SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
(Amendment No. 1)
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
WEBQUEST INTERNATIONAL, INC.
(Exact name of registrant in its charter)
Nevada 86-0894019
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
2241 Park Place, Suite E, Minden, Nevada 89423
(Address of principal executive offices) (Zip Code)
(702) 782-0350
(Issuer's Telephone Number, Including Area Code)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of Each Exchange on which
to be so registered each class is to be registered
None None
Securities to be registered pursuant to section 12(g) of the Act:
Common Stock, par value $.001
(Title of Class)
<PAGE>
Item 1. Description of Business
Background
WebQuest International, Inc., incorporated in Nevada on March 25, 1998,
(the "Company"), is the successor by merger with WebQuest International, Inc., a
Utah corporation formerly known as Phaser Enterprises, Inc. ("WB Utah"). In
April 1997 Web Utah entered into an Agreement and Plan of Reorganization with
WebQuest International, Inc., a Nevada Corporation ("old WB"), incorporated in
November 1996, formerly known as iPONG International, Inc., pursuant to which
agreement the old WB merged with and into WB Utah. Prior to April 1997 WB Utah
had no operations.
The Company's present business is the development and marketing of an
interactive game arcade, known as the iPONG Game Arcade on the Internet. Site
visitors use their eye/hand coordination and trivia knowledge to win cash and/or
prizes. The Company anticipates that it will derive revenue from the sale of
advertising.
iPONG Game Arcade
iPONG Game Arcade is an interactive game site. The site provides
visitors a Variety of PONGTM games, a simple arcade game licensed from Atari, a
division of JTSR corporation, with 10 different categories of trivia. After
entering the Company's web site at www.iPONG.com, players compete for points on
a weekly basis. As players respond to questions throughout the game, each
question or activity is accompanied by advertising. iPONG is a game of skill and
knowledge. Players who successfully score high win cash and/or prizes. The
Company intends to charge advertisers per advertisement placed with the games
questions. As of the date of this Registration Statement the Company has not
entered into contracts for advertising with any person, and the Company has not
engaged any advertising agency to do so, although it intends to do so in the
future.
The Company has entered into a Licensing and Marketing Agreement with
HomeSeekers.com, Inc. (formerly NDS Software, Inc.) ("NDS"), which owns 17.2% of
the Company's Common Stock. Pursuant to this Agreement, the Company licensed the
software and trademarks related to iPONG for a ten year term. The license fee is
7% of the revenues for the first year commencing on the live date for the site
1998, 10% in the second year, and 15% thereafter. In addition, the Company is
required to pay NDS for technical services rendered by NDS.
Employees
The Company currently has four employees, two in management, one
administration and one in sales.
Item 2. Management's Discussion and Analysis or Plan of Operation
As of August 24, 1998 the Company had not received revenues from
operations. The Company intends to obtain advertising revenue in connection with
the iPONG Game Arcade. Based on discussions with advertisers, the Company
believes it will be able to enter into contracts for advertising only when it
achieves approximately 40,000 to 50,000 players per week. The primary focus of
the Company at this time is obtaining players, which it does so by marketing its
web site. Management believes that an expenditure of $50,000 will be required
for web site marketing to bring the number of players to the desired level.
There can be no assurance that the Company will ever be able to generate
revenues, nor that it will be able to raise sufficient capital for its
requirements.
The Company anticipates its capital needs over the next twelve months
to be $80,000 per month. The Company's cash needs have been met to date from
placements of its equity securities. As of June 30, 1998 the Company had a
working capital deficit of $252,000.
Item 3. Description of Property
The Company subleases 800 square feet of office space in Minden, Nevada
from a non-affiliated party for
$832 per month. The lease expires on May 31, 1999. The Company also leases 200
square feet in Del Mar,
California from a non-affiliated party at the rate of $550 per month. The lease
expires on October 6, 1998. The
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<PAGE>
Del Mar location is used for game development. The Company will seek additional
office space in Nevada over the next four to six months.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
Company's common stock, par value $.001 ("Common Stock") beneficially owned as
of August 24, 1998 for (i) each stockholder known by the Company to be the
beneficial owner of five (5%) percent or more of the Company's outstanding
Common Stock, (ii) each of the Company's directors, (iii) each named executive
officer (as defined in Item 402(a)(2) of Regulation S-B), and (iv) all executive
officers and directors as a group. At August 24, 1998 there were 4,059,601
shares of Common Stock outstanding. Except as specifically set forth in the
notes below, the table does not give effect to (a) the exercise of warrants to
purchase 441,125 shares of Common Stock and (b) the exercise of options to
purchase an aggregate of 371,666 shares of Common Stock.
<TABLE>
<CAPTION>
Percentage
Name of Number of of Outstanding
Stockholder Shares Owned Common Stock
<S> <C> <C>
Bob Horn (1)(2) 205,000 4.9%
Kirk Johnson (1)(3) 373,554 9.0%
Frank Howard(1)(4) 7,500 .2%
Greg & Jeannie Johnson(5) 474,249 11.7%
Dr. Jack Kelly(5) 878,138 21.6%
Darin Murphy 679,943 16.7%
Homeseekers.com(5) 700,000 17.2%
Topaz Limited/Octagon
Worldwide, LTD(6) 523,616 12.3%
All directors and officers
as a group (three people) 586,054 13.7%
</TABLE>
(1) The address of this person is in care of the Company.
(2) Includes currently exercisable options to purchase 200,000 shares of
common stock. See Item 6, "Executive
Compensation."
(3) Includes currently exercisable options to purchase 105,000 shares of
common stock. See Item 6, "
Executive Compensation."
(4) Includes 2,500 shares issuable upon exercise of warrants.
(5) Homeseekers.com is a public corporation whose common stock is
registered under Section 12(g) of the Securities Exchange Act of 1934.
According to the public disclosure documents filed by Homeseekers.com,
Inc., Greg Johnson, John Giamo, John C. Kelly, Douglas Swanson and
William Tomerlin beneficially own more than 5% of Homeseekers.com,
Inc. common stock. The number of share listed above for Messrs.
Johnson and Kelly do not include the shares owned by Homeseekers.com,
Inc. The Company owns 57,324 shares of Homeseekers.com, Inc. common
stock, which it received as partial finding of a 504 stock offering.
(6) The principals of Topaz Limited, a Bahamas International Business
Company, are Merrill, Scott & Associates Limited, Director and
president; Global Management Limited, Director and Secretary and
Estate Planning Institute (Bahamas) Limited, Director. Includes
warrants to purchase 100,000 Shares at $3.00 per share through
November 18, 2000 and includes warrants to purchase 100,000 Shares at
$2.00 per share through May 11. 2001.
(7) Includes 2,500 Shares of Series B Preferred Stock.
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<PAGE>
Item 5. Directors, Executive Officers, Promoters and Control Persons
The members of the Board of Directors of the Company serve until the
next annual meeting of stockholders, or until their successors have been
elected. The officers serve at the pleasure of the Board of Directors.
Information as to the directors and executive officers of the Company is as
follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C>
Robert Horn 43 Chairman, Chief Executive Officer
and President
Kirk Johnson 41 Vice President, Secretary, Treasurer
and Director
Frank Howard 50 Director
</TABLE>
Robert Horn has been Chairman, Chief Executive Officer and President
of WebQuest International Inc. since September 1997. From June 1995 to August
1997 he was employed as Executive Producer for BlueSky Software, a San Diego
computer and video game developer. From July 1988 to May 1995 he owned Bob Horn
Productions, a commercial and industrial video production company. From 1984 to
1988 he produced "San Diego at Large", a local television show for KFMB TV.
Prior to that Mr. Horn was a middle linebacker for the San Diego Chargers and
the San Francisco 49ers from 1976 to 1984. Mr. Horn was the subject of a chapter
7 personal bankruptcy which became final on September 18, 1992.
Kirk Johnson has been Vice President, Secretary, Treasurer and
Director of the Company since October 1997. From 1981 to Oct 1997 he was active
Chief Executive Officer and President of Nevada Johnson, Inc., a Nevada real
estate and construction firm.
Frank Howard has been a Director since December 1997. Since 1989 he
has been President and CEO of STI (Sales Technology, Inc.). From 1976 to 1989 he
worked for Bently Nevada Corporation. His last position for Bently was as acting
Vice President of Sales.
Item 6. Executive Compensation
The Company has entered into a two year employment agreement with its
President and Chief Executive Officer Mr. Horn, effective September 29, 1997
providing for annual compensation of $120,000, and the issuance of options to
purchase 400,000 shares of common stock at a price of $.116 per share. The
options vest at the rate of 100,000 shares each September 23, commencing on
September 23, 1997. The Agreement provides Mr. Horn shall be eligible for
benefits under any health, life and retirement plan which may be established in
the future. In the event of any termination without cause, all options become
immediately vested and Mr. Horn shall be entitled to six months severance pay.
The Company has entered into a two year employment agreement with its
Vice President, Secretary and Treasurer, Kirk Johnson, commencing on October 1,
1997 pursuant to which Mr. Johnson shall be paid $2,000 per week, or in lieu
thereof, options to purchase 2,500 shares of common stock at a price of $.116
per share, for each week. Mr. Johnson elected to receive 30,000 share options in
lieu of salary. In addition, Mr. Johnson used stock options to purchase 150,000
shares of common stock at a price of $.116 per share vesting one half on October
1, 1998 and the remainder on October 1, 1999. Mr. Johnson is also entitled to
participate in any group medical or pension plan that may be implemented in the
future.
Frank Howard receives $500 per month and $100 per meeting for his
services as Director.
Item 7. Certain Relationships and Related Transactions
The Company has entered into a Licensing and Marketing Agreement with
HomeSeekers.com, Inc., formerly NDS Software, Inc. as discussed under Part I,
Item 1 - Business. HomeSeekers.com, Inc. owns 700,000 shares of Company's common
stock, or 17.2% of the outstanding shares.
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<PAGE>
The Company borrowed $10,000 and $100,000, respectively, on April 23,
1997 and December 31, 1996 from Jack Kelly, the father of the Company's then
President. The notes bear interest of 12% and are due on demand.
