the government of the United States and the governments of
other states and foreign countries might attempt to regulate such transmissions
or assess taxes, fees, tariffs, duties, or other payments against the Company,
the Company's Affiliates, or customers purchasing Products through the Web Site.
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET. The Company's
future success is substantially dependent upon continued growth in the use of
the Internet and the World Wide Web in order to support the volume of activity
necessary to generate advertising revenue and the sale of the Products. Rapid
growth in the use of the Internet is a recent phenomenon, and the Company relies
on consumers who have historically used traditional means of media and commerce
for entertainment and the purchase of goods and services. For the Company to be
successful, these consumers must accept and utilize novel ways of conducting
business and exchanging information. There can be no assurance that
communication or commerce over the Internet will become more widespread or that
the Internet will otherwise become a viable commercial marketplace. Moreover, to
the extent that the Internet continues to experience significant growth in the
number of users and frequency of use, there can be no assurance that the
Internet infrastructure will continue to be able to support the demands placed
upon it by such growth, or that the performance or reliability of the World Wide
Web will not be adversely affected thereby. In addition, certain factors such as
Internet commerce security and the speed of Internet transmissions may deter
existing as well as potential SportsNuts.com customers from engaging in
transactions on the Internet. The occurrence of any of these risks could
adversely affect the Company's business, operating results, and financial
condition.
RISK OF COMPUTER SYSTEM FAILURE. The success of the Company is
substantially dependent upon its ability to deliver high quality, uninterrupted
access to its Web site, which requires that the Company protect its computer
hardware and software systems and the data and information stored in connection
therewith. The Company's systems are vulnerable to damage by fire, natural
disaster, power loss, telecommunications failures, unauthorized intrusion, and
other catastrophic events. Any substantial interruption in the Company's systems
would have a material adverse effect on the Company's business, operating
results, and financial condition. Although the Company carries general
commercial insurance coverage, such coverage may not be adequate to compensate
for the losses that may occur. In addition, the Company's systems may be
vulnerable to computer viruses, physical or electronic break-ins, sabotage, or
other problems caused by third parties which could lead to interruptions,
delays, loss of data, or cessation in service to persons desiring to access the
Company's Web site. The occurrence of any of these risks could have a material
adverse effect upon the Company's business, results of operations, and financial
condition.
ELECTRONIC COMMERCE SECURITY RISKS. A significant barrier to
electronic commerce is the secure transmission of confidential information over
the Internet. The Company relies upon encryption and authentication technology
to provide the security necessary to effect secure transmissions of confidential
information. There can be no assurance that advances in decryption technology,
computer espionage, and other developments will not result in a breach or
compromise of the algorithms used by the Company to protect transaction data of
persons accessing the Web Site, and therefore lead to the misappropriation of
such data by third parties. Any such breach, compromise, or misappropriation
could damage the Company's reputation and expose the Company to a risk of loss
or litigation and possible liability, and could have a material adverse effect
upon the Company's business, results of operations, or financial condition.
<PAGE> 21
RAPID TECHNOLOGICAL CHANGE. The Internet and on-line commerce
industries are characterized by rapid technological change, changing market
conditions and customer demands, and the emergence of new industry standards and
practices that could render the Company's existing Web site and the services
provided pursuant thereto obsolete. The Company's future success will
substantially depend on its ability to enhance its existing services, develop
new services, and otherwise respond to technological advances in a timely and
cost-effective manner. If the Company is unable, for technical, legal,
financial, or other reasons, to adapt in a timely manner in response to changing
market conditions or customer requirements, or if the Company's Web site does
not achieve market acceptance, the Company's business, operating results, and
financial condition would be adversely affected.
RELIANCE ON CERTAIN DISTRIBUTORS. The Company's compensation plan
allows existing Distributors to sponsor new Distributors. The sponsoring of new
Distributors creates multiple Distributor levels in the network marketing
structure. Sponsored Distributors are referred to as "downline" Distributors
within the sponsoring Distributor's "downline network." If downline Distributors
also sponsor new Distributors, additional levels of downline Distributors are
created, with the new downline Distributors also becoming part of the original
sponsor's "downline network." As a result of this network marketing distribution
system, Distributors develop relationships with other Distributors. A few key
Distributorships comprise the Company's highest Distributor levels. These
Distributorships have developed extensive downline networks which consist of
many sub-networks. Together with such networks, these distributorships account
for substantially all of the Company's revenue attributable to direct sales.
Consequently, the loss of such a key Distributor together with a group of
leading Distributors in such Distributor's downline network, or the loss of a
significant number of distributors for any reason, could adversely affect sales
of Products, impair the Company's ability to attract new Distributors and
adversely impact earnings and the business, and financial condition of the
Company.
NO PROPRIETARY PRODUCTS/NON-EXCLUSIVE LICENSE FOR PRODUCT SALES. The
Company does not offer products or services through its Web Site that enjoy any
significant proprietary protection for the benefit of the Company. Moreover,
because written distribution agreements are not common for firms which sell
sporting goods, apparel, and outdoor products, many of the Company's Affiliates
distribute most of the Products without licenses from the manufacturer. The lack
of proprietary protection and exclusive licenses substantially diminishes the
barriers to entry for potential competitors of the Company, and could adversely
affect the Company's future prospects for growth and profitability.
