SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transaction period from____to____
Commission File Number_______________
WebQuest International, Inc.
(Exact name of small business issuer in its charter)
Nevada 86-0894019
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1662 N. Hwy 395, Suite 203, Minden, NV 89423
(Address of principal executive offices, including Zip Code)
775-782-0350
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, $.001 par value
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or any amendment
to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year: $0.00
As of September 30, 1998 there were 4,258,618 shares of the issuer's Common
Stock, $.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
WEBQUEST INTERNATIONAL, INC.
INDEX
Table of Contents
Part I
Item 1. Description of Business ...................................... 1
Item 2. Description of Property ......................................11
Item 3. Legal Proceedings ............................................12
Item 4. Submission of Matters to a Vote of Security Holders ..........12
Part II
Item 5. Market for Common Equity and Related Stockholder Matters .....12
Item 6. Plan of Operation.............................................13
Item 7. Financial Statements..........................................19
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure .....................................19
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act ...20
Item 10. Executive Compensation ........................................23
Item 11. Security Ownership of Certain Beneficial Owners and
Management ....................................................25
Item 12. Certain Relationships and Related Transactions ................25
Item 13. Exhibits and Reports on Form 8-K ..............................27
FORWARD LOOKING STATEMENTS
WebQuest International, Inc. (the "Company") cautions readers that
certain important factors may affect the Company's actual results and could
cause such results to differ materially from any forward-looking statements
that may be deemed to have been made in this Form 10-KSB or that are otherwise
made by or on behalf of the Company. For this purpose, any statements
contained in the Form 10-KSB that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the generality
of the foregoing, words such as "may," "expect," "believe," "anticipate,"
"intend," "could," "estimate," or "continue" or the negative other variations
thereof or comparable terminology are intended to identify forward-looking
statements. Factors that may affect the Company's results include, but are not
limited to, the Company's limited history of profitability, its dependence on
a limited number of customers and key personnel, its possible need for
additional financing and its dependence on certain industries. The Company is
also subject to other risks detailed herein or detailed from time to time in
the Company's filings with the Securities and Exchange Commission.
PART-I
ITEM 1. DESCRIPTION OF BUSINESS
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 WB 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.
The iPONG Game Arcade is an interactive game site. The site provides visitors
a variety of PONG games, a simple arcade game licensed from Atari, a division
of JTSR corporation (acquired by Hasbro), 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 markets of this Arcade include Players and Advertisers. Our Player
demographics indicate that our present market is between the ages of 25 and
35 with the largest percentage being male, although the Arcade attracts a good
percentage of Players from all age groups. Advertisers would be retail and
service companies attempting to reach this market. 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 iPONG Game Arcade is distributed solely online at http://www.ipong.com.
We inform potential Players about the site through a variety of online
marketing methods, including weekly drawings from a pool of Players who have
scored a minimum score of 2000 points per week. This allows the Company to
maintain regular contact with the Players through email weekly announcements.
It also allows the Company to announce our contests on a weekly basis at
numerous contest sites, discussion forums, newsgroups and mailing lists. The
Company is also engaged in banner exchanges with entertainment-oriented
sites. The Company also place and exchange classified newsletter ads in
pertinent publications and are also engaged in focus marketing in which the
Company can attract specific groups of Players based on their interests.
Prizes awarded will be related to those interests. This allows the Company
to communicate with interest-specific website owners to promote our weekly
drawings.
The market for Internet advertising is extremely competitive and WebQuest
expects that competition will intensify in the future. WebQuest believes that
it's ability to compete successfully depends on a number of factors, including
market presence; ease of access to and navigation of the Internet; the pricing
policies of its competitors; WebQuest's ability to support existing and
emerging industry standards; and industry and general economic trends.
WebQuest's current and prospective competitors include many large companies
that have substantially greater market presence and financial, technical,
marketing and other resources than WebQuest, including the following
interactive advertising companies:
"You Don't Know Jack, the Netshow ", launched in December of 1996.
Nearly 25, 000 people logged on to the off-beat trivia game during, it's
three-week pilot test period. It logged it's 1,000,000th player in July of
1997. There are currently 160,000 registered visitors. According to a rigorous
study commissioned by Berkeley Systems, Inc., the use of advertising combined
with a fast-paced entertainment experience proved to generate higher brand
recall than banner advertisements. The current list of advertisers include
Nabisco, Jack Daniels, Amstel, 7-up, Twentieth Century Fox, and Yahoo!.
Cybergold, an Internet marketing service that also rewards members with
money for reading advertisements and answering questions. Members enroll free
of charge, supply interests and demographics and then are offered individual
menus of advertisements matching their demographic information. Members
receive between $1.00 to $1.50 for each advertisement read and answered
correctly.
Yoyodyne is the creator of on-line games and promotions including "Get
Rich Click!", a multi-sponsored, sweepstakes game offering a grand prize of
$100,000 in cash, a Mazda Miata, and other prizes.
Increased competition could result in significant price competition, which in
turn, could result in significant reductions in the anticipated average
selling price of WebQuest's services. In addition, competition could result
in increased selling and marketing expenses and related costs, which could
adversely affect WebQuest 's operating results. There can be no assurance
that WebQuest will be able to offset the effects of any such price reductions
through an increase in the number of advertisers, higher revenue from
enhanced services to advertisers, cost reductions or otherwise. There can be
no assurance that WebQuest will have the financial resources, technical
expertise or marketing and support capabilities to continue to compete
successfully.
The Company's competitive strategies include, but are not limited to,
maintaining a site which is easy to navigate, creating games which are simple
to play and require less than 15 minutes each to play, awarding prizes based
on points instead of games won, which increases the play and the chance of the
Player to be included in the weekly drawings. While other sites mentioned
above award high ticket prizes, the odds of a Player winning them are very
high. We currently award lower cost prizes but also have low odds in an effort
to generate a large number of winners until such time as more valuable prizes
can be awarded.
We also provide Player support and respond quickly to any questions or
comments our Players may have. We award our players on several levels in an
effort to build trust and obtain accurate demographics, including sending them
small gifts when they report a problem with the site. We include Players who
respond to our Welcome letter with information about how they found our site
in a monthly drawing for a prize.
We do not anticipate a dependence on one or a few major advertisers due to
the wide variety of interests our Players express. There are avenues for
numerous types of advertisers within our site.
The Company has entered into a Licensing and Marketing Agreement with
HomeSeekers.com, Inc., Inc. (formerly NDS Software, Inc.) ("NDS"), which owns
17.2% of the Company's Common Stock. Pursuant to this Agreement, the Company
licensed from NDS 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 April 1, 1998, the live date for the site, 10% in the second year, and
15% thereafter. In addition, the Company is required to pay NDS for technical
services rendered by NDS.
WebQuest is not currently subject to direct regulation by the Federal
Communications Commission or any other agency, other than regulations
applicable to businesses generally, nor does WebQuest believe that it is
subject to any rules or regulations concerning games or sweepstakes. However,
it is possible that some of the aspects of WebQuest's Game and advertising
strategy could be considered "gambling", thus restricted in certain states and
regulated in other states. At present the player is not charged a fee and,
therefore, incurs no financial risk in playing iPONG.
Changes in the regulatory environment relating to the Internet advertising or
rights of privacy, could have an adverse effect on WebQuest 's business.
WebQuest 's joint venture or licensing program for the expansion of its
operations will likely involve compliance with federal and/or state franchise,
securities or business opportunity laws which would hinder or increase the
costs of conducting business. WebQuestcannot predict the impact, if any, that
future regulation or regulatory changes may have on its business.
The Company has not incurred any expense associated with environmental law
compliance and does not expect to do so.
The Company currently has 4 employees, two in management, one administration
and one in clerical. WebQuest, from time to time, utilizes part-time and
independent contractors.
ITEM 2. DESCRIPTION OF PROPERTY
Main Offices
The Company subleases 1100 square feet of office space in Minden, Nevada from
a non-affiliated party for$1203.88 per month for it's corporate headquarters.
The lease expires in June 1999. The Company also leases 200square 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 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 3. LEGAL PROCEEDINGS
WebQuest is not involved in any legal proceedings as of this date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has not traded for the past three years. As of
August 24, 1998, there were approximately 200 holders of Company common stock.
The Company's preferred stock, issued through a 504 offering, has an automatic
conversion after one year. There are presently 93,750 shares that are being
treated as common stock even though the stockholders have not exchanged their
certificates as of this date.
The Company has accrued dividends on it's preferred stock and expects to pay
them in the near future.
The 504 Offering realized $20,114 less than the anticipated $1,000,000 at it's
closing date.
The Company has yet to receive compensation for 36, 114 shares of stock from
the 504 Offering.
The Company acquired Scavengernet, an online scavenger hunt game, on October
9, 1998. 5,000 shares of stock were issued each of two Sellers on October
29, 1998 as partial consideration for payment. The Company also paid $5,000
as a down payment with a balance of $5,000 due on January 9, 1999.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Plan of operations for WebQuest International Inc, FYE 1999.
WebQuest's current financial conditions will carry the operations for
approximately ninety days from the date of this report.
The Company is conducting a private offering of convertible debt in which
the Company is seeking to raise $1,500,000. The Company anticipates the
first closing will occur in mid-February. There can be no assurance,
however, that the Company will be successful in raising all or any
significant portion of such amount.
WebQuest will develop the iPONG GAME COMMUNITY. The iPONG Game Arcade is
the first step to the development of the iPONG Game Community, a fee-based
site offering numerous member services and advertising opportunities. The
iPONG Game Arcade as it exists today, will serve as a free sample of what
players can expect when they subscribe to The iPONG Game Community. The
member services will include, but not be limited to, the following;
Free member websites.
An @ipong.com e-mail address for use in communicating with other players.
Players who choose to do so can post their email hypertext link and
Introductory Greeting at the communication center in order to communicate
with other players privately. It will also include a Public Message Board
and Chat Center for players to challenge others in a game or announce their
winnings.
The iPONG Boutique will provide a place for players to purchase iPONG brand
merchandise and view or purchase special offers from our advertisers.
The weekly newsletter will announce site updates, upcoming tournaments,
special drawings and classified advertising.