The balance owed as of August 24, 1998 was $14,620.
Kirk Johnson, the Company's Vice President, Secretary and Treasurer is
the brother of Greg Johnson, also a holder of Common and Preferred Stock of the
Company and the CEO of HomeSeekers.com, Inc.
Item 8. Description of Securities
Common Stock
The Company's Articles of Incorporation authorizes the issuance of
45,000,000 shares of common stock, $.001 par value per share, of which 4,059,601
shares were outstanding as of August 24, 1998. Holders of shares of common stock
are entitled to one vote for each share on all matters to be voted on by the
stockholders. Holders of common stock have no cumulative voting rights. Holders
of shares of common stock are entitled to share ratably in dividends, if any, as
may be declared, from time to time by the Board of Directors in its discretion,
from funds legally available therefor. In the event of a liquidation,
dissolution or winding up of the Company, the holders of shares of common stock
are entitled to share pro rata all assets remaining after payment in full of all
liabilities. Holders of common stock have no preemptive rights to purchase the
Company's common stock. There are no conversion rights or redemption or sinking
fund provisions with respect to the common stock. All of the outstanding shares
of common stock are fully paid and non-assessable.
The transfer agent for the common stock is American Registrar and
Transfer, 10 Exchange Place, Suite 705, Salt Lake City, Utah 84110.
Preferred Stock
The Company's Articles of Incorporation authorize the issuance of up
to 5,000,000 shares of Preferred Stock, of which 964,500 shares of Series B
Preferred Stock are outstanding. The Preferred Stock is convertible into shares
of common stock on a one for one basis. The holders of Series B Preferred are
senior to the Common Stock with respect to dividend rights and are entitled to
receive a 12% annual cumulative dividend, payable on the first day of June and
December commencing on December 1, 1998. At the option of the Corporation, such
dividend may be paid in cash or in Common Stock valued at market price, or a
combination thereof. Holders of Series B Preferred Stock are entitled to a
liquidation preference of $500 per share. The Company may issue additional
preferred stock in the future. The Company's Board of Directors has authority,
without action by the shareholders, to issue all or any portion of the
authorized but unissued preferred stock in one or more series and to determine
the voting rights, preferences as to dividends and liquidation, conversion
rights, and other rights of such series.
The Company considers it desirable to have preferred stock available
to provide increased flexibility in structuring possible future acquisitions and
financings and in meeting corporate needs which may arise. If opportunities
arise that would make desirable the issuance of preferred stock through either
public offering or private placements, the provisions for preferred stock in the
Company's Articles of Incorporation would avoid the possible delay and expense
of a shareholder's meeting, except as may be required by law or regulatory
authorities. Issuance of the preferred stock could result, however, in a series
of securities outstanding that will have certain preferences with respect to
dividends and liquidation over the Common Stock which would result in dilution
of the income per share and net book value of the Common Stock. Issuance of
additional Common Stock pursuant to any conversion right which may be attached
to the terms of any series of preferred stock may also result in dilution of the
net income per share and the net book value of the Common Stock. The specific
terms of any series of preferred stock will depend primarily on market
conditions, terms of a proposed acquisition or financing, and other factors
existing at the time of issuance. Therefore, it is not possible at this time to
determine in what respect a particular series of preferred stock will be
superior to the Company's Common Stock or any other series of preferred stock
which the Company may issue. The Board of Directors may issue additional
preferred stock in future financings.
The issuance of Preferred Stock could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Further, certain provisions of Nevada law could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company. While such provisions
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<PAGE>
are intended to enable the Board of Directors to maximize stockholder value,
they may have the effect of discouraging takeovers which could be in the best
interest of certain stockholders. There is no assurance that such provisions
will not have an adverse effect on the market value of the Company's stock in
the future.
Shares Eligible for Future Sale
The outstanding shares of the Company are subject to resale
restrictions and, unless registered under the Securities Act of 1933 (the "Act")
or exempted under another provision of the Act, will be ineligible for sale in
the public market. Sales may be made after one year from their acquisition based
upon Rule 144.
In general, under Rule 144 as currently in effect a person (or persons
whose shares are aggregated) who has beneficially owned shares privately
acquired or indirectly from the Company or from an Affiliate, for at least one
year, or who is an Affiliate, is entitled to sell within any three-month period
a number of such shares that does not exceed the greater of 1% of the then
outstanding shares of the Company's Common Stock (approximately 4.060 shares) or
the average weekly trading volume in the Company's Common Stock during the four
calendar weeks immediately preceding such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
at any time during the 90 days preceding a sale, and who has beneficially owned
shares for at least two years, is entitled to sell all such shares under Rule
144 without regard to the volume limitations, current public information
requirements, manner of sale provisions, or notice requirements.
Sales of substantial amounts of the Common Stock of the Company in the
public market could adversely affect prevailing market prices.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
(a) Market Information
The Company's Common Stock has not traded for the past three
years.
(b) Holders
As of August 24, 1998, there were approximately 200 holders of
Company common stock.
(c) Dividends
The Company has not paid any dividends on its common stock. The
Company currently intends to retain any earnings for use in its
business, and therefore does not anticipate paying cash dividends in
the foreseeable future.
Item 2. Legal Proceedings
Not applicable.
Item 3. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
6
<PAGE>
Item 4. Recent Sales of Unregistered Securities
In May 1997, the Company issued 2,555,000 shares to acquire all of
the shares of old WB from the 10 shareholders of old WB, in an offering exempt
under Section 4(2) of the Securities Act of 1933. Each of the shareholders of
old WB were either accredited investors or represented that they had such
experience in financial matters to protect their own interests.
From March 1997 through July 1998 the Company issued 964,500 shares
of Common Stock and 964,500 shares of Series B Preferred Stock to 30 investors
at a price of $1.00 per share, in an offering made under Rule 504. Additionally,
warrants to purchase 241,125 Shares for $7.50 per share were issued. These
warrants are exercisable from July 11, 1999 through July 10, 2000. the Company
accepted in lieu of cash, 57,324 shares of HomeSeekers.com, Inc. common stock
from three investors valued at $270,000. HomeSeekers.com, Inc. and the Company
have similar shareholders and are related entities.
On August 27, 1997 the Company issued 30,000 shares for services
valued at $1.00 per share to officers, directors and employees under Rule 701.
On September 14, 1997 the Company issued 700,000 shares to
HomeSeekers.com, Inc. in connection with a licensing agreement, under the
exemption provided by Section 4(2) of the Securities Act. The Company believes
that HomeSeekers.com, Inc. qualifies as a "sophisticated investor" under
Regulation D due to its history of doing business in the software and internet
industry.
Item 5. Indemnification of Directors and Officers
The Company has adopted provisions in its articles of incorporation
and bylaws that limit the liability of its directors and provide for
indemnification of its directors and officers to the full extent permitted under
the Nevada General Corporation Law. Under the Company's Certificate of
Incorporation, and as permitted under the Nevada General Corporation Law,
directors are not liable to the Company or its stockholders for monetary damages
arising from a breach of their fiduciary duty of care as directors. Such
provisions do not, however, relieve liability for breach of a director's duty of
loyalty to the Company or its stockholders, liability for acts or omissions not
in good faith or involving intentional misconduct or knowing violations of law,
liability for transactions in which the director derived as improper personal
benefit or liability for the payment of a dividend in violation of Nevada law.
Further, the provisions do not relieve a director's liability for violation of,
or otherwise relieve the Company or its directors from the necessity of
complying with, federal or state securities laws or affect the availability of
equitable remedies such as injunctive relief or recision.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that may result in a claim for indemnification by any director or
officer.
PART F/S
The following financial statements are included herein:
Independent Auditor's Report
Balance Sheets at June 30, 1998 and September 30, 1997
Statement of Operations from Inception (November 5, 1996) through
September 30, 1997 and for the three months ended June 30, 1998
Statement of Stockholders' Equity Statement of Cash Flows from
Inception (November 5, 1996) through September 30, 1997 and for the
three months ended June 30, 1998 Notes to Financial Statements Notes
to Interim Financial Statements
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<PAGE>
PART III
Item 1. Index to Exhibits.
The following exhibits required by Part III of Form 1-A are filed
herewith:
Exhibit No. Document Description
2. Charter and Bylaws
2.1 Articles of Incorporation(1)
2.2 Bylaws(1)
2.3 Articles of Merger(1)
3. Instruments Defining the rights of security holders
Not Applicable.
5. Voting Trust Agreement
Not Applicable.
6. Material Contracts
6.1 License and Marketing Agreement with NDS
Software, Inc.(1)
6.2 Employment Agreement - Robert Horn(1)
6.3 Employment Agreement - Kirk Johnson(1
7. Material Foreign Patents.
Not Applicable.
(1) Previously filed.
Item 2. Description of Exhibits.
See Item 1.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: August 31, 1998 WEBQUEST INTERNATIONAL, INC.
By:/s/ Robert Horn
Robert Horn
President
8
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
PRITCHETT, SILER & HARDY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
<TABLE>
<CAPTION>
CONTENTS
PAGE
<S> <C>
-- Independent Auditors' Report................................................ 1
-- Balance Sheet, September 30, 1997........................................... 2
-- Statement of Operations, from inception
on November 5, 1996 through September 30,
1997.................................................................... 3
-- Statement of Stockholders' Equity (Deficit),
from inception on November 5, 1996
through September 30, 1997.............................................. 4
-- Statement of Cash Flows, from inception
on November 5, 1996 through September 30,
1997.................................................................... 5 - 6
-- Notes to Financial Statements............................................... 7 - 18
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
WEBQUEST INTERNATIONAL, INC.
Minden, NV
We have audited the accompanying balance sheet of Webquest International, Inc.
[a development stage company] at September 30, 1997, and the related statements
of operations, stockholders' equity and cash flows from inception on November 5,
1996 through September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements audited by us present fairly, in all
material respects, the financial position of Webquest International, Inc. as of
September 30, 1997, and the results of its operations and its cash flows for the
period from inception through September 30, 1997, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 10 to the financial
statements, the Company has liabilities in excess of assets, has incurred losses
since inception and has not yet established profitable operations, raising
substantial doubt about its ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 10. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
/s/ PRITCHETT, SILER & HARDY, P.C.