FAILURE TO EXPAND SALES OPERATIONS AND CHANNELS OF DISTRIBUTION WOULD
LIMIT COMPANY GROWTH. In order to maintain and increase the Company's current
and future market share and revenue, it will need to expand its direct and
indirect sales operations and channels of distribution. Failure to do so could
have a material adverse effect on the Company's business, results of operations,
and financial condition. The Company needs to expand its relationships with
domestic and international channel partners, Product and service distribution
partners, value-added resellers, systems integrators, on-line and other
resellers, Internet service providers, and maintain strategic relationships with
key hardware and software vendors, its Distributors, and its customers..
NO TRADEMARK REGISTRATION. Although the Company has submitted
applications for trademark protection for the name "SportsNuts.com" name and
related slogans, the U.S. Patent
<PAGE> 22
and Trademark Office ("USPTO") has not approved the Company's applications for
use of the name "SportsNuts.com," the Company's logo, and such other related
terms and slogans. If the Company is unsuccessful in obtaining the right of full
usage of its name from the USPTO, other companies with names, marks, or slogans
similar to those of SportsNuts.com could seek to require that the Company obtain
a license from them or require the Company to change its name, either of which
could entail substantial costs. Additionally, if the Company were required to
change its name, it could lose all goodwill associated with the "SportsNuts.com"
mark. In addition, future products and services offered by the Company may need
to be marketed under different names if the mark "SportsNuts.com" or similar
name is likely to cause confusion with another trade name being used by another
company. The Company could also incur substantial costs to defend any legal
action taken against the Company pursuant to a trademark or service mark
dispute. If, in any legal action against the Company, its asserted trademarks,
or service marks should be found to infringe upon intellectual property rights
of a third party, the Company could be enjoined from further infringement and
could be required to pay damages. In the event a third party were to sustain a
valid claim against the Company, and in the event any required license were not
available on commercially reasonable terms, the Company's financial operations
and results of operations could be materially adversely affected. Litigation,
which could result in substantial cost to and diversion of resources of the
Company, may also be necessary to enforce intellectual property rights of the
Company or to defend the Company against claimed infringement of the rights of
others.
COMPETITION. The Company competes with other sports-themed Internet
sites, sports clubs, and direct selling and electronic commerce-based
organizations, many of which have longer operating histories and higher
visibility, name recognition, and financial resources. Management envisions the
entry of many more direct selling organizations into the marketplace as this
channel of distribution expands over the next several years. Moreover, as use of
the Internet grows, Management also anticipates a rapid increase in the number
of firms selling goods and services over the Internet. There can be no assurance
that the Company will be able to successfully meet the challenges posed by this
increased competition. The Company's Affiliates compete in the intensely
competitive market for sports, outdoor, and fitness goods and apparel and
compete directly with companies that manufacture and market these goods and
services. Many competitors of the Company's Affiliates have much greater name
recognition and financial resources than the Company's Affiliates. While the
Company believes that consumers appreciate the convenience of ordering products
from home through a sales person, through a catalog, or on the Internet, the
buying habits of many consumers accustomed to purchasing products through
traditional retail channels are difficult to change. The Company's offerings on
its Web Site in each Product category are also relatively small compared to the
wide variety of products and services offered by other electronic commerce
companies. There can be no assurance that the Company's business and results of
operations will not be affected materially by market conditions and competition
in the future.
PRODUCT LIABILITY. Although the Company does not manufacture any of
the Products purchased or sold through its Web Site, it may be subject to
liability for losses caused by such Products. While the Company maintains a
general commercial liability insurance policy, there is no guarantee that this
policy will provide coverage for or that any such coverage will be sufficient to
satisfy the claims of a successful product liability claim. Accordingly, a
successful products liability claim against the Company could have a material
adverse effect on the Company's business, results of operations, and financial
condition.
<PAGE> 23
SECURITIES CLASS ACTION CLAIMS BASED UPON PRICE FLUCTUATION.
Securities class action claims have been brought against issuing companies in
the past after volatility in the market price of a company's securities. Such
litigation could be very costly and divert the Company's management's attention
and resources, and any adverse determination in such litigation could also
subject the Company to significant liabilities, any or all of which could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
NO DIVIDENDS. To date, the Company has not paid a dividend on its
Common Stock. The Company does not anticipate paying dividends on its Common
Stock in the foreseeable future, and may be restricted from paying dividends in
the future pursuant to future financing arrangements.
CONCENTRATION OF VOTING POWER. Kenneth Forrest, the founder of the
Company, and certain other shareholders of the Company, may be able to control
the election of the Company's Board of Directors. In addition, pursuant to the
Company's Certificate of Incorporation, the Board of Directors has been divided
into three classes, with only one class subject to reelection in a given year.
The Certificate of Incorporation requires a vote of 662/3% of the shares of the
Company to amend the provision governing the election of directors.
Consequently, even if a shareholder or group of shareholders were to acquire a
majority of the outstanding shares of the Company, such acquisition would not
necessarily lead to a change in control of the Company. Although current
shareholders of the Company do not hold preemptive rights to acquire additional
shares of Common Stock and, consequently, share amounts as a percentage of
Common Stock outstanding for existing shareholders are expected to decline after
consummation of the Offering, the Company cannot guarantee that certain persons,
either collectively or individually, will not be able to control the election of
the Board of Directors and that minority shareholders will not be adversely
affected as a result.
PRIVATE CAPITAL/NEED FOR ADDITIONAL CAPITAL. SportsNuts.com presently
has limited operating capital with which to engage in its business. The amount
of capital available to SportsNuts.com is limited and may not be sufficient to
enable it to conduct its business operations without additional fund-raising.