WebQuest plans to operate additional games in 1999, including OctiPong,
Multi-player PONG, Multi-player Checkers and Multi-playerChess. WebQuest
will continue to develop new games, license and adapt already existing
games and add more amenities, all the while enticing Memberships to the
iPONG Game Community.
The Company does not anticipate any material adverse consequences to it's
financial or business operations as a result of the Year 2000 computer
"bug".
ITEM 7. FINANCIAL STATEMENTS
Financial Statements appear after the Signature Page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no changes in or disagreements with the company's
independent auditors.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
(a) 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:
Name Age Position
Robert Horn 43 Chairman, Chief Executive Officer and
President
Kirk Johnson 42 Vice President, Secretary, Treasurer and
Director
Frank Howard 50 Director
Robert Horn has been Chairman, Chief Executive Officer and President of
WebQuest International Inc. since September 1997. From June 1995 to August1997
he was employed as Executive Producer for Blue Sky 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 to1988 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
chapter7 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.
(b) There are no other significant employees.
(c) No family relationship exists between any officers, directors or
employees.
(d) No officer or director is involved in any legal proceeding associated
with bankruptcy, criminal offenses, court order or state securities
violation which would prevent them from any business involvement.
(e)To the Company's knowledge, no persons have made any filings with
respect to the Company under Section 16(a) of The Securities and Exchange
Act of 1934 since the Company's Form 10SB was declared effective in
October, 1998. However, the Company's stock has not yet begun trading and
the Company anticipates that any required 16(a) filings will be made
contemporaneous with or prior to the commencement of trading.
ITEM 10. EXECUTIVE COMPENSATION
The Company has entered into a two year employment agreement with it's
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
for all employees 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 was granted 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 for all employees in the future.
Frank Howard receives $500 per month and $100 per meeting for his services as
Director.
SUMMARY COMPENSATION TABLE
Other All
Name and Annual Other
Principal Fiscal Salary Compen- Options/ LTIP Compen-
Position Year (1) Bonus sation (#) Payouts sation
Bob Horn 1997 - - - 100,000 - -
CEO, Chairman,
Pres. 1998 120,000 - - 100,000 - -
Kirk Johnson 1997 - - - - - -
Vice-President 1998 104,000 - - 85,000 - -
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to the grant of
options to purchase shares of Common Stock during the fiscal year ended
September 30, 1998 to each person listed above in the executive officer
Summary Compensation Table.
Number of % of total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted (#) Fiscal year ($ / Shares) Date
Bob Horn 400,000 51% $00.116 09/23/03
Kirk Johnson 180,000 23% $00.116 10/01/03
Michael Krell 200,000 26% $00.80 09/30/98
Chris Turner 2,500 0% $1.00 12/11/98
The options granted to Mike Krell and Chris Turner expired without being
exercised.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Securities Value of
Underlying Unexercised in-
Unexercised the-Money
Number of Options/SARS at Options/Sars at
Shares Acquired Value FY-End (#) FY-End (#)
on Realized Exercisable/ Exercisable
Exercise Exercisable/ Unexercisable Unexercisable(1)
(#) ($)
Bob Horn, CEO 100,000 $88,400 100,000/200,000 $11,600/$23,200
Kirk Johnson,
Vice President 0 $00.00 105,000/75,000 $12,180/$8700
The Company issued Option to Purchase 200,000 shares of stock,
restricted under Rule 144, to Kirk Johnson on December 14, 1998 at $1.00
per share, issued immediately and vested upon issuance in lieu of interest
for bridge loans to WebQuest and delays in issuance of Mr. Johnson's
salary.
In accordance with the Securities and Exchange Commission's rules,
values are calculated by subtracting the exercise price from the fair
market value of the underlying common stock. For purpose of this table,
fair market value is deemed to be $1.00 per share as of September 30, 1998
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 each stockholder known by the Company to be the
beneficial owner of five (5%) percent or more of the Company's outstanding
Common Stock,
each of the Company's directors, each named executive officer (as defined
in Item 402(a)(2) of Regulation S-B), and
all executive officers and directors as a group.
At August 24, 1998 there were 4,059,601shares 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.
Stockholder Number Of Shares Percentage
Bob Horn (1) 205,000 4.9%
1662 N. Hwy 395, Suite 203
Minden, NV 89423
Kirk Johnson)(2) 373,554 9.0%
1662 N. Hwy 395, Suite 203
Minden, NV 89423
Frank Howard(3) 7,500 2.0%
1662 N. Hwy 395, Suite 203
Minden, NV 89423
Greg & Jeannie Johnson(4) 474,249 11.7%
2241 Park Place Suite E
Minden, NV 89423
Dr. Jack Kelly(4) 878,138 21.6%
75 Pringle Way Suite 1009
Reno, NV 89502
Darin Murphy 679,943 16.7%
4465 Juniper Trail
Reno, NV 89509
HomeSeekers.com, Inc.(4) 700,000 17.2%
2241 Park Place Suite E
Minden, NV 89423
Topaz Limited/
Octagon Worldwide, LTD(5) 523,616 12.3%
Southfield Park Tower II, Suite 100
12835 East Arapahoe Rd.
Englewood, CO 80112
All directors and officers as a
group (three people) 586,054 13.7%
(1) Includes currently exercisable options to purchase 200,000 shares of
common stock. See Item 6, "Executive Compensation."
(2) Includes currently exercisable options to purchase 105,000 shares of
common stock. See Item 6, " Executive Compensation."
(3) Includes 2,500 shares issuable upon exercise of warrants.
(4) HomeSeekers.com, Inc., Inc., Inc. 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., Inc., Inc., Greg Johnson, John Giaimo, John C.
Kelly, Douglas Swanson and William Tomerlin beneficially own more than 5%
of HomeSeekers.com, Inc., Inc., Inc. common stock. The number of share
listed above for Messrs. Johnson and Kelly do not include the shares owned
by HomeSeekers.com, Inc., Inc., Inc. The Company owns 11,324 shares of
HomeSeekers.com, Inc., Inc., Inc. common stock, which it received as
partial finding of a 504 stock offering.
(5) 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. The Director of Merrill, Scott &
Associates Limited and Estate Planning Institute is Pat Brody, whose
address is Katherina Court, 101 East Hill Place, Market Street North,
Nassau, Bahamas. The Director of Global Management Limited is David E.
Ross, whose address is Katherina Court, 101 East Hill Place, Market Street
North, Nassau, Bahamas. 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 1, 2001.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into a Licensing and Marketing Agreement with
HomeSeekers.com, Inc., Inc., Inc., formerly NDS Software, Inc. as discussed
under Part I, Item 1 - Business. HomeSeekers.com, Inc., Inc., Inc. owns
700,000 shares of Company's common stock, or 17.2% of the outstanding
shares.
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 13. EXHIBITS AND REPORTS ON FORM 8-K
A) Index To Exhibits
3.2 Articles Of Incorporation for WebQuest International, Inc. dated
April 17, 1997 (1)
3.2 Articles Of Merger for WebQuest International, Inc. dated May 12,
1997(1)
3.3 By-laws for WebQuest International, Inc. dated April 18, 1997(1)
10.1 Licensing Agreement between NDS Software, Inc. and WebQuest
International, Inc.(1)
10.2 Bob Horn Employment Agreement dated September 24, 1997(1)
10.3 Kirk Johnson Employment Agreement dated October 1, 1997(1)
10.4 Scavengernet Purchase Agreement dated October 9, 1998(2)
10.5 Atari Contract dated July 3, 1997 (2)
27 Financial Data Schedule
(1) Incorporated by reference to Exhibits with corresponding numbers from
the Company's Form 10-SB Registration Statement, as amended, as filed with
the Securities and Exchange Commission.
(2) Included with this document
B) Report on Form 8-k.
None
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WEBQUEST INTERNATIONAL, INC.
(Registrant)
Date: 01/11/99 By: /s/Bob Horn
Bob Horn
Chief Executive Officer and
Director_______________________________
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and
on the date indicated.
Date: 01/11/99
By: /s/Bob Horn
Bob Horn
Chief Executive Officer and Director_____________________________
(principal executive officer)
By: /s/Kirk Johnson
Kirk Johnson
Vice-President and Director____________________________________
(principal financial and accouting officer)
By: /s/Frank Howard
Frank Howard
Director _____________________________________
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
PRITCHETT, SILER & HARDY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
CONTENTS
PAGE
- Independent Auditor's Report 1
- Balance Sheets, September 30, 1998 and 1997 2 - 3
- Statements of Operations, for the year ended
September 30, 1998 and from inception on
November 5, 1996 through September 30,
1998 and 1997 4
- Statement of Stockholders' Equity, from inception
on November 5, 1996 through September 30, 1998 5 - 7
- Statements of Cash Flows, for the year ended
September 30, 1998 and from inception on
November 5, 1996 through September 30,
1998 and 1997 8 - 9
- Notes to Financial Statements 10 - 26
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
WEBQUEST INTERNATIONAL, INC.
Minden, Nevada
We have audited the accompanying balance sheets of Webquest
International, Inc. [a development stage company] as of September
30, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the year ended September
30, 1998 and for the periods from inception on November 5, 1996
through September 30, 1997 and 1998. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Webquest International, Inc. as of September 30, 1998 and
1997, and the results of their operations and their cash flows
for the year ended September 30, 1998 and for the periods from
inception through September 30, 1997 and 1998, 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 11 to the financial statements, the Company has current
liabilities in excess of current 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 11. The financial
statements do not include any adjustments that might result from
the outcome of these uncertainties.
/s/ Pritchett, Siler & Hardy, P.C.