November 6, 1997
Salt Lake City, Utah
1
<PAGE>
<TABLE>
<CAPTION>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
BALANCE SHEET
ASSETS
September 30,
1997
CURRENT ASSETS:
<S> <C>
Cash in bank $ 9,321
Total Current Assets 9,321
PROPERTY AND EQUIPMENT, net 5,716
SOFTWARE LICENSE RIGHTS, net 925,000
$ 940,037
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 140,896
Note payable - related party 14,852
Other accrued liabilities 10,415
Total Current Liabilities 166,163
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value,
5,000,000 shares authorized, 93,750 shares of 12% Series B
convertible preferred stock issued and outstanding for which
500,000
shares have been authorized 94
Common stock, $.001 par value,
20,000,000 shares authorized,
3,578,951 shares issued and
outstanding 3,579
Capital in excess of par value 1,578,879
Deficit accumulated during the
development stage (459,001)
Less: deferred compensation expense
In accordance with APB 25 (349,677)
Total Stockholders' Equity 773,874
$ 940,037
</TABLE>
The accompanying notes are an integral part of this financial
statement.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENT OF OPERATIONS
From Inception
on November 5,
1996 Through
September 30,
1997
<S> <C>
REVENUE $ -
EXPENSES:
Selling expense 199,290
General and administrative 253,382
Compensation expense recorded in
accordance with APB 25 for Stock
Options issued below market value 3,923
Total Expenses 456,595
OTHER EXPENSES:
Interest expense 2,406
Total Other Expenses 2,406
LOSS BEFORE INCOME TAXES (459,001)
CURRENT TAX EXPENSE -
DEFERRED TAX EXPENSE -
NET LOSS $ (459,001)
LOSS PER COMMON SHARE $ (.21)
</TABLE>
The accompanying notes are an integral part of this financial
statement.
- 3 -
<TABLE>
<CAPTION>
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENT OF STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION ON NOVEMBER 5, 1996
THROUGH SEPTEMBER 30, 1997
Deficit
Accumulated
Preferred Stock Common Stock Capital in During the
Excess of Development
Shares Amount Shares Amount Par Value Stage
<S> <C> <C> <C> <C>
BALANCE, November 5, 1996 - $ - - $ - $ - $ -
Issuance of 2,438,333 shares common
stock for cash, January 1997, at
$.123 per share - - 2,438,333 2,438 297,562 -
Issuance of 116,667 shares common
stock for services, January 1997, at
$.116 per share - - 116,667 117 13,417 -
Recapitalization of Phaser, issuance
of 200,201 shares of common stock
for Phaser stock, May 1997 - - 200,201 200 (2,282) -
Issuance of 93,750 shares preferred and
common stock for cash, March through
September 1997, at $1.00 per share 93,750 94 93,750 94 187,312 -
Issuance of 30,000 shares common
stock for services, August 1997, at
$1.00 per share - - 30,000 30 29,970 -
Issuance of 700,000 shares common
stock for licensing agreement, at
$1.00 per share, September 1997 - - 700,000 700 699,300 -
Granting of options to acquire 400,000
shares of common stock at below market
value. Compensation expense calculated
in accordance with APB 25. - - - - 353,600 -
Net loss for the period ended
September 30, 1997 - - - - - (459,001)
BALANCE, September 30, 1997 93,750 94 3,578,951 3,579 1,578,879 (459,001)
</TABLE>
The accompanying notes are an integral part of this financial statement.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENT OF CASH FLOWS
NET INCREASE (DECREASE) IN CASH
From Inception
on November 5,
1996 Through
September 30,
1997
Cash Flows from Operating Activities:
<S> <C>
Net loss $ (459,001)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 75,371
Non-cash expense 43,533
APB 25 compensation recorded for
Stock options issued below
Market value 3,923
Changes in assets and liabilities:
Increase in accounts payable 140,896
Increase in accounts payable - related party 14,852
Increase in accrued liabilities 10,415
Net Cash Flows Used by Operating Activities (170,011)
Cash Flows from Investing Activities:
Purchase of equipment (6,087)
Purchase of software licensing rights (300,000)
Net Cash Flows Used by Investing Activities (306,087)
Cash Flows from Financing Activities:
Proceeds from preferred stock issuance 93,750
Proceeds from common stock issuance 391,669
Net Cash Flows Provided by Financing Activities 485,419
Net Increase in Cash 9,321
Cash at Beginning of Period -
Cash at End of Period $ 9,321
Supplemental Disclosures of Cash Flow information:
Cash paid during the period for:
Interest $ 2,406
Income taxes $ -
[Continued]
- 5 -
</TABLE>
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENT OF CASH FLOWS [Continued]
NET INCREASE (DECREASE) IN CASH
Supplemental schedule of Noncash Investing and Financing Activities:
For the period ended September 30, 1997:
The Company issued a total of 700,000 shares of restricted
common stock to a related entity in exchange for licensing
rights valued at $700,000.
The Company issued a total of 146,667 shares of restricted
common stock in exchange for services rendered valued at
$43,533.
The Company issued stock options to purchase 400,000 shares of
common stock to an officer of the Company at below market
value prices. Additional paid in capital of $353,600 was
recorded, $3,923 in current compensation expense was recorded
and $349,677 of deferred compensation expense ( a reduction to
stockholders' equity) was recorded.
The Company issued a total of 200,201 shares of common stock
in exchange for merger with Phaser valued at $(2,082).
The accompanying notes are an integral part of
this financial statement.
- 6 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - The Company was organized under the laws of the State of
Nevada on November 5, 1996 as IPONG International, Inc. but
subsequently reorganized with WebQuest International, Inc. (which was
formed to serve as a vehicle for a reorganization of the Company).
During April, 1997 the Company entered into a plan and agreement of
merger with Phaser Enterprises, Inc. ["Phaser"], a publicly held Utah
corporation wherein the operations of the Company is the surviving
entity. The Company has not commenced planned principal operations and
is considered a development stage company as defined in SFAS No. 7. The
Company is planning to engage in the business of creating and marketing
Internet "web" sites on a commercial basis along with other Internet
related businesses.
Comparative Financial Statements - Prior year financial statements of
Phaser are not included because the reorganization with the Company has
been accounted for as a recapitalization in a manner similar to a
reverse purchase. Phaser was inactive prior to the reorganization and
the operations of the Company are the on-going operations of the
combined enterprise. Accordingly, the operations of Phaser prior to the
date of reorganization have been eliminated. A summary of Phaser's
stockholders' equity prior to reorganization has been included in
Footnote 12 (Unaudited).
Property and Equipment - Property and equipment are stated at cost.
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized, upon being placed in
service. Expenditures for maintenance and repairs are charged to
expense as incurred. Depreciation is computed for financial statement
purposes on a straight-line basis over the estimated useful lives of
the assets which ranges from five to seven years.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." This statement requires an asset and liability approach
for accounting for
income taxes.
Dividend Policy - The Company has not paid any dividends on common
stock to date and does not anticipate paying dividends on common stock
in the foreseeable future.
Recently Enacted Accounting Standards - In February 1997, SFAS Nos.
128, "Earnings Per Share" and 129, "Disclosures of Information about
Capital Structure" were issued. SFAS No. 128 changes the computation,
presentation and disclosure requirements of earnings per share for
entities with publicly held common stock. SFAS No. 129 addresses
standards for disclosing information about an entity's capital
structure. Although such statements are not effective until December
31, 1997, had such statements been adopted for the eleven months ended
September 30, 1997 and for the period from inception through September
30, 1997 the effect would not be significant.
- 7 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
Revenue Recognition - The Company has not yet generated any revenues.
Loss Per Share - The computation of loss per share is based on the
weighted average number of shares outstanding during the period
presented.
Statement of Cash Flows - For purposes of the statement of cash flows,
the Company considers all highly liquid debt investments purchased with
a maturity of three months or less to be cash equivalents.
Stock Based Compensation - The Company accounts for its stock based
compensation in accordance with Statement of Financial Accounting
Standard 123 "Accounting for Stock-Based Compensation". This statement
establishes an accounting method based on the fair value of equity
instruments awarded to employees as compensation. However, companies
are permitted to continue applying previous accounting standards in the
determination of net income with disclosure in the notes to the
financial statements of the differences between previous accounting
measurements and those formulated by the new accounting standard. The
Company has adopted the disclosure only provisions of SFAS No. 123,
accordingly, the Company has elected to determine net income using
previous accounting standards.
Reverse Stock Split - In connection with the recapitalization, Phaser
reverse split its outstanding common stock on the basis of 1 share
issued for each 27 shares previously outstanding. The financial
statements have been restated to reflect the common stock split for all
periods presented.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles required
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities, the disclosures of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimated by management.
NOTE 2 - RECAPITALIZATION
The Company was organized on November 5, 1996 as IPONG International,
Inc. and subsequently reorganized with WebQuest International, Inc.
(which was formed to serve as a vehicle for a reorganization of the
Company). During April, 1997 the Company entered into a plan and
agreement of merger with Phaser Enterprises, Inc., a public
corporation, wherein Webquest International, Inc. was the surviving
entity. The transaction has been accounted for as a recapitalization of
the Company. The operations of Phaser are included only from the date
of recapitalization. Accordingly, the previous operations and retained
deficits of Phaser prior to the date of reorganization have been
eliminated. In anticipation of the reorganization, Phaser effected a
reverse stock split on the basis of 1 share issued for each 27 shares
previously outstanding. The former shareholders of Phaser held
approximately 200,201 shares of common stock immediately after the
reorganization.
- 8 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - SOFTWARE LICENSE RIGHTS
Software licensing rights consists of the following at September 30,
1997:
<TABLE>
<CAPTION>
1997
<S> <C>
Cash paid for licensing rights $ 300,000
Stock issued for licensing rights 700,000
1,000,000
Less accumulated amortization 75,000
$ 925,000
</TABLE>
Amortization expense amounted to $75,000 for the period ended September
30, 1997.