The Company will likely be required to raise additional capital in order to fund
its anticipated growth. If the Company seeks new equity investors in order to
raise additional capital, it will dilute the ownership of the Company's
stockholders, and such dilution could be significant.
ANTI-TAKEOVER PROVISIONS. The Restated Certificate of Incorporation of
the Company ("Certificate") contains certain provisions which could be an
impediment to a non-negotiated change in control of the Company, namely an
ability, without stockholder approval, to issue up to 5,000,000 shares of
preferred stock with rights and preferences determined by the board of
directors, staggered terms for directors, and super-voting requirements. These
provisions could impede a non-negotiated change in control and thereby prevent
stockholders from obtaining a premium for their Common Stock.
SECURITIES ELIGIBLE FOR PUBLIC TRADING. Of the 15,724,227 shares of
the Company's Common Stock outstanding at June 30, 1999, 2,441,713 are freely
tradeable or immediately eligible for resale under Rule 144 promulgated pursuant
to the Securities Act of 1933, as amended (the "Securities Act"). Sales of
substantial amounts of the freely tradeable stock in the public market could
adversely affect the market price of the Common Stock.
<PAGE> 24
NO DIVIDENDS. The Company does not currently intend to pay cash
dividends on its Common Stock and does not anticipate paying such dividends at
any time in the foreseeable future. At present, the Company will follow a policy
of retaining all of its earnings, if any, to finance the development and
expansion of its business.
PRIVATE LIABILITY OF MANAGEMENT. The Company has adopted provisions in
its Certificate which limit the liability of its Officers and Directors and
provisions in its bylaws which provide for indemnification by the Company of its
Officers and Directors to the fullest extent permitted by Delaware corporate
law. The Company's Certificate generally provides that its directors shall have
no personal liability to the Company or its stockholders for monetary damages
for breaches of their fiduciary duties as directors, except for breaches of
their duties of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, acts involving unlawful
payment of dividends or unlawful stock purchases or redemptions, or any
transaction from which a director derives an improper personal benefit. Such
provisions substantially limit the shareholders' ability to hold directors
liable for breaches of fiduciary duty.
POTENTIAL ISSUANCE OF ADDITIONAL COMMON AND PREFERRED STOCK. The
Company will be authorized to issue up to 50,000,000 shares of Common Stock. To
the extent of such authorization, the Board of Directors of the Company will
have the ability, without seeking shareholder approval, to issue additional
shares of common stock in the future for such consideration as the Board of
Directors may consider sufficient. The issuance of additional Common Stock in
the future will reduce the proportionate ownership and voting power of the
Common Stock offered hereby. The Company will also be authorized to issue up to
5,000,000 shares of preferred stock, the rights and preferences of which may be
designated in series by the Board of Directors. To the extent of such
authorization, such designations may be made without shareholder approval. The
designation and issuance of series of preferred stock in the future would create
additional securities which would have dividend and liquidation preferences over
the common stock.
VOLATILITY OF STOCK PRICES. In the event that there is an established
public market for the Company's Common Stock, market prices will be influenced
by many factors and will be subject to significant fluctuations in response to
variations in operating results of the Company and other factors such as
investor perceptions of the Company, supply and demand, interest rates, general
economic conditions and those specific to the industry, developments with regard
to the Company's activities, future financial condition and management.
APPLICABILITY OF LOW PRICED STOCK RISK DISCLOSURE REQUIREMENTS. The
Common Stock of the Company may be considered a low priced security under rules
promulgated under the Exchange Act. Under these rules, broker-dealers
participating in transactions in low priced securities must first deliver a risk
disclosure document which describes the risks associated with such stocks, the
broker-dealer's duties, the customer's rights and remedies, and certain market
and other information, and make a suitability determination approving the
customer for low priced stock transactions based on the customer's financial
situation, investment experience and objectives. Broker-dealers must also
disclose these restrictions in writing to the customer, obtain specific written
consent of the customer, and provide monthly account statements to the customer.
With all these restrictions, the likely effect of designation as a low priced
stock will be to decrease the willingness of broker-dealers to make a market for
the stock, to decrease the liquidity of the stock and to increase the
transaction cost of sales and purchases of such stock compared to other
<PAGE> 25
securities.
YEAR 2000 COMPLIANCE. Although the Company believes that it is Year
2000 compliant, it may be wrong. If the Company is wrong, it could face
unexpected expenses fixing Year 2000 problems or unanticipated Web site outages
related to the Year 2000, either of which could have a material adverse effect
upon the Company's business, results of operations, and financial condition.
Furthermore, the Company's Web site is integrated with equipment provided by
third parties that may not be Year 2000 compliant. SportsNuts.com is unable to
make contingency plans covering the possibility that a significant number of
computers constituting the Internet may fail to properly process dates for the
year 2000 and that there may be a system wide slowdown or breakdown. Any
interruption or significant degradation of Internet operations, whether due to
Year 2000 problems or otherwise, could have a material adverse effect upon the
Company's business, results of operations, or financial condition.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
a)
The following exhibit is incorporated by reference from the Form SB-2 of the
Company filed October 18, 1996:
Exhibit No. Description
- ----------- -----------
<PAGE> 26
3* Bylaws of Durwood, Inc.