December 10, 1998
Salt Lake City, Utah
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
BALANCE SHEETS
ASSETS
September 30,
________________________
1998 1997
___________ ___________
CURRENT ASSETS:
Cash $ 4,682 $ 9,321
Marketable Securities, available-
for-sale 107,451 -
Employee advances 258 -
___________ ___________
Total Current Assets 112,391 9,321
___________ ___________
PROPERTY AND EQUIPMENT, net 21,875 5,716
___________ ___________
OTHER ASSETS:
Software licensing rights, net 825,000 925,000
Refundable deposits 3,751 -
___________ ___________
Total Other Assets 828,751 925,000
___________ ___________
$ 963,017 $ 940,037
___________ ___________
[Continued]
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
BALANCE SHEETS
[Continued]
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
________________________
1998 1997
___________ ___________
CURRENT LIABILITIES:
Accounts payable $ 71,114 $ 140,896
Advances - related parties 6,500 300
Notes payable - related parties 17,582 12,620
Other accrued liabilities 100,989 12,347
Accrued dividends payable 30,779 -
Current portion - capital
lease obligation 2,420 -
___________ ___________
Total Current Liabilities 229,384 166,163
___________ ___________
CAPITAL LEASE OBLIGATION, less
current portion 7,137 -
___________ ___________
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par
value, 5,000,000 shares
authorized, 396,000 and
93,750 shares of 12% Series
B convertible preferred
stock issued and outstanding
for which 500,000 shares
have been authorized 396 94
Common stock, $.001 par
value, 20,000,000 shares
authorized, 4,258,618 and
3,578,951 shares issued
and outstanding 4,259 3,579
Capital in excess of par value 2,630,515 1,578,879
Deficit accumulated during the
development stage (1,548,718) (459,001)
___________ ___________
1,086,452 1,123,551
Less: Receivable stock
subscription (36,114) -
Deferred compensation expense
in accordance with APB 25 (239,407) (349,677)
Unrealized (loss) - marketable
securities (84,435) -
___________ ___________
Total Stockholders' Equity 726,496 773,874
___________ ___________
$ 963,017 $ 940,037
___________ ___________
The accompanying notes are an integral part of these financial
statements.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENTS OF OPERATIONS
From Inception
on November 5,
For the Year 1996 Through
Ended ________________________
September 30, September 30, September 30,
1998 1997 1998
___________ ___________ ___________
REVENUE $ - $ - $ -
___________ ___________ ___________
EXPENSES:
Selling expense 137,906 199,290 337,196
General and administrative 661,671 253,382 915,053
Compensation expense recorded
in accordance with APB 25 for
stock options issued below
market value 269,390 3,923 273,313
___________ ___________ ___________
Total Expenses 1,068,967 456,595 1,525,562
___________ ___________ ___________
LOSS FROM OPERATIONS (1,068,967) (456,595) (1,525,562)
___________ ___________ ___________
OTHER INCOME (EXPENSE):
Gain on sale of marketable
securities 13,363 - 13,363
Interest expense (3,334) (2,406) (5,740)
___________ ___________ ___________
Total Other Income
(Expense) 10,029 (2,406) 7,623
___________ ___________ ___________
LOSS BEFORE INCOME TAXES (1,058,938) (459,001) (1,517,939)
CURRENT TAX EXPENSE - - -
DEFERRED TAX EXPENSE - - -
___________ ___________ ___________
NET LOSS $(1,058,938) $ (459,001) $(1,517,939)
LESS: PREFERRED DIVIDEND
REQUIREMENTS (30,779) - (30,779)
___________ ___________ ___________
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS $(1,089,717) $ (459,001) $(1,548,718)
___________ ___________ ___________
LOSS PER COMMON SHARE $ (.28) $ (.21) $ (.51)
___________ ___________ ___________
The accompanying notes are an integral part of these financial
statements.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENT OF STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION ON NOVEMBER 5, 1996
THROUGH SEPTEMBER 30, 1998
Deficit
Accumulated
Preferred Stock Common Stock Capital in During the
______________ __________________ Excess of Development
Shares Amount Shares Amount Par Value Stage
_______ ____ _________ _______ __________ __________
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 93,750 941 87,312 -
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)
Issuance of
251,000
shares
preferred
and common
stock for
cash, October,
1997 through
September,
1998 at
$1.00 per
share 251,000 251 251,000 251 501,498 -
[Continued]
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENT OF STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION ON NOVEMBER 5, 1996
THROUGH SEPTEMBER 30, 1998
[Continued]
Deficit
Accumulated
Preferred Stock Common Stock Capital in During the
______________ __________________ Excess of Development
Shares Amount Shares Amount Par Value Stage
_______ ____ _________ _______ __________ __________
Issuance of
126,943
shares
preferred
and common
stock for
non-cash
consideration,
July, 1998
at $1.00 per
share 126,943 127 126,943 127 253,632 -
Issuance of
18,057
shares
preferred
and common
stock at
$1.00 per
share,
accounted
for as a
subscription
receivable,
July to
September,
1998 18,057 18 18,057 18 36,078 -
Granting of
options to
an officer
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
an officer
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
50,000
shares common
stock upon
exercise of
options by
an officer,
February
1998, at
$.116 per
share - - 50,000 50 5,750 -
Issuance of
50,000
shares common
stock upon
exercise of
options by
an officer,
July 1998,
at $.116
per share - - 50,000 50 5,750 -
Issuance of
5,000
shares common
stock to
an officer
for cash
at $1.00
per share,
July, 1998 - - 5,000 5 4,995 -
[Continued]
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENT OF STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION ON NOVEMBER 5, 1996
THROUGH SEPTEMBER 30, 1998
[Continued]
Deficit
Accumulated
Preferred Stock Common Stock Capital in During the
______________ __________________ Excess of Development
Shares Amount Shares Amount Par Value Stage
_______ ____ _________ _______ __________ __________
Issuance of
62,000
shares common
stock for
consulting
services at
$1.00 per
share, May,
1998 - - 62,000 62 61,938 -
Issuance of
shares of
common stock
for consultation,
programming
and other
services
rendered at
$1.00 per
share, to
employees,
officers and
directors of
the Company - - 22,898 23 22,875 -
Assumed mandatory
conversion of
Series B
preferred
stock during
the period
ended
September 30,
1998 (93,750) (94) 93,750 94 - -
Accrued
preferred
dividends
for period
ending
September 30,
1998 - - - - - (30,779)
Shares
issued due
to rounding - - 19 - - -
Net loss
for the
year ended
September 30,
1998 - - - - - (1,058,938)
_______ ____ _________ _______ __________ __________
BALANCE,
September 30,
1998 396,000 $396 4,258,618 $ 4,259 $2,630,515 $(1,548,718)
_______ ____ _________ _______ __________ __________
The accompanying notes are an integral part of this financial
statement.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
From Inception
on November 5,
For the Year 1996 Through
Ended ________________________
September 30, September 30, September 30,
1998 1997 1998
___________ ___________ ___________
Cash Flows from Operating
Activities:
Net loss applicable to
common stockholders $ (1,089,717) $ (459,001) $ (1,548,718)
Adjustments to
reconcile net loss
to net cash used by
operating activities:
Depreciation and
amortization 103,167 75,371 178,538
Non-cash expense 89,038 43,533 132,571
APB 25 compensation
recorded for stock
options issued below
market value 269,390 3,923 273,313
Changes in assets
and liabilities:
(Increase) in
employee advances (258) - (258)
Increase in accounts
payable (69,782) 140,896 71,114
Increase in advances
- related parties 6,200 300 6,500
Increase in accrued
liabilities 88,642 12,347 100,989
___________ ___________ ___________
Net Cash (Used) by
Operating Activities (603,320) (182,631) (785,951)
___________ ___________ ___________
Cash Flows from Investing
Activities:
(Increase) in
refundable deposits (3,751) - (3,751)
Purchase of equipment (19,326) (6,087) (25,413)
Purchase of software
licensing rights - (300,000) (300,000)
Proceeds from marketable
securities sales 70,363 - 70,363
___________ ___________ ___________
Net Cash Provided (Used)
by Investing Activities 47,286 (306,087) (258,801)
___________ ___________ ___________
Cash Flows from Financing
Activities:
Proceeds from notes payable 18,500 110,000 128,500
Payments on notes payable (16,152) (97,380) (113,532)
Payments on capital lease
obligation (332) - (332)
Proceeds from preferred
stock issuance 251,000 93,750 344,750
Proceeds from common
stock issuance 267,600 391,669 659,269
Increase in accrued
dividends payable 30,779 - 30,779
___________ ___________ ___________
Net Cash Provided by
Financing Activities 551,395 498,039 1,049,434
___________ ___________ ___________
Net Increase (Decrease) in Cash (4,639) 9,321 4,682
Cash at Beginning of Period 9,321 - -
___________ ___________ ___________
Cash at End of Period $ 4,682 $ 9,321 $ 4,682
___________ ___________ ___________
Supplemental Disclosures of Cash Flow information:
Cash paid during the year and from inception for:
Interest $ 541 $ 174 $ 715
Income taxes $ - $ - $ -
[Continued]
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENTS OF CASH FLOWS [Continued]
Increase (Decrease) in Cash
[Continued]
Supplemental schedule of Non-cash Investing and Financing
Activities:
For the year ended September 30, 1998:
The Company has accounted for 93,750 shares of common stock
due to the mandatory conversion of 93,750 preferred shares.
The Company has issued a total of 22,898 shares of common
stock to employees, officers and directors for consultation,
programming, or other services rendered, valued at $22,898.
The Company issued 2,500 shares of common and 2,500 shares
of preferred stock in payment of legal fees.
The Company issued 124,443 shares of common and 124,443
shares of preferred stock for non-cash consideration
consisting of marketable securities valued at $248,886.
The Company issued a total of 18,057 shares of common and
18,057 shares of preferred stock valued at $36,114 and
recorded a subscription receivable of $36,114.
The Company issued 62,000 shares of common stock valued at
$62,000 along with warrants to purchase 100,000 shares of
common stock to another company for consulting services.
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, $92,638 in current compensation expense was
recorded and $66,482 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 $176,752.
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 these financial
statements.
<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 is considered a development
stage company as defined in SFAS No. 7. The Company is
engaging in the business of developing and marketing an
interactive game arcade, known as the iPONG Game Arcade on the
Internet. The Company anticipates that it will derive revenue
from the sale of advertising. The Company may also pursue
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.
Marketable Securities - The Company's investments in
marketable equity securities are held for an indefinite period
and thus are classified as available-for-sale. Available-for-
sale securities are recorded at fair value under the caption
"marketable securities" on the balance sheet, with the change
in fair value during the period excluded from earnings and
recorded as a separate component of equity. Fair value of the
equity securities was determined on a specific identification
basis in computing unrealized gain or loss.
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 three to seven years.