Licensing and Marketing Agreement - During December, 1996 the Company
paid $300,000 for an option to acquire licensing rights to an
interactive advertising game for use on the Internet. On January 5,
1997, the Company exercised its option and entered into a licensing and
marketing agreement (with technical support) with a Nevada corporation,
NDS Software, Inc. ("NDS"), that owns the software rights. The license
agreement has a 10-year term and allows the Company to develop, use,
and market the product on an exclusive basis. Licensing rights are
capitalized and amortized on a 10- year basis (the life of the
agreement) and programming costs are expensed as incurred. Programming
expense amounted to $194,290 for the period ended September 30, 1997.
As consideration for this agreement the Company agreed to pay $58,333
per month for a year, commencing January 5, 1997. During September
1997, the Company issued 700,000 shares of restricted common stock at
an agreed upon value of $700,000 (or $1.00 per share) for full
consideration of the one year, $58,333 per month payment. The Company
agreed to pay 7% of gross revenues for the first year after the live
date (anticipated to be March 9, 1998), 10% of gross revenues for the
second year after the live date, and 15% thereafter. The company also
agreed to pay $20,000 per month commencing at the live date for
"website" fees to the Nevada corporation. The Company agreed to pay
$125 per hour and $0.50 per development question to the Nevada
corporation for technical support. Upon merger with IPONG
International, Inc. on April 18, 1997 Webquest assumed the rights and
obligations to this agreement. NDS Software is considered to be an
affiliate of the Company because it has the same controlling
shareholders as the Company.
- 9 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
Non-exclusive License Agreement - On July 3, 1997, the Company entered
into a non-exclusive licensing agreement with a Delaware corporation,
Atari-JTS Corp. that owns the software, programs, trade names,
trademarks, promotional material, and intellectual property for use on
the Internet. The agreement with the Company has a five year term
(which is renewable for an additional five years if minimum royalty
fees received are at least $400,000 over the five year period) and
allows the Company to license and use the game (Pong) in connection
with its "website" on a non-exclusive basis. As consideration for this
agreement the Company paid a $5,000 non-refundable execution of
agreement fee. The Company also agreed to pay a quarterly 1/10 of one
cent ($.001) royalty fee for each player who accesses Pong; with a base
amount of $5,000 to the Delaware corporation if the number of Pong
players fails to exceed 5,000,000 in each quarter. Royalty fees are
expensed as incurred. Royalty expense amounted to $5,000 for the period
ended September 30, 1997.
Property and equipment consists of the following at September 30, 1997:
<TABLE>
<CAPTION>
1997
<S> <C>
Office equipment $ 2,357
Computer equipment 3,730
6,087
Less accumulated depreciation 371
$ 5,716
</TABLE>
Depreciation expense amounted to $371 for the period ended September
30, 1997.
NOTE 5 - NOTES PAYABLE - Related Party
A shareholder of the Company made two advances to the Company totaling
$110,000. The unpaid balance of the advances was $14,852 at September
30, 1997; of which $2,232 was unpaid accrued interest.
NOTE 6 - CAPITAL STOCK
Common Stock - During January, 1997, the Company issued 2,438,333
shares of its previously authorized, but unissued common stock to its
initial shareholders. Total proceeds from the sale of stock amounted to
$300,000 (or $.123 per share).
Services Rendered - During January, 1997, the Company issued 116,667
shares of common stock for services rendered which were valued at
$13,534 (or $.116 per share). Also, during August, 1997, the Company
issued 30,000 shares of common stock for services rendered which were
valued at $30,000 (or $1.00 per share).
- 10 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - CAPITAL STOCK
Public Offering - During the period from March through September, 1997,
the Company sold 93,750 shares of common stock and 93,750 shares of
series B preferred stock pursuant to a public offering. This offering
was registered by qualification in the State of Utah and was made in
reliance on Rule 504 of Regulation D under the Securities Act of 1933.
An offering price of $10,000 per unit was arbitrarily determined by the
Company and the sales agent. Each unit sold consisted of 5,000 shares
of common stock, 2,500 warrants to purchase common stock and 5,000
shares of Series B 12% convertible preferred stock. Total proceeds from
the stock sold through September 30, 1997 amounted to $187,500. The
warrants are exercisable at $7.50 per share commencing one year from
the date of closing of the stock offering and continuing till January
15, 1999. The warrants are subject to redemption by the Company at $.01
per warrant provided the common stock of the Company has traded at a
price of more than $10.00 for 10 consecutive days concluding within any
20 consecutive day period immediately prior to the date the Company has
provided notice of such redemption.
Stock Options - During September, 1997, the Company issued options to
an officer of the Company to purchase 400,000 shares of common stock at
$.116, which was below the current market value of $1.00 per share.
Total compensation expense (in accordance with APB 25) of $353,600 has
been calculated with $3,923 being recorded as a current period expense.
The deferred portion of $349,677 is recorded as a reduction to
stockholders' equity.
License Agreement - During September, 1997, the Company issued 700,000
shares of common stock to an affiliated company for software licensing
rights which were valued at $700,000 (or $1.00 per share).
Preferred Stock - The Company authorized 5,000,000 shares of preferred
stock, $.001 par value with such rights, preferences and designations
and to be issued in such series as determined by the Board of
Directors.
Series B Preferred Stock - The Series B Preferred Stock pays dividends
at the rate of 12% and is fully cumulative. The series B preferred
stock shall be entitled to receive dividends, commencing December 1,
1998, at an annual rate of 12% per share out of the funds legally
available and to the extent declared by the Board of Directors. The
dividends shall be payable in semi-annual installments on December 1
and June 1 commencing December 1, 1998. The dividends may be paid
either in cash, in common stock of the corporation or a combination
thereof. The Series B Preferred Stock will be automatically converted
to one (1) share common stock one year from the date of issuance. The
holders of Series B Preferred Stock shall be entitled to one (1) vote
of each share of Series B Preferred Stock held.
- 11 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - STOCK OPTIONS
A summary of the status of the options granted under agreements at
September 30, 1997, and changes during the period then ended is
presented in the table below:
<TABLE>
<CAPTION>
1997
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of period -- $ --
Granted 400,000 .116
Exercised - -
Forfeited - -
Canceled - -
Outstanding at end of Period 400,000 $ .116
Exercisable at end of period 100,000 $ .116
Weighted average fair value of options
granted 400,000 $ .88
</TABLE>
The fair value of each option granted is estimated on the date granted
using the Black-Scholes option pricing model, with the following
weighted-average assumptions used for grants during the period ended
September 30, 1997: risk-free interest rate of 6.1%, expected dividend
yield of zero, an expected life of 5 years and expected volatility of
225%.
A summary of the status of the options outstanding under agreements at
September 30, 1997 is presented below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ .116 400,000 5 years $ .116 100,000 $ .116
</TABLE>
The Company accounts for options agreements under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. Had compensation cost for these options been
determined, based on the fair value at the grant dates for awards under
these agreements, consistent with the method prescribed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Company's net loss would have been the proforma
amounts as indicated below:
- 12 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - STOCK OPTIONS - [Continued]
<TABLE>
<CAPTION>
Period Ended
September 30,
1997
Net Loss
<S> <C>
As reported $ (459,001)
Proforma $ (459,001)
Earnings per Share
As reported $ (.21)
Proforma $ (.21)
</TABLE>
NOTE 8 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes".
FASB 109 requires the Company to provide a net deferred tax
asset/liability equal to the expected future tax benefit/expense of
temporary reporting differences between book and tax accounting methods
and any available operating loss or tax credit carryforwards. At
September 30, 1997, the Company's tax assets consist primarily of
unused operating loss carryforwards of approximately $455,000, which
may be applied against future taxable income and which expire in 2012.
The amount of and ultimate realization of the benefits from the
operating loss carryforwards for income tax purposes is dependent, in
part, upon the tax laws in effect, the future earnings of the Company,
and other future events, the effects of which cannot be determined.
Because of the uncertainty surrounding the realization of the loss
carryforwards the Company has established a valuation allowance equal
to the amount of the loss carryforwards and, therefore, no deferred tax
asset has been recognized for the loss carryforwards. The net deferred
tax assets are approximately $156,000 as of September 30, 1997.
NOTE 9 - RELATED PARTY TRANSACTIONS
Employment Agreements - The Company has entered into two employment
agreements with officers of the Company.
The employment agreement for the Chief Executive Officer was effective
as of September 22, 1997 and has a term of two years. The agreement
provides for a base salary of $120,000 per year. The employee may
terminate the agreement on 30 days notice. The agreement also provides
for stock options to purchase 400,000 shares of registered common stock
of the Company. Options to purchase 100,000 shares of common stock vest
immediately while the remainder of the options vest at the rate of
100,000 shares on each yearly anniversary. There are no restrictions on
the underlying common stock except for those imposed under Rule 144 of
the Securities Act of 1933, as amended. Once vested the options are
exercisable for a five year period from the date of vesting whether or
not the employee is still employed by the company. However, the
employee must be employed by the company on the date of vesting or the
options for that date will not vest. The options are exercisable at
$.116 per share which is less than the current market value of the
stock on the date the agreement took effect and the options were
granted (See Note 6).
- 13 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - RELATED PARTY TRANSACTIONS
The employment agreement for the position which includes
Vice-President, Secretary and Treasurer was effective as of October 1,
1997 and has a term of two years. The agreement provides for a base
salary of $2,000 per week commencing December 1, 1997. For the period
from October 1, 1997 through November 30, 1997 the employee will
receive stock options as follows: 10,000 upon signing and 2,500 per
week. The options vest on a monthly basis. At November 30, 1997, all
30,000 options received will be fully vested. Beginning December 1,
1997, the employee can elect to receive options in lieu of cash salary
at the rate of 2,500 options per week. The options will vest on a
monthly basis. The employee may terminate the agreement on 30 days
notice. The agreement also provided for stock options to be immediately
granted to purchase 150,000 shares of registered common stock of the
Company. Options to purchase 75,000 shares of common stock vest on
October 1, 1998 while the remainder of the options (75,000 shares) vest
on October 1, 1999. There are no restrictions on any of the underlying
common stock except for those imposed under Rule 144 of the Securities
Act of 1933, as amended. Once vested the options are exercisable for a
five year period from the date of vesting whether or not the employee
is still employed by the company. However, the employee must be
employed by the company on the date of vesting or the options for that
date will not vest. The options are exercisable at $.116 per share
which is less than the current market value of the stock on the date
the agreement took effect and the options were granted (See Note 6).