The following exhibit is incorporated by reference from the Form 8-K of the
Company filed April 20, 1999:
Exhibit No. Description
- ----------- -----------
2.1* Agreement and Plan of Reorganization among Durwood, Inc.,
SportsNuts.com, Inc., and Darren Heiselt
The following exhibits are incorporated by reference from the Form 10-QSB of
the Company filed May 19, 1999.
Exhibit No. Description
- ----------- -----------
Exhibit 3(i) Restated Certificate of Incorporation of SportsNuts.com
International, Inc. (formerly, Durwood, Inc.)
Exhibit 10.1# SportsNuts.com International, Inc. 1999 Stock Option Plan
Exhibit 10.2# Form of Stock Option Grant.
Exhibit 10.3 Lease Agreement for Corporate Office in Salt Lake City, Utah
Exhibit 10.4 First Amendment to Lease Agreement for Corporate Office in Salt
Lake City, Utah
Exhibit 10.5 Three Gateway Office Lease for Company office located in
Phoenix Arizona
Exhibit 10.6# Executive Employment Agreement between Company and Kenneth
Denos
Exhibit 10.7# Executive Employment Agreement between Company and Rodger Smith
Exhibit 10.8# Summary of Agreement between Company and Anthony Moore, a
Director, regarding payment for capital raising services
Exhibit 10.9 Business Loan Agreement and related
<PAGE> 27
documents between Company and Zions First National Bank.
* Denotes exhibits specifically incorporated in this From 10-QSB by reference
to other filings pursuant to the provisions of Rule 12B-32 under the Securities
Exchange Act of 1934.
# Identifies management or compensatory plans, contracts, or arrangements.
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of July 28, 1999, among
SportsNuts.com International, Inc., SportsNuts Merger Sub.,
Inc., Sportzz.com, Inc., ObjectSelect, L.C., and individual
members thereof.
The following documents are filed as exhibits to this Form 10-QSB:
Exhibit No. Description
- ----------- -----------
Exhibit 10.1 Internet Service Private Label Reseller
Agreement between Eclipse
Telecommunications, Inc., and SportsNuts.com,
Inc.
Exhibit 27 Financial Data Schedule
(b) The Company filed a Form 8-K on April 20, 1999, with information satisfying
Item 1 of Form 8-K. The Company filed a Form 8-K/A on June 18, 1999 with
financial statements satisfying Item 7 of Form 8-K, as an amendment to the
April 20, 1999 8-K filing.
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPORTSNUTS.COM INTERNATIONAL, INC.
Date: August 13, 1999 By /s/ Kenneth Denos
-------------------------------------
Kenneth Denos
Chief Financial Officer
Exhibit Index
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of July 28, 1999,
among SportsNuts.com International, Inc., SportsNuts Merger
Sub., Inc., Sportzz.com, Inc., ObjectSelect, L.C., and
individual members thereof.
10.1 Internet Service Private Label Reseller Agreement between
Eclipse Telecommunications, Inc., and SportsNuts.com, Inc.,
dated [** GET DATE FROM CURTIS MORLEY]
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
ECLIPSE TELECOMMUNICATIONS, INC.
PRIVATE LABEL RESELLER AGREEMENT
This is a Private Label Reseller Agreement dated as of the 23rd day of June,
1999 ("the Agreement") between ECLIPSE Telecommunications, Inc. (Eclipse), a
Delaware corporation with its principal business located at 1122 Capital of
Texas Hwy. S., Austin, Texas 78746 and Sportsnut.com, Inc. (the "Company"), a
Delaware corporation with its principal business located at 10421 South 400
West, Salt Lake City, Utah 84095.
WHEREAS, Eclipse is in the business of providing Internet services and
related supplemental services to end users of such services; and
WHEREAS, the Company is in, or is planning to enter, the business of
marketing Internet services and related supplemental services to end users of
such services; and
WHEREAS, Eclipse and the Company wish to enter into an agreement
pursuant to which the Company will be authorized to market Eclipse's services to
end users;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, receipt and
sufficiency of which is hereby acknowledged, Eclipse and the Company agree as
follows:
ARTICLE 1 - Definitions
1. "Company's Accounts" shall mean those End Users whose business
with Eclipse was produced through the efforts of the Company or persons or
entities who have contracted with, the Company to resell Internet services and
related supplemental services.
1.2 "End User" shall mean any person or entity that utilizes
Internet Services or other supplemental services provided by or through Eclipse,
including any affinity group, corporation, or other group and its end users.
1.3 "Gross Revenue" shall mean the total receipts of Eclipse
attributable to sales of Internet access or Supplemental Services to End Users,
which are the Company's Accounts, before deductions for any purpose whatsoever,
as permitted by this agreement.
1.4 "Net Collectible Revenue" shall mean Gross Revenue, less any
accrued finance charges, any applicable taxes, fees or charges Eclipse may be
required to collect on behalf of any regulatory agency or governmental
authority, any installation charges and other recurring or one-time fees and
charges for other services and products provided by Eclipse (at rates quoted by
Eclipse to the Company in advance) and any amount due Eclipse on any unpaid or
uncollected billings, including charge backs, to the Company's Accounts for any
previous month or months.
1.5 "Internet Services" shall mean the Internet services provided to
End-Users by Eclipse as outlined in Exhibit A.
1.6 "Regulatory Approvals" shall mean any and all certifications,
permits, licenses,
<PAGE> 2
approvals or consents as may be required at any time by the Federal
Communications Commission, any state or local public utility commission, or any
other regulatory authority of the United States or any state or territory
thereof for Eclipse or any person or entity in pnvity with Eclipse to either (i)
provide Internet Services or the Supplemental Services to an End User, or (ii)
transfer and assign any rights or obligations under this Agreement.