Software Licensing Rights - Software licensing rights are
stated at cost. The Company is amortizing the software
licensing rights on a straight-line basis over ten-years (the
original term of the agreement) [See Note 4].
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. The Company has a
dividend requirement with respect to its preferred stock [See
Note 7].
Revenue Recognition - The Company plans to receive revenues
from advertising but has not yet generated any revenues.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
Earnings (Loss) Per Share - Effective for the year ended
September 30, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share",
which requires the Company to present basic earnings (loss)
per share and dilutive earnings (loss) per share when the
effect is dilutive. There was no effect on the financial
statements for the change in accounting principle [See Note
14].
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 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.
Reclassification of Financial Statements - The financial
statements for all periods presented have been reclassified to
conform to the titles and headings used in the September 30,
1998 financial statements.
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. SFAS No. 132 provides for
disclosures about pensions and other post-retirement benefits.
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. SFAS No.
133 dictates the accounting standards for Derivative
Instruments and Hedging Activities and is effective for fiscal
years beginning after June 15, 1999. SFAS No. 134 relates to
Mortgage Backed Securities and has no applicability to the
Company. Had such SFAS statements been adopted for the periods
presented, their effect on the financial statements would not
have been significant.
Accounting Estimates - The preparation of financial statements
in conformity with generally accepted accounting principles
requires 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.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO 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 - MARKETABLE SECURITIES
During the year ended September 30, 1998, the Company accepted
53,924 shares of marketable securities valued at $248,886 in
an entity, which is a shareholder of the Company, for the
purchase of 124,443 shares of common and preferred stock of
the Company. During the year ended September 30, 1998, the
Company sold 12,000 shares of the marketable securities for
$70,363 and realized a gain of $13,363. As of September 30,
1998 the remaining marketable securities have a value of
$107,451 and the Company has recorded an unrealized loss on
such securities of $84,435, which was subtracted from
stockholders' equity.
NOTE 4 - SOFTWARE LICENSE RIGHTS
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,
Homeseekers.com, Inc. (formerly, NDS Software, Inc.), that
owns the software rights. The license agreement has a ten-
year term, which automatically renews for an additional ten-
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 ten-year basis (the original
life of the agreement). Database management costs (including
programming costs) are expensed as incurred and amounted to
$102,462 and $194,290 for the year and period ended September
30, 1998 and 1997. As consideration for this agreement the
Company agreed: i) 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. ii)
to pay 7% of gross revenues for the first year after the live
date (April 1, 1998), 10% of gross revenues for the second
year after the live date, and 15% thereafter. iii) to pay
$20,000 per month commencing at the live date for "website"
fees to the Nevada corporation. During July 1998, the payment
of $20,000 per month was amended to a pro-rata charge for
services. and iv) to pay $125 per hour for Webpage
development, website changes or customization, and management
consulting, plus $0.50 per question for question development
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.
Homeseekers.com, Inc. is considered to be an affiliate of the
Company because it has the same controlling shareholders as
the Company.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - SOFTWARE LICENSE RIGHTS [Continued]
The following is a summary of software licensing rights - at
cost, less accumulated amortization as of September 30, 1998
and 1997:
1998 1997
___________ ___________
Cash paid for
licensing rights $ 300,000 $ 300,000
Stock issued for
licensing rights 700,000 700,000
___________ ___________
1,000,000 1,000,000
Less: accumulated
amortization (175,000) (75,000)
___________ ___________
$825,000 $925,000
___________ ___________
Amortization expense for the year and period ended September
30, 1998 and 1997 amounted to $100,000 and $75,000,
respectively.
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 per quarter 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 $23,333 and
$5,000 for the year and period ended September 30, 1998 and
1997, respectively.
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment - at
cost, less accumulated depreciation as of September 30, 1998
and 1997:
1998 1997
___________ ___________
Office equipment $ 13,299 $ 2,357
Computer equipment 12,114 3,730
___________ ___________
25,413 6,087
Less: accumulated
depreciation (3,538) (371)
___________ ___________
$ 21,875 $ 5,716
___________ ___________
Depreciation expense for the year and period ended September
30, 1998 and 1997 amounted to $3,167 and $371, respectively.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
Notes payable consist of the following at September 30:
1998 1997
_________ _________
Notes payable to a shareholder of the Company,
annual compounding interest at 12%, due upon
demand, unsecured $ 15,234 $ 12,620
Notes payable to a shareholder of the Company,
interest at 10% and 12%, due upon demand,
unsecured 294 -
Note payable to a shareholder of the Company,
interest at 12%, due upon demand, unsecured 54 -
Note payable to an entity related to a shareholder
of the Company, annual compounding interest
at 12%, due upon demand, unsecured 2,000 -
_________ _________
$ 17,582 $ 12,620
_________ _________
During June 1998, a shareholder of the Company loaned the
Company $10,000, which bears interest at 12% and is payable
upon demand. In connection with the note, the Company granted
the lender warrants to purchase 20,000 shares of the Company's
common stock at $1.00 per share at any time through June 11,
2001. During July 1998, the unsecured note payable, plus
interest amounting to $155, was paid in full.
NOTE 7 - CAPITAL STOCK
Common Stock - During the year ended September 30, 1998, the
Company made various issuances of common stock. A total of
22,898 shares were issued to employees, officers and directors
for consultation, programming, or other services rendered.
The stock was valued at $1.00 per share. The Company also
issued 62,000 shares of common stock valued at $1.00 per share
and 100,000 warrants to purchase common stock at $2.00 per
share to an entity pursuant to a consultation agreement [See
Note 13].
During the year ended September 30, 1998, an officer exercised
options to purchase a total of 100,000 shares of common stock
[See Note 8]. The same officer also paid $5,000 cash to
acquire 5,000 shares of 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). 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). 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).
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - CAPITAL STOCK [Continued]
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 September 1998,
the Company sold an additional 396,000 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 through September 1998 amounted to $792,000.
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.
Included in the above sales are 2,500 shares of common and
preferred stock, which were issued for legal fees and 124,443
shares of common and preferred stock, which were issued for
marketable securities [See Note 3].
Stock Subscriptions - During the year ended September 30, 1998
the Company issued a total of 18,057 shares of common stock
and 18,057 shares of preferred stock, pursuant to its public
offering (see above), where the stock was issued but the
consideration has not yet been received. Management believes
the consideration will be received in full and has recorded an
account receivable for the consideration amounting to $36,114.
The subscription receivable has been reflected in the
financial statements as a reduction to stockholders' equity.
Warrants - At September 30, 1998, the Company had 244,875
warrants to purchase common stock outstanding that 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).
As of September 30, 1998, none of the warrants have been
exercised.
Also at September 30, 1998, the Company had an additional
320,000 warrants outstanding to purchase common stock at
prices ranging from $1.00 to $3.00 per share and expiring
through June 1, 2001 that were issued in conjunction with the
Company obtaining financing and for consulting services [See
Notes 10 and 13, respectively]. As of September 30, 1998,
none of the warrants have been exercised.
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.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - CAPITAL STOCK [Continued]
Series B Convertible Preferred Stock - The Company authorized
500,000 shares of preferred stock to be designated as Series B
Convertible Preferred Stock. The Series B Convertible
Preferred Stock pays dividends at the rate of 12% and is fully
cumulative. The Series B Convertible 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 Convertible Preferred Stock will be automatically converted
to one (1) share common stock one year from the date of
issuance. The holders of Series B Convertible Preferred Stock
shall be entitled to one (1) vote for each share of Series B
Convertible Preferred Stock held. As of September 30, 1998,
the Company has accrued preferred dividends of $30,779.
During the year ended September 30, 1998, 93,750 shares of
preferred stock have been accounted for as converted to 93,750
shares of common stock due to the automatic conversion of
preferred to common at one year from date of issuance.
NOTE 8 - STOCK OPTIONS
During September 1997, the Company granted 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 compensation expense through September 30, 1997
and $176,752 for the year ended September 30, 1998. The
deferred portion of $172,925 as of September 30, 1998, is
recorded as a reduction to stockholders' equity. During
February 1998, the officer exercised 50,000 options for $5,800
or $.116 per share. During July 1998, the officer exercised
an additional 50,000 shares for $5,800 or $.116 per share.
During October 1997, the Company granted 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 $66,118
being recorded as compensation expense for the year ended
September 30, 1998. The deferred portion of $66,482 as of
September 30, 1998, is recorded as a reduction to
stockholders' equity.
During November 1997, the Company granted 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
has been recorded as of November 1997.
During August 1998, the Company granted 200,000 options to
purchase the Company's stock at $.80 per share in connection
with an employment agreement [See Note 10]. During September
1998, the individual ended his employment and all 200,000
options were canceled.
During September 1998, the Company granted 2,500 options to
purchase the Company's common stock at $1.00 per share in
connection with an employment agreement [See Note 10].
Subsequent to the year ended September 30, 1998, the employee
ended his employment and the 2,500 options were cancelled.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - STOCK OPTIONS [Continued]
A summary of the status of the options granted under
agreements at September 30, 1998 and 1997, and changes during
the year and period then ended are presented in the table
below:
1998 1997
______________________ ______________________
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
Price Price
__________ __________ __________ __________
Outstanding at
beginning of
period 400,000 $ .116 - $ -
Granted 382,500 .479 400,000 .116
Exercised (100,000) .116 - -
Forfeited (200,000) .80 - -
Canceled - - - -
__________ __________ __________ __________
Outstanding at
end of
period 482,500 .12 400,000 $ .116
__________ __________ __________ __________
Exercisable at
end of
period 130,313 .117 100,000 $ .116
__________ __________ __________ __________
Weighted average
fair value of
options granted 382,500 .52 400,000 $ .88
__________ __________ __________ __________
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 year and period ended September 30, 1998 and 1997: risk-
free interest rate of 5.6% and 6.1%, expected dividend yield
of zero, expected lives of 4 and 5 years and expected
volatility of 167% and 225%.