Office Space - Prior to September 30, 1997, the Company had no office
facilities. Officers of the Company conducted the Company's business
from their own residences or offices at no expense to the Company.
Notes Payable - During 1997, the Company entered into two notes payable
with a shareholder of the company. The notes payable from the
shareholder of the Company totaled $110,000, bear interest at 12%, and
have a remaining balance of $12,620. The Company has paid $174 interest
and interest expense for the period ended September 30, 1997 totaled
$2,407.
Related Entity - Certain officers or shareholders of the Company are
also affiliated with an entity with whom the Company has a licensing
and marketing agreement (See Note 3). Cash of $300,000 and common stock
valued at $700,000 was paid to the affiliated company for the licensing
rights.
NOTE 10 - GOING CONCERN
The Company was formed with a very specific business plan. However, the
possibility exists that the Company could expend virtually all of its
working capital in a relatively short time period and may not be
successful in establishing on-going profitable operations. The
financial statements do not contain any allowances, liabilities or
other adjustments which may need to be recorded if the Company is not
successful in achieving profitable operations.
- 14 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - GOING CONCERN - [Continued]
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company is
newly formed, has incurred losses since its inception, has current
liabilities in excess of current assets of $156,842 and has not yet
been successful in establishing profitable operations. These factors
raise substantial doubt about the ability of the Company to continue as
a going concern. In this regard, management is proposing to raise any
necessary additional funds not provided by operations through loans
and/or through additional sales of its common stock. There is no
assurance that the Company will be successful in raising additional
capital or achieving profitable operations. The financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
NOTE 11 - LEASE OBLIGATIONS
Operating Leases - The Company has no long-term operating leases that
have remaining terms in excess of one year as of September 30, 1997.
However, the Company has a month to month sublease for office space and
telephone line access with the same affiliated company that the Company
purchased the licensing rights from (and is performing the technical
support), wherein the Company pays $400 per month starting October 1,
1997.
NOTE 12 - PHASER'S STOCKHOLDERS' EQUITY (UNAUDITED)
Financial statements of Phaser prior to the recapitalization of
subsidiary have not been included because Parent's operations have been
eliminated in the recapitalization. However, the following information
taken from Phasers April 30, 1997 financial statements summarizes the
Stockholders' Equity of Phaser prior to the reorganization.
<TABLE>
<CAPTION>
PHASER ENTERPRISES, INC.
[A Development Stage Company]
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM THE DATE OF INCEPTION ON JULY 5, 1984 THROUGH JUNE 30, 1996
Deficit
Accumulated
Preferred Stock Common Stock Additional During the
Paid-in Development
Shares Amount Shares Amount Capital Stage
<S> <C> <C> <C> <C> <C>
BALANCE, July 5, 1984 - $ - - $ - $ - $ -
Common stock issued to
officers, directors and others
for cash at $0.022667
per share - - 45,000 45 20,355 -
Preferred stock issued
to officers, directors and others
for cash at $1.00 per share 50,000 50 - - 38,050 -
Forward split of common stock - - 405,000 405 (405) -
- 15 -
<PAGE>
Net loss from inception on
July 5, 1984 through
June 30, 1985 - - - - - (21,417)
BALANCE, June 30, 1985 50,000 50 450,000 450 58,000 (21,417)
Common stock issued to
officers and others for cash
at $0.037044 per share - - 460,800 461 340,934 -
Retirement of preferred stock (45,000) (45) - - (44,955) -
Retirement of common stock - - (431,650) (432) (1,566) -
Common stock issued to
shareholders of Phaser
Enterprises, Inc. pursuant
to merger agreement - - 1,850,003 1,850 460,650 -
Net loss for the year ended
June 30, 1986 - - - - - (73,989)
BALANCE, June 30, 1986 5,000 5 2,329,153 2,329 796,661 (95,406)
[Continued]
- 16 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - PHASER'S STOCKHOLDERS' EQUITY (UNAUDITED) [Continued]
PHASER ENTERPRISES, INC.
[A Development Stage Company]
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM THE DATE OF INCEPTION ON JULY 5, 1984 THROUGH JUNE 30, 1996
[CONTINUED]
Deficit
Accumulated
Preferred Stock Common Stock Additional During the
Paid-in Development
Shares Amount Shares Amount Capital Stage
Common stock issued to
officers and others for
services provided at $0.001
per share - - 176,500 177 3,353 -
Retirement of preferred stock (5,000) (5) - - 5 -
Net loss for the year ended
June 30, 1987 - - - - - (707,319)
BALANCE, June 30, 1987 - - 2,505,653 2,506 800,019 (802,725)
Net loss for the year ended
June 30, 1988 - - - - - (100)
BALANCE, June 30, 1988 - - 2,505,653 2,506 800,019 (802,825)
Net loss for the year ended
June 30, 1989 - - - - - (460)
BALANCE, June 30, 1989 - - 2,505,653 2,506 800,019 (803,285)
Net loss for the year ended
June 30, 1990 - - - - - (844)
BALANCE, June 30, 1990 - - 2,505,653 2,506 800,019 (804,129)
Net loss for the year ended
June 30, 1991 - - - - - (100)
BALANCE, June 30, 1991 - - 2,505,653 2,506 800,019 (804,229)
Net loss for the year ended
June 30, 1992 - - - - - (391)
BALANCE, June 30, 1992 - - 2,505,653 2,506 800,019 (804,620)
Net loss for the year ended
June 30, 1993 - - - - - (100)
BALANCE, June 30, 1993 - - 2,505,653 2,506 800,019 (804,720)
[Continued]
- 17 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - PHASER'S STOCKHOLDERS' EQUITY (UNAUDITED) [Continued]
PHASER ENTERPRISES, INC.
[A Development Stage Company]
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM THE DATE OF INCEPTION ON JULY 5, 1984 THROUGH JUNE 30, 1996
[CONTINUED]
Deficit
Accumulated
Preferred Stock Common Stock Additional During the
Paid-in Development
Shares Amount Shares Amount Capital Stage
Net loss for the year ended
June 30, 1994 - - - - - (100)
BALANCE, June 30, 1994 - - 2,505,653 2,506 800,019 (804,820)
Common stock issued
to officer for services
provided at $0.001 per
share - - 3,000,000 3,000 57,000 -
Net loss for the year ended
June 30, 1995 - - - - - (59,600)
BALANCE, June 30, 1995 - - 5,505,653 5,506 857,019 (864,420)
Adjustment for fractional
shares in 20 for 1 reverse
stock split - - 5 - - -
Net loss for the year ended
June 30, 1996 - - - - - (191)
BALANCE, June 30, 1996 - $- 5,505,658 $5,506 $857,019 $(864,611)
</TABLE>
The following unaudited Proforma condensed financial information
assumes that PHASER and the Company entered into the reorganization on November
5, 1996:
<TABLE>
<CAPTION>
For the
Period Ended
September 30,
1997
(Unaudited)
<S> <C>
Revenues $ -
Expenses 459,001
Net loss $ (459,001)
Loss per share $ (.21)
- 18 -
</TABLE>
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENTS
Public Offering - During the period subsequent to September, 1997, the
Company is continuing to sell shares of common stock pursuant to a
public offering (See Note 6). During the period from October 1, 1997
through November 18, 1997 a total of 93,500 additional shares of common
and preferred stock have been sold. Total proceeds from the subsequent
stock sales amounted to $187,000.
Lease Agreement - The Company entered into a one year lease agreement
for office facilities which commenced on October 6, 1997 and expires on
October 6, 1998. The agreement calls for monthly payments of $550.
Consulting Agreements - During November, 1997 the Company entered into
two consulting agreements to provide financial public relations for the
Company. Both agreements have a term of one year. One agreement
provides for monthly cash payments of $3,500 ($42,000 total). The other
agreement provides for the issuance of a stock option to purchase
100,000 shares of the Company's common stock at a price of $3.00 per
share.
- 19 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1998
PRITCHETT, SILER & HARDY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
- 20 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
<TABLE>
<CAPTION>
CONTENTS
PAGE
<S> <C>
-- Accountant's Disclaimer of Opinion................................. 1
-- Unaudited Balance Sheet, June 30, 1998............................. 2
Unaudited Statements of Operations, for the nine months ended
June 30, 1998 and from inception on November 5, 1996 through
June 30, 1998...................................................... 3
-- Unaudited Statements of Stockholders' Equity,
for the period from inception on November 5,
1996 through September 30, 1997 and through
June 30, 1998......................................................4 - 5
- Unaudited Statements of Cash Flows, for the nine months ended
June 30, 1998 and from inception on November 5, 1996 through
June 30, 1998......................................................6 - 7
-- Notes to Unaudited Financial Statements............................8 - 17
</TABLE>
- 21 -
<PAGE>
ACCOUNTANT'S DISCLAIMER OF OPINION
Board of Directors
WEBQUEST INTERNATIONAL, INC.
Minden, NV
The accompanying balance sheet of Webquest International, Inc. as of June 30,
1998 and the related statements of operations, stockholders' equity and cash
flows for the periods then ended were not audited by us, and, accordingly, we do
not express an opinion on them.
/s/ PRITCHETT, SILER & HARDY, P.C.