1.7 "Supplemental Services" shall mean such additional Internet or
telecommunications services as Eclipse may choose, to make available to End
Users from time to time.
1.8 "Retail Service Rates" shall mean retail costs for Internet
Services charged to an End User, which are subject to review at the end of the
contract.
ARTICLE 2 - Authorization of Company
2.1 Upon the terms and conditions set forth in this Agreement
Eclipse hereby appoints and authorizes the Company, and the Company hereby
accepts Eclipse's appointment and authorization, to market Internet Services and
designated Supplemental Services to any person or entity which is not then an
End User, in such states or territories of the United States as Eclipse has
provided a local dial connection to the Company.
2.2 The Company's authority to market Internet Services and
Supplemental Services, shall not extend to marketing such services to any person
or entity which is at the time, an End User but not one of the Company's
Accounts, unless prior written authority is obtained from Eclipse.
2.3 The Company's authority hereunder, shall be limited to marketing
Internet Services and Supplemental Services in accordance with the scheduled
rates, policies, restrictions and conditions prescribed hereunder or as may
otherwise be prescribed by Eclipse from time to time, and to obtain orders for
Internet Services and Supplemental Services ("Service Subscriptions") from
prospective End Users utilizing forms of service agreements provided by Eclipse.
The Company shall make no representations and give no guarantees or warranties
with respect to the Internet Services or Supplemental Services except as
expressly authorized in writing by Eclipse.
2.4 The Company shall promptly forward to Eclipse, all Service
Subscriptions obtained from any prospective End User for processing.
2.5 Eclipse reserves the right to reject any Service Subscription
from any person, or entity which is already an End User or if Eclipse otherwise
determines that service to such prospective End User, is not in the best
interest of Eclipse.
2.6 The Company agrees to pay Eclipse, upon the execution of this
Agreement, a one-time non-refundable fee of fifteen thousand dollars
($15,000.00) for the Program Setup. The fee shall be paid in three installments
as follows: (i) The first installment of $5,000 upon contract execution; (ii)
$5,000 on July 23, 1999 and (iii) $5,000 on August 23, 1999. Customer
specifically understands that Eclipse will not commence work on the Services
described herein unless and until the first required payment of the set-up fee
is received. The fee is used to cover
<PAGE> 3
various administrative costs. The Reseller Program includes customized account
sign-up screens for End Users. The Company will provide all logos and scripts to
Eclipse as needed to create the appropriate sign-up screens. The Company will
also provide one master auto-enrollment CD which is a customized version of
Netscape Communicator. The estimated time for the complete set-up of the program
is 45 days after receipt of the appropriate information from the Customer.
2.7 The Company agrees to pay Eclipse, a $750.00 per month recurring
charge to include customer branded sales management tool maintenance, customer
branded end-user account creation maintenance and radius database management
(customer brand). Tliis sum shall be due and payable on the 10th day of the
month.
ARTICLE 3 - Support Services
3.1 The Company, or persons designated by the Company, shall be
entitled to receive or participate in such sales training programs as Eclipse
may elect to provide its sales companies generally at such location(s) as may be
designated by Eclipse. The Company shall be responsible for all incidental
expenses (including transportation, food and lodging), associated with the
attendance of the Company or its designees at any such training programs.
3.2 Eclipse shall be responsible for billing the Company's Accounts,
for all products or services provided by Eclipse. Eclipse shall bill the
Company's Accounts for Internet Services and any Supplemental Services, on a
monthly basis within thirty (30) days of the end of each calendar month at
Retail Service Rates. All such billing shall utilize Eclipse's standard merchant
account (d/b/a reseller) statement format, provided that Eclipse may, at its
discretion and subject to all regulatory requirements and restrictions, make
modifications or customizations to the standard billing statement. All End
Users will be required to pay with credit card, no cash payments will be
accepted.
3.3 Eclipse shall provide the Company with monthly commission
reports, containing itemized information with respect to the Company's Accounts,
including a calculation of the commission payment due to the Company for the
reported month. Reports shall be provided by the 20th day of the month.
ARTICLE 4 Service Rates. Commissions
4.1 Eclipse will provide the Company with schedules of commissions
applicable to the Internet Services and any offered Supplemental Services (the
"Commissions"). Commissions will be calculated on the number of active End
Users. The Commissions in effect as of the date of this Agreement, are set forth
in the schedules attached hereto as Exhibit B to this Agreement.
4.2 Eclipse will provide the Company with schedules of the Company's
Retail Service Rates, fees and surcharges applicable to the Internet Services
and any offered Supplemental Services. The Company may offer to prospective End
Users the Internet Services or Supplemental Services, only at the scheduled
Retail Service Rates. Where more than one "Plan" or price is specified in the
Retail Service Rates for any service, the Company may choose which Plan or price
to offer any prospective End User.
<PAGE> 4
4.3 Eclipse's service agreements with End Users ("Service
Agreements") shall permit Eclipse to increase or decrease the Retail Service
Rates for any Internet Services or Supplemental Services, at any time (subject
to any regulatory restrictions) in accordance with the scheduled Retail Service
Rates then in effect.
4.4 The Company acknowledges that any unpaid or uncollected
billings, including charge backs, to the Company's accounts for any previous
month or months shall be deducted on the month following non-payment.