A summary of the status of the options outstanding under
agreements at September 30, 1998 is presented below:
Options Outstanding Options Exercisable
_____________________________________ ________________________
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercose Number Exercise
Prices Outstanding Life Price Exercisable Price
________ __________ __________ __________ __________ __________
$ .116 480,000 5 years $ .116 130,000 $ .116
$ 1.00 2,500 3 years $ 1.00 313 $ 1.00
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - 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:
From Inception
Year EndedPeriod Ended Through
September 30,September 30,September
30,
1998 1997 1998
___________ ___________ ___________
Net Loss applicable to
common stockholders As reported $(1,089,717) $ (459,001) $(1,548,718)
Proforma $(1,089,717) $ (459,001) $(1,548,718)
Earnings per Share As reported $ (.28) $ (.21) $ (.51)
Proforma $ (.28) $ (.21) $ (.51)
NOTE 9 - INCOME TAXES
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 Accounting
for Income taxes [FASB 109]. FASB 109 requires the Company to
provide a net deferred tax asset or liability equal to the
expected future tax benefit or expense of temporary reporting
differences between book and tax accounting and any available
operating loss or tax credit carryforwards. At September 30,
1998 and 1997, the total of all deferred tax assets was
$460,396 and $164,298 and the total of the deferred tax
liabilities was $80,378 and $118,890. The amount of and
ultimate realization of the benefits from the deferred tax
assets for income tax purposes is dependent, in part, upon the
tax laws in effect, the Company's future earnings, and other
future events, the effects of which cannot be determined.
Because of the uncertainty surrounding the realization of the
deferred tax assets, the Company has established a valuation
allowance of $380,018 and $45,408 as of September 30, 1998 and
1997, which has been offset against the deferred tax assets.
The net change in the valuation allowance during the years
ended September 30, 1998 and 1997 amounted to approximately
$334,610 and $45,408.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES [Continued]
The components of income tax expense from continuing
operations for the years ended September 30, 1998 and 1997
consist of the following:
1997 1996
___________ ___________
Current income tax expense:
Federal $ - $ -
State - -
___________ ___________
Net tax expense - -
___________ ___________
Deferred tax expense (benefit) arising from:
Excess of tax over financial
accounting depreciation $ (10,706) $ (8,258)
Excess of tax over financial
accounting compensation (10,512) -
Carryforward of excess contributions (156) -
Deferred compensation - stock options (38,513) 118,891
Net operating loss carryforward (274,723) (156,041)
Valuation allowance 334,610 45,408
___________ ___________
Net deferred tax expense $ - $ -
___________ ___________
Deferred income tax expense results primarily from the
reversal of temporary timing differences between tax and
financial statement income.
A reconciliation of income tax expense at the federal
statutory rate to income tax expense at the company's
effective rate is as follows:
1998 1997
___________ ___________
Computed tax at the expected
statutory rate 34.00% 34.00%
___________ ___________
State and local income taxes, net of
federal benefit - -
Other (.22) 1.80
Deferred compensation - stock options (2.18) (25.91)
Valuation allowance (31.60) (9.89)
___________ ___________
Income tax expense - -
___________ ___________
As of September 30, 1998 and 1997 the Company has net tax
operating loss (NOL) carryforwards available to offset its
future income tax liability. The NOL carryforwards have been
used to offset deferred taxes for financial reporting
purposes. The Company has federal NOL carryforwards of
$1,266,953 that expire in 2012 and 2013.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES [Continued]
The temporary differences and carryforwards gave rise to the
following deferred tax asset (liability) at September 30, 1998
and 1997:
1998 1997
___________ ___________
Excess of tax over book accounting
depreciation $ 18,964 $ 8,258
Excess of tax over book accounting
compensation 10,512 -
Contribution carryover 156 -
Deferred compensation - stock options (80,378) (118,891)
Net operating loss carryover 430,764 156,041
As of September 30, 1998 and 1997 the deferred tax asset
(liability) consisted of the following:
1998 1997
___________ ___________
Current deferred tax assets $ 460,396 $ 164,298
Deferred tax assets (liabilities) (80,378) (118,890)
___________ ___________
$ 380,018 $ 45,408
___________ ___________
NOTE 10 - RELATED PARTY TRANSACTIONS
Notes Payable - During the year and period ended September 30,
1998 and 1997, the Company entered into several notes payable
with shareholders and entities related shareholders of the
Company [See Note 6]. i) a shareholder of the Company loaned
the Company a total of $110,000 during the period ended
September 30, 1997. The notes are due upon demand, bear
interest at 12% compounding annually and have a remaining
balance of $15,234 (of which $2,614 consists of compounded
interest) and $12,620 as of September 30, 1998 and 1997,
respectively. The Company has paid $0 and $174 interest and
total unpaid interest for the year and period ended September
30, 1998 and 1997 totaled $1,367 and $2,232, respectively.
ii) during October 1997 through April 1998, a shareholder of
the Company loaned the Company a total of $11,500 of which
$5,000 bears interest at 10% and $6,500 bears interest at12%.
The notes are payable upon demand and have a remaining balance
of $15 and $279 as of September 30, 1998. The Company has
paid $15 and $279 interest and total unpaid interest for the
year ended September 30, 1998 totaled $1 and $10. iii) during
June 1998, a shareholder of the Company loaned the Company
$10,000, which bears interest at 12% and is payable upon
demand. During July 1998, the unsecured note payable, plus
interest amounting to $155, was paid in full. iv) during
April 1998, a shareholder of the Company loaned the Company
$5,000, which bears interest at 12% and is due upon demand.
During the year ended September 30, 1998, the Company paid $92
in interest leaving an unpaid interest balance of $2 and an
unpaid principal balance of $55 as of September 30, 1998. v)
during April 1998, an entity related to a shareholder of the
Company loaned the Company $2,000. The note is due upon
demand, bears interest at 12% compounding annually and has a
remaining balance of $2,000 as of September 30, 1998. The
unpaid interest amounted to $101 as of September 30, 1998.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - RELATED PARTY TRANSACTIONS [Continued]
During February 1998 through September 1998, a shareholder
advanced the Company a total of $17,700. The advances are non-
interest bearing and are due upon demand. As of September 30,
1998, the unpaid balance of the advances amounted to $6,200.
Employment Agreements - During the year and period ended
September 30, 1998 and 1997, the Company entered into four
employment agreements with officers and employees 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
7].
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 ($104,000 per
year) 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 7].
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - RELATED PARTY TRANSACTIONS [Continued]
The employment agreement for the Director of Promotions was
effective as of September 15, 1998 and is an at-will
agreement. The agreement provides for a base salary of
$45,000 per year, $150 per month vehicle allowance and
commission on monthly revenues generated through advertising
sales as follows: 10% on revenue up to the first 14,999
during each month (5% on revenue up to the first 10,000 and
then 10% as stated from 10,001 to $14,999 during the first
year), 14% on revenue from $15,000 to $24,999 during each
month, 18% on revenue from $25,000 and above during each
month. The agreement also provides for a 20% commission on net
revenue generated by first time memberships to play iPONG head
to head which are direct traceable sales efforts of employee.
The agreement also provided for stock options to be granted to
purchase 2,500 shares of the Company's common stock at an
exercise price of $1.00 per share. The option vests each
fiscal quarter during the employment at a rate of 313 shares
per quarter with the first 313 shares vesting on September 30,
1998. Once vested the options are exercisable for a three-
year period from the date of vesting unless the employee is no
longer employed by the Company. Subsequent to the year ended
September 30, 1998, the employee left the Company and the
options were cancelled.
The employment agreement for the Vice President of Marketing
was effective as of August 3, 1998 and is an at-will
agreement. The agreement provides for a base salary of
$60,000 per year, $300 per month vehicle allowance and
commission on monthly revenues generated through the marketing
division as follows: 10% on revenue from 10,000 to 14,999
during each month, 14% on revenue from $15,000 to $24,999
during each month, 18% on revenue from $25,000 and above
during each month. The agreement also provided for stock
options to be granted to purchase 200,000 shares of the
Company's common stock at an exercise price of $.80 per share.
The option vests each fiscal quarter during the employment at
a rate of 12,500 shares per quarter with the first 12,500
shares vesting on September 30, 1998. Once vested the options
are exercisable for a three-year period from the date of
vesting unless the employee is no longer employed by the
Company. During September 30, 1998, the employee left the
Company and the options were cancelled.
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. During the year ended September 30,
1998, the Company rented one office facility from an
affiliated company and two office facilities from unrelated
parties [See Note 12].
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 4].
Cash of $300,000 and common stock valued at $700,000 was paid
to the affiliated company for the licensing rights.
NOTE 11 - 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.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - 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 $116,993 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 12 - LEASE OBLIGATIONS
Operating Leases - During September 1997 and effective October
1997, the Company entered into 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. During June 1998, this
sublease agreement was canceled. During October 1997, the
Company entered into a one-year lease agreement for office
space in Del Mar, California. The lease agreement calls for
monthly rents of $550 and expires during October 1998.
Subsequent to the year ended September 30, 1998, the Company
extended the lease to a month by month basis at $580 per month
[See Note 16]. During May 1998 and effective June 1998, the
Company entered into a one-year lease agreement for office
space in Minden, Nevada. The lease agreement calls for
monthly rents of $815 and is for one year. Effective
subsequent to the year ended September 30, 1998, the Company
amended their lease agreement in Minden, Nevada [See Note 16].
Rent expense amounted to $13,060 and $0 for the periods ended
1998 and 1997, respectively.
Capital Lease - The Company is the lessee of equipment under a
capital lease expiring in 2001. The assets and liabilities
under the capital lease were recorded at the fair value of the
assets at the time of purchase, which was the lower of the
present value of the minimum lease payments or the fair value
of the assets at the time of purchase. The assets are
amortized over the related lease term. Amortization expense
amounted to $1,057 for the assets under the capital lease as
of September 30, 1998 and the amortization expense has been
included in depreciation expense for the year ended September
30, 1998.
Equipment at September 30, 1998 and 1997 under capital lease
obligations is as follows:
1998
___________
Office equipment $ 9,889
Less: accumulated amortization (1,057)
___________
$ 8,832
___________
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - LEASE OBLIGATIONS [Continued]
Total future minimum lease payments, executory costs and
current portion of capital lease obligations are as follows:
Future minimum lease payments for the year ended September 30:
Year Ended September 30, Lease Payments
_______________________ ___________
1999 $ 5,620
2000 5,620
2001 4,684
2002 -
2003 -
___________
Total future minimum lease payments $ 15,924
Less: amounts representing interest
and executory costs (6,367)
___________
Present value of the future minimum
lease payments 9,557
Less: lease current portion (2,420)
___________
Capital lease obligations - long term 7,137
___________
NOTE 13 - CONSULTING AGREEMENTS
During November 1997, the Company entered into a consulting
agreement with a Colorado corporation in which the Colorado
corporation will provide various consulting and financial
public relations with broker-dealers, shareholders and members
of the general public. This agreement has a term of one year
and provides for monthly cash payments of $3,500 ($42,000
total).