August 7, 1998
Salt Lake City, Utah
1
<PAGE>
<TABLE>
<CAPTION>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
BALANCE SHEET
[Unaudited - See Accountant's Disclaimer of Opinion]
ASSETS
June 30,
1998
CURRENT ASSETS:
<S> <C>
Cash in bank $ 45,770
Refundable deposit 1,005
Employee advances 150
Total Current Assets 46,925
PROPERTY AND EQUIPMENT, net 11,948
SOFTWARE LICENSE RIGHTS, net 850,000
$ 908,873
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 164,336
Note payable - related party 18,809
Other accrued liabilities 75,128
Accrued dividends payable 40,714
Total Current Liabilities 298,987
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 5,000,000 shares authorized, 228,500
shares of 12% Series B convertible preferred stock issued and outstanding
for which 500,000
shares have been authorized 229
Common stock, $.001 par value,
20,000,000 shares authorized,
3,865,201 shares issued and
outstanding 3,865
Capital in excess of par value 2,114,378
Deficit accumulated during the
development stage (1,162,451)
Less: deferred compensation expense
In accordance with APB 25 (346,135)
Total Stockholders' Equity 609,886
$ 908,873
</TABLE>
The accompanying notes are an integral part of these financial
statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENTS OF OPERATIONS
[Unaudited - See Accountant's Disclaimer of Opinion]
For the From Inception
Nine Months on November 5,
Ended 1996 Through
June 30, June 30,
1998 1998
<S> <C> <C>
REVENUE $ - $ -
EXPENSES:
Selling expense 84,298 283,588
General and administrative 413,980 667,362
Compensation expense recorded in
accordance with APB 25 for Stock
Options issued below market value 162,663 166,587
Total Expenses 660,941 1,117,537
OTHER EXPENSES:
Interest expense 1,794 4,200
Total Other Expenses 1,794 4,200
LOSS BEFORE INCOME TAXES (662,735) (1,121,737)
CURRENT TAX EXPENSE - -
DEFERRED TAX EXPENSE - -
NET LOSS $ (662,735) $(1,121,737)
LESS PREFERRED DIVIDEND
REQUIREMENTS (40,714) (40,714)
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (703,449) $ (1,162,451)
LOSS PER COMMON SHARE $ (.19) $ (.41)
</TABLE>
The accompanying notes are an integral part of these
financial statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENTS OF STOCKHOLDERS' EQUITY
[Unaudited - See Accountant's Disclaimer of Opinion]
FROM THE DATE OF INCEPTION ON NOVEMBER 5, 1996
THROUGH JUNE 30, 1998
Deficit
Accumulated
Preferred Stock Common Stock Capital in During the
Excess of Development
Shares Amount Shares Amount Par Value Stage
<S> <C> <C> <C> <C> <C>
BALANCE, November 5, 1996 - $ - - $ - $ - $ -
Issuance of 2,438,333 shares common
stock for cash, January 1997, at
$.123 per share - - 2,438,333 2,438 297,562 -
Issuance of 116,667 shares common
stock for services, January 1997, at
$.116 per share - - 116,667 117 13,417 -
Recapitalization of Phaser, issuance
of 200,201 shares of common stock
for Phaser stock, May 1997 - - 200,201 200 (2,282) -
Issuance of 93,750 shares preferred and
common stock for cash, March through
September 1997, at $1.00 per share 93,750 94 93,750 94 187,312 -
Issuance of 30,000 shares common
stock for services, August 1997, at
$1.00 per share - - 30,000 30 29,970 -
Issuance of 700,000 shares common
stock for licensing agreement, at
$1.00 per share, September 1997 - - 700,000 700 699,300 -
Granting of options to acquire 400,000
shares of common stock at below market
value. Compensation expense calculated
in accordance with APB 25. - - - - 353,600 -
Net loss for the period ended
September 30, 1997 - - - - - (459,001)
[Continued]
- 4 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENTS OF STOCKHOLDERS' EQUITY
[Unaudited - See Accountant's Disclaimer of Opinion]
FROM THE DATE OF INCEPTION ON NOVEMBER 5, 1996
THROUGH JUNE 30, 1998
[CONTINUED]
Deficit
Accumulated
Preferred Stock Common Stock Capital in During the
Excess of Development
Shares Amount Shares Amount Par Value Stage
BALANCE, September 30, 1997 93,750 94 3,578,951 3,579 1,578,879 (459,001)
Issuance of 367,000 shares preferred
and common stock for cash, October
through June, 1998 at $1.00 per share183,500 183 183,500 183 366,633 -
Granting of options to acquire 150,000
shares of common stock at below market
value. Compensation expense calculated
in accordance with APB 25, October, 1997- - - - 132,600 -
Granting of options to acquire 30,000
shares of common stock at below market
value. Compensation expense calculated
in accordance with APB 25, October, 1997- - - - 26,520 -
Issuance of 3,000 shares common stock
for programming costs, December 1997,
at $1.00 per share - - 3,000 3 2,997 -
Issuance of 1,000 shares common stock
for services performed, February 1998,
at $1.00 per share - - 1,000 1 999 -
Issuance of 50,000 shares common stock
upon exercise of options, February 1998,
at $.116 per share - - 50,000 50 5,750 -
Accrued preferred dividends for period
ending June 1998 - - - - - (40,714)
Series B preferred stock conversion
during period ending June 30, 1998 (48,750) (48) 48,750 49 - -
Net loss for the period ended
June 30, 1998 - - - - - (662,735)
BALANCE, June 30, 1998 228,500 $ 229 3,865,201 $ 3,865 $ 2,114,378 $ (1,162,451)
</TABLE>
The accompanying notes are an integral part of
these financial statements.
- 5 -
<PAGE>
<TABLE>
<CAPTION>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENTS OF CASH FLOWS
[Unaudited - See Accountant's Disclaimer of Opinion]
NET INCREASE (DECREASE) IN CASH
For The From Inception
Nine Months on November 5,
Ended 1996 Through
June 30, June 30,
1998 1998
Cash Flows from Operating Activities:
<S> <C> <C>
Net loss $ (662,735) $(1,121,737)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 75,810 151,181
Non-cash expense 4,000 47,533
APB 25 compensation recorded for stock
options issued below market value 162,663 166,587
Changes in assets and liabilities:
(Increase) in employee advances (150) (150)
(Increase) in deposits (1,005) (1,005)
Increase in accounts payable 23,440 164,336
Increase in accounts payable - related party 3,957 18,809
Increase in accrued liabilities 23,997 34,412
Increase in accrued dividends 40,714 40,714
Net Cash Used by Operating Activities (329,309) (499,320)
Cash Flows from Investing Activities:
Purchase of equipment (7,042) (13,129)
Purchase of software licensing rights - (300,000)
Net Cash Used by Investing Activities (7,042) (313,129)
Cash Flows from Financing Activities:
Proceeds from preferred stock issuance 183,500 277,250
Proceeds from common stock issuance 189,300 580,969
Net Cash Provided by Financing Activities 372,800 858,219
Net Increase (Decrease) in Cash (36,449) 45,770
Cash at Beginning of Period 9,321 -
Cash at End of Period $ 45,770 $ 45,770
Supplemental Disclosures of Cash Flow information:
Cash paid during the period for:
Interest $ - $ 174
Income taxes $ - $ -
</TABLE>
[Continued]
- 6 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENTS OF CASH FLOWS
[Unaudited - See Accountant's Disclaimer of Opinion]
NET INCREASE (DECREASE) IN CASH
[CONTINUED]
Supplemental schedule of Noncash Investing and Financing Activities:
For the period ended June 30, 1998:
The Company issued 48,750 shares of common stock in the conversion of
48,750 preferred shares.
The Company issued 3,000 shares of common stock in exchange for
programming costs valued at $3,000.
The Company issued 1,000 shares of common stock to an employee of the
Company in payment of $1,000 bonus.
The Company issued stock options to purchase 180,000 shares of common
stock to an officer of the Company at below market value prices.
Additional paid in capital of $159,120 was recorded, $75,928 in current
compensation expense was recorded and $83,192 of deferred compensation
expense ( a reduction to stockholders' equity) was recorded.
Amortization of deferred compensation on stock options granted prior to
October 1, 1997 amounted to $88,078.
For the period ended September 30, 1997:
The Company issued a total of 700,000 shares of restricted common stock
to a related entity in exchange for software licensing rights valued at
$700,000.
The Company issued a total of 146,667 shares of restricted common stock
in exchange for services rendered valued at $43,533.
The Company issued stock options to purchase 400,000 shares of common
stock to an officer of the Company at below market value prices.
Additional paid in capital of $353,600 was recorded, $3,923 in current
compensation expense was recorded and $349,677 of deferred compensation
expense ( a reduction to stockholders' equity) was recorded.
The Company issued a total of 200,201 shares of common stock in
exchange for merger with Phaser valued at $(2,082).
The accompanying notes are an integral part of these financial
statements.
- 7 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - The Company was organized under the laws of the State of
Nevada on November 5, 1996 as IPONG International, Inc. but
subsequently reorganized with WebQuest International, Inc. (which was
formed to serve as a vehicle for a reorganization of the Company).
During April, 1997 the Company entered into a plan and agreement of
merger with Phaser Enterprises, Inc. ["Phaser"], a publicly held Utah
corporation wherein the operations of the Company is the surviving
entity. The Company has not commenced planned principal operations and
is considered a development stage company as defined in SFAS No. 7. The
Company is planning to engage in the business of creating and marketing
Internet "web" sites on a commercial basis along with other Internet
related businesses.
Comparative Financial Statements - Prior year financial statements of
Phaser are not included because the reorganization with the Company has
been accounted for as a recapitalization in a manner similar to a
reverse purchase. Phaser was inactive prior to the reorganization and
the operations of the Company are the on-going operations of the
combined enterprise. Accordingly, the operations of Phaser prior to the
date of reorganization have been eliminated.
Property and Equipment - Property and equipment are stated at cost.
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized, upon being placed in
service. Expenditures for maintenance and repairs are charged to
expense as incurred. Depreciation is computed for financial statement
purposes on a straight-line basis over the estimated useful lives of
the assets which ranges from five to seven years.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." This statement requires an asset and liability approach
for accounting for
income taxes.
Dividend Policy - The Company has not paid any dividends on common
stock to date and does not anticipate paying dividends on common stock
in the foreseeable future.
Recently Enacted Accounting Standards - In June 1997, SFAS Nos. 130,
"Reporting Comprehensive Income" and 131, "Disclosures about Segments
of an Enterprise and Related Information" were issued. SFAS No. 130
requires that all items that are required to be recognized as
comprehensive income be reported in a financial statement that is
displayed with the same prominence as the other financial statements.