ARTICLE 5 - Certain Rights of Company
5.1 Subject to the prior written consent of Eclipse, which consent
shall not be unreasonably withheld, the Company may transfer and assign all of
its rights and obligations under this Agreement to any person or entity. In the
event of such an assignment, the Company's transferee shall be subject to all of
the terms, obligations, covenants and conditions applicable to the Company under
this Agreement and Eclipse's rights under its Service Agreements with the
Company's Accounts shall be unaffected thereby. The Company has no right to
otherwise sell, or to solicit offers for the sale of, Eclipse's rights in the
Company's Accounts except as may be agreed to in advance by Eclipse.
5.2 Neither party hereto may assign this agreement without the
expressed written consent of the other party hereto, which consent shall not be
unreasonably withheld. Not withstanding the foregoing, either party may assign
all its rights and obligations to any successor in interest or to a parent
company.
5.3 Notwithstanding any other provision of this Agreement, Eclipse
reserves the right to unilaterally cancel, void or terminate any Service
Subscription or Service Agreement or to otherwise discontinue Internet Services
or Supplemental Services to any of the Company's Accounts for any cause,
specifically including delinquent payment fraudulent use, or breach of any
material term of the Service Subscription.
ARTICLE 6 - Relationship of the Parties
6.1 Eclipse and the Company each acknowledge and agree that the
Company is an independent contractor and not an employee, franchisee, partner,
agent or co-venturer of Eclipse. Except as may specifically be provided by this
Agreement the Company is solely responsible for its own business expenses
(including, but not limited to, all costs of purchasing or leasing office space,
equipment and furniture; employing or hiring any full-time or part-time office
personnel or sales representatives; securing insurance of any kind; and all
taxes), working hours, office location, customer contacts, transportation,
advertising and promotion.
6.2 The Company, nor any employees or its subsidiaries, affiliates,
employees, shareholders, officers, directors, or representatives shall, under no
circumstances, represent or imply to any third party that they have the power or
authority to enter into any contract or commitment in the name of or on behalf
of Eclipse, or to otherwise bind Eclipse.
<PAGE> 5
ARTICLE 7 - Use of Marks
7.1 Subject to paragraph 7.2 below, without the prior written
consent of Eclipse, the Company shall not use, or authorize or permit any of its
subsidiaries, affiliates, employees, shareholders, officers, directors, or
representatives to use, the name "Eclipse", or any other trademark or service
mark owned by or licensed to Eclipse for any purpose.
7.2 The restrictions of paragraph 7.1, shall not bar the Company's
disclosure in printed material or otherwise, that the Internet Services and
Supplemental Services offered by the Company are provided through Eclipse or
that the Company is Authorized by Eclipse to offer such services. However, the
Company must obtain Eclipse's prior written consent on any and all such printed
or written material offered or distributed by the Company.
7.3 Upon termination of this Agreement, all rights of the Company to
use the Marks shall expire, and the Company shall immediately discontinue the
use thereof.
ARTICLE 8 - Confidentiality
8.1 Eclipse and the Company understand and agree that the terms and
conditions of this Agreement, and all non-public information regarding their
respective businesses and business practices including, but not limited to,
Retail Service Rates, Commissions, Service Agreements, and any other financial
information, is confidential as between the Company and Eclipse (collectively,
"Confidential Information").
8.2 Without the prior written consent of the other, neither Eclipse
nor the Company shall publish, disclose or convey to any other person or entity
any Confidential Information of the other unless required by law or a court of
competent jurisdiction.
8.3 The provisions of this Article 8, will be effective from and
after the date of this Agreement and shall remain in full force and effect after
expiration or termination of this Agreement. Violation of the foregoing
provision by any party, or its subsidiaries, affiliates, employees,
shareholders, officers, directors, or representatives shall entitle the other
party, at its option, to obtain injunctive relief for specific performance of
the obligations described in the Article 8 without a showing of irreparable harm
or injury and without bond.
ARTICLE 9 - Term of Agreement
Subject to termination pursuant to Article 10 of this Agreement this
Agreement shall be effective for a period of three (3) years, commencing on the
date of this Agreement. This Agreement shall be automatically renewed for
successive terms of one (1) year (each a "Renewal Term") unless either party
notifies the other, not less than thirty (30) days prior to the end of the
Initial Term or the Renewal Term then in effect, that the Agreement will not be
renewed.
ARTICLE 10 - Termination
<PAGE> 6
10.1 Eclipse may unilaterally terminate this Agreement effective
immediately upon notice to the Company, upon the occurrence of any of the
following:
(a) The instigation of any action, suit or proceeding, or
the adoption or issuance of any law, regulation, ruling or determination,
including but not limited to any regulation, ruling or determination or the
Federal Communications Commission or any public utility commission or other
state regulatory agency, which materially and adversely affects the business of
Eclipse or the ability of Eclipse to render all or a material part of the
Internet Services or Supplemental Services; or
(b) The willful misconduct or gross negligence of the
Company, including but not limited to the willful violation of any law or
regulation.
10.2 Eclipse may unilaterally terminate this Agreement after not less
than ten (10) days' notice of any of the following events, each of which shall
be a material breach of this Agreement and the Company has failed to cure such
breach within such notice period:
(a) The Company's (i) adjudication as a bankrupt (ii)
admission in writing of an inability to pay debts generally as they become due,
(iii) insolvency (in that total assets are in the aggregate worth less than all
liabilities) or the Company's inability to pay debts generally as they become
due, (iv) petition or admission (by answer, default or otherwise) to the
material allegations of any petition filed against the Company in bankruptcy
under the federal bankruptcy laws (as in effect on the date of this Agreement or
as they may be amended from time to time), or under any other law for the relief
of debtors, or for the discharge, arrangement or compromise of debts, or (v)
consent to the appointment of a receiver, conservator, trustee or liquidator of
all or part of the debtor's assets; or
(b) Any other breach of this Agreement which is material.