Also during November 1997, the Company entered into a
consulting agreement with a British Virgin Island Corporation
in which the British Virgin Island Corporation will develop,
implement and maintain an on-going stock market support system
that increases broker awareness of the Company's activities
and stimulates investor interest in the Company. This
agreement has a term of one year and provides for the issuance
of a warrant to purchase 100,000 shares of the Company's
common stock at a price of $3.00 per share, which for a three-
year period are subject to piggyback registration rights.
During May 1998, the Company entered into an additional
agreement with the British Virgin Island Corporation in which
the British Virgin Island Corporation will develop, implement
and maintain an on-going stock market support system that
increases broker awareness of the Company's activities and
stimulates investor interest in the Company. This agreement
has a term of one year and provides for the issuance of a
warrant to purchase 100,000 shares of the Company's common
stock at a price of $2.00 per share, which for a three-
year period are subject to piggyback registration rights. The
agreement also provides for the issuance of 62,000 shares of
the Company's common stock valued at $62,000 (or $1.00 per
share).
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - EARNINGS (LOSS) PER SHARE
The following data show the amounts used in computing earnings
(loss) per share and the effect on income and the weighted
average number of shares of dilutive potential common stock
for the year ended September 30, 1998 and from inception on
November 5, 1996 through September 30, 1998 and 1997:
From Inception on
November 5,
For the 1996 Through
Year Ended ___________________________
September 30, September 30, September 30,
1998 1997 1998
___________ ___________ ___________
Income (loss) from
continuing operations
applicable to
common stock $ (1,058,938) $ (459,001) $ (1,517,939)
Less: preferred dividends (30,779) - (30,779)
___________ ___________ ___________
Income (loss) available
to common stockholders
used in earnings (loss)
per share $ (1,089,717) $ (459,001) $ (1,548,718)
___________ ___________ ___________
Weighted average number
of common shares
outstanding used in
earnings (loss) per
share during the period 3,852,383 2,150,469 3,045,568
___________ ___________ ___________
Dilutive earnings (loss) per share was not presented, as its
effect is anti-dilutive. The Company had at September 30,
1998, options and warrants to purchase 1,047,375 shares of
common stock, at prices ranging from $.116 to $7.50 per share,
that were not included in the computation of diluted earnings
(loss) per share because their effect was anti-dilutive. The
Company also has preferred stock outstanding at September 30,
1998, which is convertible into approximately 396,000 shares
of common stock that was not included in the computation of
diluted earnings (loss) per share as its effect was anti-
dilutive.
NOTE 15 - CONCENTRATION OF RISK
The Company's operations are currently dependent upon the use
of software which is licensed from a related entity and from
an unrelated entity [See Note 4]. In the event the Company is
unable to renew these software licenses, when they expire, a
disruption or termination of the Company's operations could
occur. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENTS
Operating Leases - During October 1998, the Company extended
the original lease in Del Mar, California. The lease
extension is on a month by month basis with an increase in
monthly rents to $580. During September 1998 and effective
November 1998, the Company amended the original lease in
Minden, Nevada. The lease amendment calls for monthly rents
of $1,204 and is for one year (which automatically renews for
another year with a monthly rent increase of .75% or $1213).
SCAVENGERnet - During October 1998, the Company entered into a
purchase agreement with two individuals to purchase a game
(with all rights, software, programs, source codes,
copyrights, trade secrets, patent rights, and other applicable
rights for use on the Internet) called SCAVENGERnet. As
consideration for this purchase agreement the Company gave
$5,000 down ($2,500 to each individual), $5,000 due on January
9, 1999 (an additional $2,500 to each individual), and 10,000
shares (5,000 shares of common stock to each individual) of
its common stock valued at $10,000 or $1.00 per share.
Notes Payable - On October 7, 1998, the Company entered into a
note payable to an individual for $20,000. The note is due on
February 7, 1999 and bears interest at 12% per annum. On
October 28, 1998, the Company entered into an additional note
payable to the same individual for $20,000. This note is due
on November 28, 1998 and bears interest at 12% per annum. The
Company is in default in regards to this note and is accruing
a late penalty of 5,000 warrants, to purchase the Company's
common stock at $1.00 per share, for every week the loan is
delinquent.
Warrants - In connection with the issuance of the note payable
on October 28, 1998 to an individual, the Company granted
warrants to purchase 20,000 shares of the Company's common
stock at $1.00 per share through October 28, 2002.
Options - During December 1998, the Company granted options to
the Vice-President of the Company to purchase 200,000 shares
of common stock at $1.00 per share. These options vest
immediately and expire in December 2003.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,682
<SECURITIES> 107,451
<RECEIVABLES> 258
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 112,391
<PP&E> 25,413
<DEPRECIATION> 3,538
<TOTAL-ASSETS> 963,017
<CURRENT-LIABILITIES> 229,384
<BONDS> 0
396
0
<COMMON> 4,259
<OTHER-SE> 721,841
<TOTAL-LIABILITY-AND-EQUITY> 963,017
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,068,967
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,334
<INCOME-PRETAX> (1,058,938)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,058,938)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,058,938)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
PURCHASE AGREEMENT
THIS AGREEMENT is made this 9th day of October, 1998, between
Gordon Seeley and Mark Watson ("Seller") and Webquest
International, Inc., a Nevada corporation (hereinafter, "Buyer")
WHEREAS, Seller has developed through its research and
development and is the owner of and possesses a certain on-line
computer game commonly known "SCAVENGERnet", identified with the
URL address of "www.scavengernet.com" (hereinafter, the "Game"),
and related software programs, trade names, trademarks, promotional
material, marketing strategies, customer base and intellectual
property hereinafter referred to as the "Property"); and
WHEREAS, Buyer desires to purchase the Property and all rights
associated with the Property; and
NOW, THEREFORE, in consideration of the mutual covenants,
agreements, representations and warranties in this agreement and
other consideration the adequacy and receipt of which is hereby
acknowledged, the Parties agree as follows:
ARTICLE 1: SALE OF PROPERTY
1.1 Seller hereby sells, grants, transfers, and assigns to
Buyer, it's successors and assigns, all rights, title, and interest
in and to the property and all work and materials relating to the
Game including programming source code, system analysis pertaining
to all phases of the operation of the "Website" developed by
Seller, and the customer base and marketing strategy for the Game.
Specifically, the Property including the Property identified and
set forth EXHIBIT "A" attached hereto and incorporated herein by
reference.
1.2 The rights and information transferred herein consisting
of all existing source codes, enhancements, upgrades,
documentation, flowcharts, design documents, and record and file
layouts, in
-1-
<PAGE>
any medium, relating to the Software and any all right, title, and
interest therein, proprietary and otherwise, and includes without
limitation, the copyright, trade secret right, patent tight, and
rights to publish, reproduce, transmit, adapt, prepare derivative
works, sell, or otherwise make use of the Software throughout the
world in any form or medium and in my language, and to license or
otherwise transfer to others the rights commensurate therewith.
This transfer is exclusive to Buyer and Seller shall not retain any
copies of the Software in any form without the express, written
consent of Buyer.
ARTICLE 2: CONSIDERATION
2.1 Buyer shall pay to Seller upon receipt of the Property the
sum of Ten Thousand Dollars and Ten Thousand Shares of Buyer's
common stock. The cash shall be payable Five Thousand Dollars
($5,000) upon delivery of the Property to Buyer and Five Thousand
Dollars ($5.000) within ninety (90) days of the date hereof. The
cash payable hereunder shall be paid fifty percent (50%) to Gordon
Seeley and fifty percent (50%) to Mark Watson.
2.2 Immediately upon execution of this Agreement Seller shall
deliver the Property to Buyer in a manner and on a medium
acceptable to Buyer.
ARTICLE 3: STOCK TRANSFERRED BY BUYER
3.1 Buyer agrees to transfer to seller upon delivery of the
Property to Buyer the shares of the common stock of Buyer to be
issued hereunder in the amount of five thousand (5,000) shares to
Gordon Seeley and five thousand (5,000) shares to Mark Watson.
3.2 The transfer of Buyer's shares shall be effected by the
delivery to Seller of certificates representing the transferred
shares, duly issued by Buyer and entered into the corporate
records.
3.3 Seller acknowledges, and irrespective of any other term or
provision herein, that the Buyer stock exchanged hereunder
presently is or may in the future be restricted stock subject to
Securities and Exchange Commission "Rule 144". No warranties or
representations by Buyer are made nor shall be
-2-
<PAGE>
implied herein that such restrictions will be removed except by
compliance with the applicable requirements of Rule 144 or the
Securities Act of 1933
ARTICLE 4: REPRESENTATIONS AND WARRANTIES OF SELLER. Seller
hereby represents and warrants to Buyer as follows, which
representations and warranties shall be deemed made by Seller upon
transfer of title to the Property:
4.1 Seller has an unrestricted exclusive right to use, execute
and reproduce the original Property enhancements and upgrades
thereof, and to sell and distribute the Property without obligation
or restriction of any kind and that there is no other ownership or
proprietary interest in the Property other than those transferred
hereunder.
4.2 Seller is the sole and exclusive owner of and has good and
marketable title to the Property and is duly authorized and empowered
to sell all rights to the Property without the consent of any other
person or entity; and there are no debts, liens, encumbrances, or
obligations against the Property and Seller has paid all taxes, charges,
debts, and other Assessments as may be attributed thereto and that all
debts and obligations relating thereto are and will remain fully
satisfied through transfer of title. The Property is not subject to any
permits, licenses, or grants of use or any right whatsoever and
Seller has not sold or granted any interest, whether in total or in
any portion of the Property to any person or entity and the use of
the Property does not conflict or infringe in any way with the
trade-marks, trade-names, copyright, or other proprietary rights,
nondisclosure or other rights or interest of any other person or
entity.