SFAS No. 131 sets standards for reporting information about operating
segments in the financial statements. SFAS No. 131 also sets standards
for the disclosures about products, major customers, and geographical
areas. Although such statements are not effective until fiscal years
beginning after December 15, 1997, had such statements been adopted for
the periods presented, their effect on the financial statements would
not have been significant.
- 8 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
Revenue Recognition - The Company has not yet generated any revenues.
Loss Per Share - Effective for the period ended June 30, 1998 the
Company
adopted Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings
Per Share," which requires the Company to present basic earnings per
share and
dilutive earning per share when the effect is dilutive. There was no
effect on the
financial statements for the change in accounting principle.
[See Note 13]
Cash and Cash Equivalents - For purposes of the statement of cash
flows, the Company considers all highly liquid debt investments
purchased with a maturity of nine months or less to be cash
equivalents.
Stock Based Compensation - The Company accounts for its stock based
compensation in accordance with Statement of Financial Accounting
Standard 123 "Accounting for Stock-Based Compensation". This statement
establishes an accounting method based on the fair value of equity
instruments awarded to employees as compensation. However, companies
are permitted to continue applying previous accounting standards in the
determination of net income with disclosure in the notes to the
financial statements of the differences between previous accounting
measurements and those formulated by the new accounting standard. The
Company has adopted the disclosure only provisions of SFAS No. 123,
accordingly, the Company has elected to determine net income using
previous accounting standards.
Reverse Stock Split - In connection with the recapitalization, Phaser
reverse split its outstanding common stock on the basis of 1 share
issued for each 27 shares previously outstanding. The financial
statements have been restated to reflect the common stock split for all
periods presented.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles required
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities, the disclosures of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimated by management.
- 9 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 2 - RECAPITALIZATION
The Company was organized on November 5, 1996 as IPONG International,
Inc. and subsequently reorganized with WebQuest International, Inc.
(which was formed to serve as a vehicle for a reorganization of the
Company). During April, 1997 the Company entered into a plan and
agreement of merger with Phaser Enterprises, Inc., a public
corporation, wherein Webquest International, Inc. was the surviving
entity. The transaction has been accounted for as a recapitalization of
the Company. The operations of Phaser are included only from the date
of recapitalization. Accordingly, the previous operations and retained
deficits of Phaser prior to the date of reorganization have been
eliminated. In anticipation of the reorganization, Phaser effected a
reverse stock split on the basis of 1 share issued for each 27 shares
previously outstanding. The former shareholders of Phaser held
approximately 200,201 shares of common stock immediately after the
reorganization.
NOTE 3 - SOFTWARE LICENSE RIGHTS
Software licensing rights consists of the following at June 30, 1998:
Cash paid for licensing rights $ 300,000
Stock issued for licensing rights 700,000
1,000,000
Less accumulated amortization 150,000
$ 850,000
Amortization expense amounted to $75,000 for the nine month period
ended June 30, 1998.
Licensing and Marketing Agreement - During December, 1996 the Company
paid $300,000 for an option to acquire licensing rights to an
interactive advertising game for use on the Internet. On January 5,
1997, the Company exercised its option and entered into a licensing and
marketing agreement (with technical support) with a Nevada corporation,
NDS Software, Inc. ("NDS"), that owns the software rights. The license
agreement has a 10-year term and allows the Company to develop, use,
and market the product on an exclusive basis. Licensing rights are
capitalized and amortized on a 10-year basis (the life of the
agreement) and programming costs are expensed as incurred. Programming
expense amounted to $69,248 for the nine month period ended June 30,
1998. As consideration for this agreement the Company agreed to pay
$58,333 per month for a year, commencing January 5, 1997. During
September 1997, the Company issued 700,000 shares of restricted common
stock at an agreed upon value of $700,000 (or $1.00 per share) for full
consideration of the one year, $58,333 per month payment. The Company
agreed to pay 7% of gross revenues for the first year after the live
date (anticipated to be March 9, 1998), 10% of gross revenues for the
second year after the live date, and 15% thereafter. The company also
agreed to pay $20,000 per month commencing at the live date for
"website" fees to the Nevada corporation. The Company agreed to pay
$125 per hour and $0.50 per development question to the Nevada
corporation for technical support. Upon merger with IPONG
International, Inc. on April 18, 1997 Webquest
- 10 -
<PAGE>
assumed the rights and obligations to this agreement. NDS Software is
considered to be an affiliate of the Company because it has the same
controlling shareholders as the Company.
Non-exclusive License Agreement - On July 3, 1997, the Company entered
into a non-exclusive licensing agreement with a Delaware corporation,
Atari-JTS Corp. that owns the software, programs, trade names,
trademarks, promotional material, and intellectual property for use on
the Internet. The agreement with the Company has a five year term
(which is renewable for an additional five years if minimum royalty
fees received are at least $400,000 over the five year period) and
allows the Company to license and use the game (Pong) in connection
with its "website" on a non-exclusive basis. As consideration for this
agreement the Company paid a $5,000 non-refundable execution of
agreement fee. The Company also agreed to pay a quarterly 1/10 of one
cent ($.001) royalty fee for each player who accesses Pong; with a base
amount of $5,000 to the Delaware corporation if the number of Pong
players fails to exceed 5,000,000 in each quarter. Royalty fees are
expensed as incurred. Royalty expense amounted to $15,000 for the nine
month period ended June 30, 1998.
- 11 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30, 1998:
1998
Office equipment $ 6,471
Computer equipment 6,658
13,129
Less accumulated depreciation 1,181
$ 11,948
- ------------------------------------------------------------------
Depreciation expense amounted to $810 for the nine month period ended June
30, 1998.
NOTE 5 - NOTES PAYABLE - Related Party
A shareholder of the Company has made two advances to the Company totaling
$110,000. The unpaid balance of the advances was $18,809 at June 30, 1998;
of which $4,027 was unpaid accrued interest.
During October, 1997, a shareholder of the Company advanced the company
$5,000, which is non-interest bearing and payable upon demand. Also during
October, the advance was paid in full.
NOTE 6 - CAPITAL STOCK
Common Stock - During January, 1997, the Company issued 2,438,333 shares of
its previously authorized, but unissued common stock to its initial
shareholders. Total proceeds from the sale of stock amounted to $300,000
(or $.123 per share).
Services Rendered - During January, 1997, the Company issued 116,667 shares
of common stock for services rendered which were valued at $13,534 (or
$.116 per share). Also, during August, 1997, the Company issued 30,000
shares of common stock for services rendered which were valued at $30,000
(or $1.00 per share).
Public Offering - During the period from March through September, 1997, the
Company sold 93,750 shares of common stock and 93,750 shares of series B
preferred stock pursuant to a public offering. From October, 1997 through
June, 1998 the Company sold an additional 183,500 shares of common and
preferred stock. This offering was registered by qualification in the State
of Utah and was made in reliance on Rule 504 of Regulation D under the
Securities Act of 1933. An offering price of $10,000 per unit was
arbitrarily determined by the Company and the sales agent. Each unit sold
consisted of 5,000 shares of common stock, 2,500 warrants to purchase
common stock and 5,000 shares of Series B 12% convertible preferred stock.
Total proceeds from the stock sold through September 30, 1997 amounted to
$187,500. Proceeds from the subsequent sales
- 12 -
<PAGE>
through June, 1998 amounted to $367,000. The warrants are exercisable at
$7.50 per share commencing July 11, 1999 and continuing until July 11,
2000. The warrants are subject to redemption by the Company at $.01 per
warrant provided the common stock of the Company has traded at a price of
more than $10.00 for 10 consecutive days concluding within any 20
consecutive day period immediately prior to the date the Company has
provided notice of such redemption.
- 13 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 6 - CAPITAL STOCK [Continued]
Stock Options - During September, 1997, the Company issued options to an
officer of the Company to purchase 400,000 shares of common stock at $.116,
which was below the current market value of $1.00 per share. Total
compensation expense (in accordance with APB 25) of $353,600 has been
calculated with $3,923 being recorded as compensation expense through
September, 1997 and $90,658 for the nine months ended June, 1998. The
deferred portion of $259,019, as of June, 1998, is recorded as a reduction
to stockholders' equity. During January, 1998 the officer exercised 50,000
options for $5,800 or $.116 per share.
During October, 1997, the Company issued options to the vice-president of
the Company to purchase 150,000 shares of common stock at $.116, which was
below the current market value of $1.00 per share. Total compensation
expense (in accordance with APB 25) of $132,600 has been calculated with
$49,407 being recorded as compensation expense for the nine months ended
June, 1998. The deferred portion of $83,193, as of June, 1998, is recorded
as a reduction to stockholders' equity.
During November, 1997, the Company issued options to the vice-president of
the Company to purchase 30,000 shares of common stock at $.116, which was
below the current market value of $1.00 per share. The options were issued
in lieu of salary for services rendered during October and November, 1997.
Total compensation expense (in accordance with APB 25) of $26,520 had been
recorded as of November, 1997.
Warrants - At June 30, 1998 the Company had 138,625 warrants to purchase
common stock outstanding. The warrants were issued in conjunction with the
public stock offering (see above). The warrants are exercisable at $7.50
per share and are subject to redemption by the Company at $.01 per share
under the conditions explained above (See Public Offering).
License Agreement - During September, 1997, the Company issued 700,000
shares of common stock to affiliated company for software licensing rights
which were valued at $700,000 (or $1.00 per share).
Programming Fees - During the nine months ended June, 1998 the Company
issued 4,000 shares of common stock, valued at $4,000 or $1.00 per share,
for contract programming services and bonuses.
Preferred Stock - The Company authorized 5,000,000 shares of preferred
stock, $.001 par value with such rights, preferences and designations and
to be issued in such series as determined by the Board of Directors.
Series B Convertible Preferred Stock - The Series B Preferred Stock pays
dividends at the rate of 12% and is fully cumulative. The series B
preferred stock shall be entitled to receive dividends, commencing December
1, 1998, at an annual rate of 12% per share out of the funds legally
available and to the extent declared by the Board of Directors. The
dividends shall be payable in semi-
- 14 -
<PAGE>
annual installments on December 1 and June 1 commencing December 1, 1998.