10.3 Commissions to the Company, shall cease thirty (30) days after
the termination or expiration of this Agreement
ARTICLE 11 - Covenants Not to Compete
The Company agrees that for a period of six (6) months from the date of
expiration or termination of this Agreement for any reason, as long as Eclipse
nor the Company is in violation of any provision of this agreement, neither the
Company nor any of its subsidiaries, employees, officers, or directors shall not
market, sell or offer to sell to any of the Company's Accounts any Internet
products or services that are competitive with any Internet product or service
offered by Eclipse at the time of such expiration or termination.
ARTICLE 12 - Force Mageure
12.1 If either party's performance under this Agreement or any
obligation hereunder, is prevented, restricted or interfered with by causes
beyond their reasonable control, including but not limited to the "Causes"
identified in paragraph 12.2 below, then such party shall be excused from such
performance on a day-to-day basis to the extent of such prevention, restriction
or
<PAGE> 7
interference.
12.2 The "Causes" shall include acts of God, fire, explosion,
vandalism, cable cut, storm or other similar occurrence; any law, order,
regulation, direction, action or request of the United States government or of
any governmental department (including state and local governments or any
government agency, commission, court bureau, corporation or other
instrumentality of any one or more of said governments) or of any civil or
military authority; any national emergency, insurrection, riot war, strike,
lockout work stoppage or other labor difficulty; or any other supplier failure,
shortage, breach or delay.
12.3 Eclipse and the Company shall use their good faith and diligent
efforts to avoid, remove or terminate such Causes of nonperformance and both
parties shall proceed to perform with dispatch whenever such Causes are removed
or cease.
ARTICLE 13 - Limitation of Warranties and Liabilities
13.1 Subject to the provisions of Article 12 of this Agreement,
Eclipse warrants that its provision of the Internet Services and Supplemental
Services will be in accordance with prevailing standards in the Internet and
telecommunications industry, and Eclipse will use reasonable efforts under the
circumstances to remedy any delays, interruptions, omissions, mistakes,
accidents or errors with respect to any part of such services.
13.2 The foregoing warranty and remedies are exclusive and in lieu of
all warranties or remedies, whether expressed, implied or statutory, including,
without limitation, implied warranties of merchantability and fitness for a
particular purpose. In the event of any defect whatsoever, in the Internet
Services or Supplemental Services, neither Eclipse nor any third-party provider
or operator of facilities employed in the provision of any part of such service
shall be liable to the Company or any End User for any direct, indirect,
consequential, special, actual, punitive or any other damages, or for any lost
profits of any kind or nature whatsoever.
13.3 The Company acknowledges that it will not rely on Eclipse for
future legal or regulatory advice and that Eclipse has made no representations
and given no assurances that the Company will not be subject to future
regulatory compliance requirements in its offer or sale of the Internet Services
or Supplemental Services. The Company assumes full responsibility for and all
expenses associated with obtaining any regulatory approvals, which may be
required for the Company. Eclipse agrees to notify the Company, in the event any
changes in regulatory compliance requirements require the Company to obtain any
regulatory approvals.
ARTICLE 14 - Indemnification
14.1 Each party shall indemnify, defend, and hold harmless the other
party from and against any and all liabilities (including reasonable attorney
fees) resulting from the indemnifying party's (or its subsidiaries, affiliates,
employees, shareholders, officers, directors, or representatives) actions
hereunder. This indemnification shall include but not be limited to, breach of
any provision in this Agreement misrepresentation of the Internet Services and
Supplemental Services or prices, and unauthorized or illegal acts of the
indemnifying party, its shareholders, officers, employees, Companies or
independent contractors.
<PAGE> 8
ARTICLE 15 - Insurance
At all times during the Initial Term and any Renewal Term under this
Agreement the Company shall secure and maintain at the Company's sole expense
Worker's Compensation insurance as may be required by law, and comprehensive
general liability covering a minimum of $500,000 per occurrence. Upon request
each party shall furnish insurance certificates as evidence of such coverage.
ARTICLE 16 - Notices
16.1 All notices or communications under this Agreement shall be in
writing and shall be hand delivered or mailed to the parties addressed in the
form listed in the preamble to this Agreement and any notice so addressed and
(i) when hand delivered, shall be deemed to have been given when delivered, (ii)
when mailed by registered or certified mail, return receipt requested with
postage prepaid, shall be deemed to have been given three (3) business days
after so mailed, or (iii) when delivered to an internationally recognized small
package courier service to the address of the intended recipient with shipping
prepaid, shall be deemed to have been given when delivered by such courier.
16.2 The parties hereto may from time to time specify other addresses
for the purpose of notice under paragraph 16. 1, by giving the other party
notice thereof.
ARTICLE 17 - Miscellaneous
17.1 The Company and Eclipse each agree to execute such other
documents and instruments, provide such additional information, and otherwise
cooperate with one another, as may be reasonably requested from time to time by
the other to achieve the purposes of this Agreement and to consummate any and
all transactions contemplated herein.