4.3 The Property and its use by Seller and its customers has
been and presently is in compliance with all applicable laws, rules
and regulations.
-3-
<PAGE>
4.4 Seller agrees, on behalf of itself, its affiliated
companies, officers, directors, consultants or employees,
successors and assigns, not to develop a Property competitive to
the Property, either for itself or any third party, except and
unless for the benefit of the Buyer or its successors or assigns.
4.5 Seller is not aware of any claims that have been, or
potentially could be, made pursuant to indemnification provisions
of Seller herein as of date of this Agreement.
4.6 Seller has full authority to enter into this Agreement
and to carry out Seller's obligation hereunder, and that this
Agreement constitutes a valid and binding obligation of Seller and
performance hereunder will not violate any Articles of
Incorporation, Bylaws, or other agreements or commitments of
Seller,
ARTICLE 5: INDEMNITY
6.1 In addition to any other obligation of indemnity as may be
set forth herein, Seller agrees to indemnify, defend and shall hold
harmless Buyer, its corporate affiliates, officers, directors,
assigns and any employee or agent thereof against all liabilities,
claims, damages, penalties, assessments, costs and attorney's fees
arising from the breach by Seller of any provision of this
Agreement and the conveyance to or use by Buyer of the Property,
including without limitation, the violation of any third party's
trade secrets, proprietary information, trademark, copyright or
patent rights in connection with the Property. Seller may, at its
option, conduct the defense of any such claim or action arising as
described herein and Buyer shall fully cooperate with such defense.
6.2 If a third party claim causes Buyer's quiet enjoyment and
use of the property to be endangered or disrupted, Seller shall use
best efforts to either: (1) replace the Property, without
additional charge, by a compatible, functionally equivalent and
non-infringing Property; (2) modify the Property to avoid thc
infringement; (3) obtain a license or purchase such rights as
necessary for Buyer to continue use of the Property and pay for any
additional fee related therefore; or (4) if none of the foregoing
-4-
<PAGE>
alternatives are possible even after Seller's best efforts, Seller
shall return all consideration received hereunder and Buyer shall
be allowed to pursue other damages as appropriate.
6.3 Buyer agrees to indemnify, defend and shall hold
harmless Seller against all liabilities, claims, damages, penalties,
assessments, costs and attorney's fees arising from the use of the
Property by Buyer subsequent to the delivery to and acceptance by
Buyer of the Property, including without limitation, the violation
of my third party's trade secrets, proprietary information,
trademark, copyright, or patent rights in connection with the
Property caused or created by Buyer, but excluding any such claim
arising out of Seller's indemnity obligations herein.
6.4 Upon obtaining knowledge thereof, the indemnifying party
shall promptly notify the indemnified party of any claim which has
given or could give rise to a right of indemnification under this
Agreement. If the right of indemnification relates to a claim
asserted by a third party against Buyer for infringement of any
proprietary interest arising from Seller's use or creation of the
Property prior to delivery of possession thereof to Buyer, Seller
shall have the right to employ counsel, at Seller's expense,
acceptable to Buyer to cooperate in the defense of any such claim.
If Seller does not elect to defend any such infringement claim,
Buyer shall have no obligation to do so and no action or inaction
by Buyer shall be deemed or constitute a waiver of any right or
remedy of Buyer, whether in law or in equity. To the extent Buyer
elects to defend such infringement action after Seller's failure to
do so, Seller shall reimburse Buyer for all costs and attorneys
fees incurred by Buyer and for any sums paid by virtue of any
settlement or satisfaction of judgment,
ARTICLE 7: NON-COMPETITION
Seller, as additional material consideration hereunder, agrees
that, for a period of ten (10) years from the date of this
Agreement, they will not directly or indirectly develop a product
or computer game similar to the Property and Seller will not
participate as a shareholder, partner, employee, consultant,
-5-
<PAGE>
or otherwise in any enterprise engaging in activities that would
violate this provision if engaged in by Seller directly. This
covenant shall be applicable to the entire United States of America
and the World on the basis that the Property is distributed and
placed on the "World Wide Web" and that Buyer intends to continue
such use of the Property and to sell the Property and related
products nationally and to the World. The parties, and Specifically
Seller, acknowledges and agrees that the scope of this covenant is
reasonable given the special relationship of the parties and the
nature of the Internet and sale of products thereon. Seller further
acknowledges and confirms that this covenant is a material
inducement to Buyer to enter into this Agreement, is considered
material to Buyer, and is required By Buyer for the purpose of
preserving the business and goodwill of Buyer. The parties agree
that the statement of reasonableness and enforceability of this
provision shall be conclusively binding on any legal tribunal for
all purposes.
ARTICLE 8: GENERAL PROVISIONS
8.1 Notice. Notices to or for the respective parties shall be
given in writing and delivered in person or mailed by certified or
registered mail, addressed to the respective party at the address
as set out below, or at such other address as either party may
elect to provide in advance in writing, to the other party:
Buyer: Seller:
WebQuest International, Inc. Gordon Seeley
Kirk Johnson, Vice President Mark Watson
1662 Highway 395 12760 SW Remundo Lane
Minden, NV 89423 Beaverton, IR 97008
8.2 Further Assurances. At any time, and from time to time,
each party, will execute such additional instruments and take such
action as may be reasonably requested by the other party to confirm
or perfect title to any property transfers hereunder or otherwise
to carry out the intent and purposes of this Agreement.
-6-
<PAGE>
8.3 Waiver. Any failure on the part of either party hereto to
comply with any of their obligations, agreements, or conditions
hereunder may be waived in writing by the party to whom such
compliance is owed.
8.4 Brokers. Each of the parties represents to the other
parties that no broker or finder has acted for them in connection
with this Agreement and agrees to indemnify and hold harmless the
other parties against any fee, loss, or expense arising out of
claims by brokers or finders employed or alleged to have been
employed by such party.
8.5 Governing Law. This Plan shall be construed and governed by
the laws of the State of Nevada and jurisdiction shall vest
exclusively in the Ninth Judicial District Court, located in
Minden, Douglas County, Nevada. The parties acknowledge and agree
that this Agreement is executed and to be wholly performed in
Douglas County, State of Nevada.
8.6 Assignment. This Agreement and all of the terms and
conditions hereof shall inure to the benefit of, and be binding
upon, the parties hereto and their heirs, executors,
administrators, successors, and assigns; provided, however, that
assignment by either party of it's rights under this Agreement
without the written consent of the other party shall be null and
void.
8.7 Entire Agreement. This Agreement supersedes any and all
other agreements, either oral or in writing between the parties
hereto and contains all of the covenants and agreements between the
parties with respect to this matter. Each party to this Agreement
acknowledges that no representations, inducements, promises, or
agreements, orally or otherwise, have been made by any party, or
anyone acting on behalf of any party, which are not embodied
herein, and that no other agreement, statement or promise not
contained in this Agreement shall be binding. Any modification of
this Agreement will be effective only if it is in writing, signed
by the party to be charged specifically referencing this Agreement.
-7-
<PAGE>
8.8 Interpretation. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be valid and
effective under applicable law, such provision shall be ineffective
to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or the remaining
provisions of this Agreement. The parties acknowledge and agree that
this Agreement was a product of mutual negotiation between the parties
and no provision or term herein shall be in any manner construed
against either party as the drafter hereof, and that this provision
shall be conclusively binding on any legal tribunal for all
purposes.
8.9 Counterparts, Telefacsimile. This Agreement may be
executed in counterparts, and each counterpart or set thereof shall
be deemed to be a duplicate original, Executed copies of this
Agreement may be delivered by telefacsimile, and delivery of
executed telefacsimile copies to the parties and their counsel
shall be deemed to be a delivery of a duplicate original and
sufficient delivery to result in entry to this Agreement by the
transmitting party; provided, however, that within ten (10) days
thereafter, a signed duplicate original shall he forwarded to the
party to whom a telefacsimile copy was forwarded. IN WITNESS
WHEROF, the parties have executed this Agreement the day and year
first above written.
BUYER: SELLER:
WebQuest International, Inc. Gordon Seeley
BY: KIRK JOHNSON Mark Watson
Vice President
-8-
<PAGE>
EXHIBIT A
Once the contract has been signed by both parties, Mark Watson and
Gordon Seeley will mail a complete volume of information and
property in both print and electronic form to WebQuest. The
material to be turned over upon the sale shall include the
following:
1) All rights end privileges associated with the name SCAVENGERnet.
2) Transfer of ownership of the domain http://www.scavengernet.com.
3) Full rights to the name and likeness of "Cassie Clue"
(SCAVENGERnet's Mascot)
4) The web site and all associated graphic design work to date
presented in both print and on diskette.
5) All passwords, email addresses, contact information and
documentation for the current hosting company on which the
Scavengernet website presides.
6) The complete member email list in both print and on diskette.
7) All demographic data and feedback collected via online surveys
to date in both print and on diskette.
g) All past hunt clues and results in both print and on diskette.
9) All contact information of companies having expressed interest
in sponsoring future hunts, as well as those companies previously
approached regarding sponsorship opportunities.
10) A full report outlining all future hunt and promotional ideas.
<PAGE>
NON-EXCLUSIVE LICENSE AGREEMENT
THIS AGREEMENT is made and entered into this 3rd day of July,
1997, by and between ATARI, a division of JTS CORPORATION, a
Delaware Corporation, with its principal place of business located
at 166 Baypointe Parkway, San Jose, California 95134 (hereinafter,
"Licensor") and WEBQUEST INTERNATIONAL, INC., a Nevada corporation,
with its principal place of business located at 1135 Terminal Way,
Suite 106, Reno, Nevada 89502 (hereinafter "Licensee").
WITNESSETH:
WHEREAS, Licensor has developed through its research and
development and is the owner of, and possesses certain computer
game software, programs, trade names, trademarks, promotional
material and intellectual property herein commonly known as "Pong"
(hereinafter referred to as the "Property"); and
WHEREAS, Licensor is the owner of certain valuable trade names
and logos relating to the Property, which such trade names were or
are registered in the countries of USA, United Kingdom, Canada,
Japan, Sweden, Germany, Australia, and Austria, and any renewals
thereunder; and
WHEREAS, Licensor has granted a non-exclusive license to
Hasbro Interactive for use of the Property on the Internet; and
WHEREAS, Licensee desires to license the Property to use the
game in connection with its "website" on the World Wide Web
identified with the URL address of "www.ipong.com"; and
WHEREAS, Licensor is willing to grant a limited, non-exclusive
license to Licensee to use the Property under the terms and
conditions provided for herein.