The dividends may be paid either in cash, in common stock of the
corporation or a combination thereof. The Series B Preferred Stock will be
automatically converted to one (1) share common stock one year from the
date of issuance. The holders of Series B Preferred Stock shall be entitled
to one (1) vote of each share of Series B Preferred Stock held. As of June
30, 1998 the Company had accrued preferred dividends of $40,714. During the
period ended June 30, 1998 $48,750 shares of preferred stock were converted
to 48,750 shares of common stock.
- 15 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 7 - STOCK OPTIONS
A summary of the status of the options granted under agreements at June 30,
1998, and changes during the nine month period then ended is presented in
the table below:
<TABLE>
<CAPTION>
Nine Months Ended
June 30, 1998
-----------------------------
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of period 400,000 $ .116
Granted 280,000 1.15
Exercised (50,000) .116
Forfeited - -
Canceled - -
Outstanding at end of Period 630,000 $ .56
Exercisable at end of period 180,000 $ 1.72
Weighted average fair value of options
granted during the period 280,000 $ .57
</TABLE>
The fair value of each option granted is estimated on the date granted
using the Black-Scholes option pricing model, with the following
weighted-average assumptions used for grants during the nine month
period ended June 30, 1998: risk-free interest rate of 6.0%, expected
dividend yield of zero, an expected life of 4 years and expected
volatility of 225%.
A summary of the status of the options outstanding under agreements at
June 30, 1998 is presented below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ .116 350,000 5 years $ .116 50,000 $ .116
$ .116 180,000 2 years $ .116 30,000 $ .116
$ 3.00 100,000 3 years $ 3.00 100,000 $ 3.00
</TABLE>
- 16 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 7 - STOCK OPTIONS [Continued]
The Company accounts for options agreements under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. Had compensation
cost for these options been determined, based on the fair
value at the grant dates for awards under these agreements,
consistent with the method prescribed by Statement of
Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", the Company's net loss would have
been the proforma amounts as indicated below:
<TABLE>
<CAPTION>
From
Nine months Inception
Ended Through
June 30, June 30,
1998 1998
------------ -----------
<S> <C> <C>
Net Loss As reported $ (662,735) $ (1,121,737)
Proforma $ (662,735) $ (1,121,737)
Earnings per Share As reported $ (.18) $ (.39)
Proforma $ (.18) $ (.39)
</TABLE>
NOTE 8 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes". FASB
109 requires the Company to provide a net deferred tax asset/liability
equal to the expected future tax benefit/expense of temporary reporting
differences between book and tax accounting methods and any available
operating loss or tax credit carryforwards. At June 30, 1998, the Company's
tax assets consist primarily of unused operating loss carryforwards of
approximately $1,121,737, which may be applied against future taxable
income and which expire in 2012.
The amount of and ultimate realization of the benefits from the operating
loss carryforwards for income tax purposes is dependent, in part, upon the
tax laws in effect, the future earnings of the Company, and other future
events, the effects of which cannot be determined. Because of the
uncertainty surrounding the realization of the loss carryforwards the
Company has established a valuation allowance equal to the amount of the
loss carryforwards and, therefore, no deferred tax asset has been
recognized for the loss carryforwards. The net deferred tax assets are
approximately $381,000 as of June 30, 1998. The net change in the valuation
allowance amounted to approximately $224,900 for the nine months ended June
30, 1998.
NOTE 9 - RELATED PARTY TRANSACTIONS
Notes Payable - During the fiscal year ended September 30, 1997, the
Company entered into two notes payable with a shareholder of the company.
The notes payable from the shareholder of the Company totaled $110,000,
bear interest at 12%, and have a remaining balance of $18,809 at June 30,
1998. The Company has paid $174 interest and total unpaid interest expense
for the period ended June 30, 1998 totaled $4,027. During October, 1997, a
shareholder advanced $5,000 to the Company which was subsequently paid in
full during October, 1997.
- 17 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 9 - RELATED PARTY TRANSACTIONS [Continued]
Employment Agreements - The Company has entered into two employment
agreements with officers of the Company.
The employment agreement for the Chief Executive Officer was effective as
of September 22, 1997 and has a term of two years. The agreement provides
for a base salary of $120,000 per year. The employee may terminate the
agreement on 30 days notice. The agreement also provides for stock options
to purchase 400,000 shares of registered common stock of the Company.
Options to purchase 100,000 shares of common stock vest immediately while
the remainder of the options vest at the rate of 100,000 shares on each
yearly anniversary. There are no restrictions on the underlying common
stock except for those imposed under Rule 144 of the Securities Act of
1933, as amended. Once vested the options are exercisable for a five year
period from the date of vesting whether or not the employee is still
employed by the company. However, the employee must be employed by the
company on the date of vesting or the options for that date will not vest.
The options are exercisable at $.116 per share which is less than the
current market value of the stock on the date the agreement took effect and
the options were granted (See Note 6).
The employment agreement for the position which includes Vice-President,
Secretary and Treasurer was effective as of October 1, 1997 and has a term
of two years. The agreement provides for a base salary of $2,000 per week
commencing December 1, 1997. For the period from October 1, 1997 through
November 30, 1997 the employee received stock options as follows: 10,000
upon signing and 2,500 per week. The options vest on a monthly basis. At
November 30, 1997, all 30,000 options received were fully vested. Beginning
December 1, 1997, the employee can elect to receive options in lieu of cash
salary at the rate of 2,500 options per week. The options will vest on a
monthly basis. The employee may terminate the agreement on 30 days notice.
No such election was made. The agreement also provided for stock options to
be immediately granted to purchase 150,000 shares of registered common
stock of the Company. Options to purchase 75,000 shares of common stock
vest on October 1, 1998 while the remainder of the options (75,000 shares)
vest on October 1, 1999. There are no restrictions on any of the underlying
common stock except for those imposed under Rule 144 of the Securities Act
of 1933, as amended. Once vested the options are exercisable for a five
year period from the date of vesting whether or not the employee is still
employed by the company. However, the employee must be employed by the
company on the date of vesting or the options for that date will not vest.
The options are exercisable at $.116 per share which is less than the
current market value of the stock on the date the agreement took effect and
the options were granted (See Note 6).
Office Space - Prior to September 30, 1997, the Company had no office
facilities. Officers of the Company conducted the Company's business from
their own residences or offices at no expense to the Company. For the nine
months ended June 30, 1998 the Company rented office facilities from
un-related parties.
- 18 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Related Entity - Certain officers and shareholders of the Company are also
affiliated with an entity with whom the Company has a licensing and
marketing agreement (See Note 3). Cash of $300,000 and common stock valued
at $700,000 was paid to the affiliated company for the licensing rights.
NOTE 10 - GOING CONCERN
The Company was formed with a very specific business plan. However, the
possibility exists that the Company could expend virtually all of its
working capital in a relatively short time period and may not be successful
in establishing on-going profitable operations.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company is newly formed, has
incurred losses since its inception, has current liabilities in excess of
current assets of $211,347 at June 30, 1998, and has not yet been
successful in establishing profitable operations. These factors raise
substantial doubt about the ability of the Company to continue as a going
concern. In this regard, management is proposing to raise any necessary
additional funds not provided by operations through loans and/or through
additional sales of its common stock. There is no assurance that the
Company will be successful in raising additional capital or achieving
profitable operations. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
NOTE 11 - LEASE OBLIGATIONS
Operating Leases - The Company has no long-term operating leases that have
remaining terms in excess of one year as of June 30, 1998. However, the
Company has a month to month sublease for office space and telephone line
access with the same affiliated company that the Company purchased the
licensing rights from (and is performing the technical support), wherein
the Company pays $400 per month starting October 1, 1997. The company has
another lease agreement which commenced October 6, 1997 and expires October
6, 1998 which calls for monthly rents of $550.
NOTE 12 - CONSULTING AGREEMENTS
Consulting Agreements - During November, 1997 the Company entered into two
consulting agreements to provide financial public relations for the
Company. Both agreements have a term of one year. One agreement provides
for monthly cash payments of $3,500 ($42,000 total). The other agreement
provides for the issuance of a stock option to purchase 100,000 shares of
the Company's common stock at a price of $3.00 per share.
- 19 -
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 13 - EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share
and the effect on income and the weighted average number of shares of
dilutive potential common stock for the periods ended June 30, 1998:
<TABLE>
<CAPTION>
For the nine From inception
months ended through
June 30, 1998 June 30, 1998
---------------- -----------------
Loss from continuing operations applicable to
<S> <C> <C>
common stock $ (662,735) $ (1,121,737)
Less: preferred dividends (40,714) (40,714)
-------------- --------------
Loss available to common stockholders used in
earnings per share $ (703,449) $ (1,162,451)
-------------- --------------
Weighted average number of common shares used
in earnings per share outstanding during the period 3,709,729 2,857,576
-------------- --------------
</TABLE>
Dilutive earnings per share was not presented as its effect is
anti-dilutive. The
Company had at June 30, 1998, options and warrants to purchase 768,625
shares of common stock, at prices ranging from $.116 to $7.50 per
share, that
were not included in the computation of diluted earnings per share
because
their effect was anti-dilutive. The Company also has preferred stock
outstanding at June 30, 1998 which is convertible into approximately
228,500
shares of common stock that was not included in the computation of
diluted
earnings per share as its effect was anti-dilutive.
NOTE 14 - SUBSEQUENT EVENTS
Public Stock Offering - During the period subsequent to June 30, 1998 the
Company sold an additional 205,000 shares of common and 205,000 shares of
preferred stock pursuant to its public offering [See Note 6]. Of these
shares sold, 135,000 shares of common stock and 135,000 shares of preferred
stock were sold for non-cash consideration consisting of 57,324 shares of
common stock in an affiliated company which stock was valued at $270,000.
The remaining 70,000 shares of common stock and 70,000 shares of preferred
stock were sold for cash proceeds of $140,000.
- 20 -
<PAGE>