17.2 Failure by Eclipse or the Company to exercise any right shall
not be deemed a waiver of that right and any single or partial exercise of any
right shall not prelude the further exercise of that right. Every right of
Eclipse or the Company shall continue in full force and effect until such right
is specifically waived in writing signed by the party waiving such right
17.3 Any and all losses related to "bad debt " on all Internet
Services are to be the sole responsibility of Eclipse. Bad debt is defined as
the amount of unpaid billings by the end user, after that amount has exceeded 60
days past due from the date of billing. Eclipse will have the right to withhold
and charge back to the Company any commissions due to the Company for any and
all bad debt commissioned accounts in excess of 60 days past due until the bad
debt has been resolved.
17.4 If any part, term or provision of this Agreement is held by any
court or administrative agency to be prohibited by any law, regulation or rule
applicable to this Agreement or the transactions contemplated herein, the rights
and obligations of the parties shall be construed and enforced to the greatest
extent allowed by law, or if such part, term or
<PAGE> 9
provision is totally unenforceable, as if this Agreement did not contain that
particular part, term or provision.
17.5 The Article headings in the Agreement have been included for
ease of reference only and shall not be considered in the construction or
interpretation of this Agreement.
17.6 This Agreement shall benefit and bind Eclipse and the Company
and their respective successors and assigns.
17.7 To the extent allowed under the Federal Communications Act and
other federal laws, this Agreement shall in all respects by governed by and
construed in accordance with the laws of the State of Texas.
17.8 The parties will attempt in good faith to resolve any
controversy or claim arising out of or relating to this Agreement promptly,
through discussions between themselves at the operational level. In the event a
resolution cannot be reached, such controversy or claim shall be negotiated
between appointed counsel or senior executives of the parties who have authority
to settle the controversy.
The disputing party shall give the other party written notice of the
dispute. If the parties fail to resolve such controversy or claim within thirty
(30) days of the disputing party's notice, either party may seek arbitration as
set forth below.
Any controversy or claim arising out of or relating to this Agreement,
or a breach of this Agreement, shall be finally settled by arbitration in
Austin, Texas and shall be resolved under the laws of the State of Texas. The
arbitration shall be conducted before a single arbitrator in accordance with the
commercial rules and practices of the American Arbitration Association then in
effect.
The arbitrator shall have the power to order specific performance if
requested. Any award, order, or judgment pursuant to such arbitration shall be
deemed final and binding and may be enforced in any court of competent
jurisdiction. The parties agree that the arbitrator shall have no power or
authority to make awards or issue orders of any kind except as expressly
permitted by this Agreement, and in no event shall the arbitrator have the
authority to make any award that provides for punitive or exemplary damages. All
such arbitration proceedings, shall be conducted on a confidential basis. The
arbitrator may, as part of the arbitration award, permit the substantially
prevailing party to recover all or part of its attorney's fees and other
out-of-pocket costs incurred in connection with such arbitration. Customer may,
at its option, continue to accept what it considers to be below-standard
Services and pay the charges hereunder relating thereto during such pendency of
such arbitration, without prejudice thereto.
17.9 The Company agrees that Eclipse shall be the sole and exclusive
owner of all End User accounts.
17.10 This Agreement constitutes the entire agreement of the parties
with respect to the subject matter
<PAGE> 10
hereof and supersedes all prior understandings with respect to the subject
matter hereof. No change, modification, addition or termination of this
Agreement shall be enforceable unless in writing and signed by the party against
whom enforcement is sought.
IN WITNESS THEREOF, the parties hereto have executed and delivered this
Agreement as of the date set forth in the preamble hereto, but actually on the
date(s) set forth below.
Eclipse:
By: /s/ David L. Hughart
-----------------------------------
Name: David L. Hughart
Title: President, U.S. Sales and Marketing
Date: June 28, 1999
THE COMPANY
By: /s/ Ken Denos
-----------------------------------
Name: Ken Denos
Title: Chief Operating Officer
Date: June 25, 1999
Exhibit A - Internet Service Rates
Exhibit B - Commission Schedule
<PAGE> 11
Exhibit A
Internet Services Rate
Dial-Up Services (List products and rates**):
$19.95 Dial Flat Rate Product:
-- Initial Set-up fee ($15.00) waived
-- 150 hours per month included
-- Additional hours of usage $0.95 per hour
-- One E-mail box included
-- Additional Email boxes $1 each per month
-- Maximum of five E-mail boxes per Dial-up account
-- ISDN access includes 150 channel hours of usage per
month (one hour on two channels -128K, counts as two
hours)
-- 800# access $.09 per minute
Notes:
1. Reseller understands that by reselling Eclipse Dial-up product, any and
all ancillary charges associated with the Eclipse Dial-up product will
apply to reseller's Dial-up product, unless otherwise noted.
2. Additional fees are outlined in Section 2.6 and 2.7 of the Agreement.
<PAGE> 12
Exhibit B
Commission Schedule
Dial-Up Services:
Total Number of End Users Commission
0-5,000 $3.00 per active End User Account
5,001 - 10,000 $4.00 per active End User Account
10,001 - 15,000 $5.00 per active End User Account
15,001-25,000 $6.00 per active End User Account
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,458,700
<SECURITIES> 0
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10,046,311
0
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<CGS> 320,803
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<INCOME-PRETAX> (973,786)
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<INCOME-CONTINUING> (973,786)
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<EXTRAORDINARY> 82,552
<CHANGES> 0
<NET-INCOME> (891,234)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