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein, and other good and valuable
consideration, receipt whereof is hereby acknowledged, it is hereby
agreed as follows:
-1-
<PAGE>
ARTICLE I
GRANT OF LICENSE
1.1 Licensor hereby grants to the Licensee, in accordance with
the terms of this Agreement, a non-exclusive right and license to
use the Property described herein, to be placed for access by the
public on one (1) website located on the World Wide Web, as
identified above, owned and operated by Licensee in connection with
its services and products. Licensor retains all rights to further
license the Property. Notwithstanding anything to the contrary
stated herein, the grant of any right by Licensor to Licensee under
this agreement shall be subject to any and all legal obligations
and requirements with which Licensee is bound by law to comply.
1.2 Unless otherwise terminated under the provisions hereof,
the term of the license granted herein shall be for an initial
period of five (5) years from the date hereof, and shall be
renewable for an additional five (5) year period at the option of
Licensee as long as a minimum royalty of $400,000 has been paid to
Licensor during the original five (5) year license period.
1.3 Subject to the terms of this Agreement, all copies of the
licensed Property made by the Licensee including transactions,
encodings, decodings, compilations, partially modified copies, and
updated works are and shall be the sole property of Licensor.
1.4 The rights and information licensed herein consist of all
existing source codes, enhancements, upgrades, documentation,
flowcharts, design documents, and record and file layouts, in any
medium, relating to the Property and any and all right, title, and
interest therein, proprietary and otherwise, and includes without
limitation, the copyright, trade secret right, patent right, and
rights to publish, reproduce, transmit, adapt, prepare derivative
works, sell, or otherwise make use of the Property as otherwise set
forth herein.
ARTICLE II
LICENSE FEES
2.1 Licensee shall pay to Licensor a royalty, payable in
quarterly installments, in an amount equal to 1/10 of one cent
($0.001) for each player who accesses "Pong" through Licensee's
website. Licensee
-2-
<PAGE>
shall pay Licensor a base quarterly royalty in the amount of Five
Thousand Dollars ($5,000) if the number of Pong players fails to
exceed five million (5,000,000) in any one quarter. Payments shall
be made within thirty (30) days of the end of each calendar
quarter.
2.2 Licensee shall pay the first base quarterly royalty in the
amount of Five Thousand Dollars ($5,000) upon execution of this
Agreement, which such initial fee shall be considered non-
refundable regardless of the breach of Licensee of this Agreement.
Thereafter, the quarterly fees (base or otherwise) shall be payable
according to the terms herein.
2.3 Licensee shall keep accurate records and books of account
showing the quantities of players accessing Pong on the Internet.
Licensor, or its representative, shall be given access to such
records and books at all reasonable times at Licensee's place of
business. Licensee shall additionally make this information
available to Licensor annually during the terms of the Agreement,
within sixty (60) days after the first of each year.
ARTICLE III
TERMINATION: REMEDIES
3.1 This Agreement may be terminated in the event of any of
the following, which shall be deemed events of default:
3.1.1 Appointment of a trustee or receiver for Licensee.
3.1.2 Licensee is adjudged bankrupt, becomes
insolvent, or makes an assignment for the benefit
of creditors.
3.1.3 Licensee's failure to pay to Licensor the amounts
payable under the terms hereof whether minimum
annual payments or otherwise, or to furnish the
accounting as set forth herein.
-3-
<PAGE>
3.1.4 Licensee's violation or failure to keep or
perform any other obligation, term or condition
contained herein and Licensee fails to cure
within thirty (30) days after written
notification of such failure or default is
received.
3.2 Licensee shall have the right to terminate this
Agreement upon thirty (30) days written notice without cause, and
subject to payment of all amounts due under and performance of the
remaining terms of this Agreement.
3.3 Upon termination of this Agreement for any reason,
Licensee shall cause "Pong" to be removed from Licensee's website
within twenty-four (24) hours of effective termination.
Additionally, Licensee shall discontinue all use of the trade name,
"Pong," as well as any use of the Property described herein, and
all copies of the software and programming known as "Pong" shall be
returned to Licensor or destroyed by Licensee. Licensee shall
certify to Licensor that all copies or partial copies have been
returned to Licensor or destroyed.
3.4 Except as to a claim for accrued royalties due and payable
to Licensor, Licensor's rights and remedies provided for heroin are
Licensor's sole and exclusive remedies for breach of this Agreement
by Licensee regardless of any and all other rights and remedies
which Licensor may have in law or in equity. The waiver by Licensor
of any right of termination for any default or of any breach shall
not constitute a waiver of the right to terminate this Agreement
for any subsequent default or breach.
3.5 In no event shall either party be liable to the other for
any special, indirect, or consequential damages, including damages
for loss of use, economic loss (such as business interruption) or
loss of profits, however the same may be caused, including, without
limitation, the fault, breach of contract, tort (including the
concurrent or sole and exclusive negligence), strict liability or
otherwise of either party, but excluding the intentional or wilful
act of such party.
-4-
<PAGE>
ARTICLE IV
ASSIGNMENT
It is agreed that none of the rights of Licensee provided for
herein are transferable or assignable without the express written
approval of Licensor, which such approval is in Licensor's absolute
discretion.
ARTICLE V
INFRINGEMENT
In the event that any infringement of the licensed trade name,
trademark, and/or intellectual property known as "Pong" comes to
the attention of either party, such party shall promptly notify the
other party of the infringement. Each party shall have the option
to prosecute and defend, at their respective cost and expense, any
infringement action arising out of the licensed patents herein.
Each party agrees to cooperate with the other if any such action is
commenced and both parties shall have the right, but not the
obligation, to obtain counsel of their choosing to prosecute or
defend such action. In no event shall either party have the
responsibility or obligation to prosecute or defend any such suit
or be obligated for the cost or expenses of such litigation,
including attorney's fees. It is expressly agreed that each party
shall bear their own attorney's fees and costs which may be
incurred as a result of any such infringement action.
ARTICLE VI
PROPRIETARY RIGHTS AND INFORMATION PROTECTION
6.1 Licensee recognizes that the Property licensed hereunder
constitutes valuable trade secrets of Licensor. Accordingly,
Licensee agrees that it shall protect and hold in confidence all
Property and related information furnished to it by Licensor. All
the Property shall be kept in secure places, under access and use
restrictions not less strict than those used by Licensee to protect
its own similar, valuable trade secret information. Except with
Licensor's prior written consent, Licensee shall not disclose any
Property to any other person, firm, or corporation (including any
stockholder, partner, or joint venturer or any parent, subsidiary,
or affiliated corporation), and shall further restrict circulation
of such material within its own organization except to the extent
necessary to fulfil the herein stated purposes. The fact that the
Property
-5-
<PAGE>
has been obtained or becomes available from unauthorized sources
shall in no way relieve Licensee from its obligations hereunder and
unauthorized use of the Property by Licensee shall be deemed to
include any disclosure by Licensee of the Property obtained from
such sources.
6.2 Licensee agrees to respect Licensor's copyright in its
brochures and other materials, provided that during the term of
this Agreement, Licensee may reproduce such promotional brochures
or materials for use in connection with the license granted herein.
The Licensee shall reproduce and mark any such copies with any
copyright notice which may appear on the original or on any
packaging material. Notwithstanding anything stated herein to the
contrary, Licensor is not obligated to provide any such material
nor shall the failure to provide such material be considered a
breach of this Agreement; it being the intent of the parties to
make use of such material as may be available to the mutual benefit
of the parties.
ARTICLE VII
INVALIDITY OF TRADEMARK
If any claim of any proprietary interest under which this
license is granted shall be declared invalid by a final decision of
a court of competent jurisdiction, whether an appellate court or a
lower court whose decision becomes final by failure to appeal
therefrom or no certiorari is granted within the period allowed
therefor, or if, as a result of a final decision, any such claim
shall be hereafter awarded to another, Licensee shall be relieved
of all obligations hereunder.
ARTICLE VIII
CONFIDENTIALITY
Licensee hereby agrees, that during the term of this Agreement
and for a period of five (5) yeas after its termination, Licensee
will hold secret and confidential and will not disclose in any
manner to any person or concern (excluding such of its employees or
agents as are required to allow full use of the rights granted
herein and then only under an obligation of secrecy binding upon
such employee or agent for the benefit of Licensor), any method,
process, technique, information, knowledge, trade practice or trade
secret divulged, disclosed or in any way communicated by Licensor
to Licensee. Additionally, Licensee hereby agrees that
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it will not use or employ, either directly or indirectly, any
information, knowledge, trade practice or trade secret acquired
under this Agreement for such period as stated herein.
ARTICLE IX
OWNERSHIP
Licensee hereby recognizes and acknowledges the Licensor's
ownership of the software, trade name and trademarks which are the
subject of this Agreement, to any future, improvement,
modification, invention or design as contemplated herein, and to
any trademark licensed or used in association with the products
herein. Licensee further agrees that it will not at any time do or
cause to be done any act or thing contesting or in any way
impairing or tending to impair Licensor's ownership. In the event
Licensee challenges the ownership of Licensor to any item
contemplated herein in any court having jurisdiction over such
matters, Licensor shall have the right to immediately terminate
this Agreement.
ARTICLE X
TAXABILITY
Licensor and Licensee agree that Licensee will deduct the
payments under the term of this agreement as a business expense by
Licensee for purposes of federal and state income taxation, and
that Licensor shall treat its payment in whatever method is
acceptable under prevailing Internal Revenue Service rules and
regulations as well as federal and state income taxation laws. In
no event, however, is the method of treatment of said payments by
the Internal Revenue Service a condition of the Agreement herein.
ARTICLE XI
NOTICES
All notices required by this agreement shall be mailed by
certified mail, return receipt requested, tothe following
addresses:
Licensor:
Atari, a division of JTS Corporation
John Skruch
166 Baypointe Parkway
San Jose, California 95134
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Licensee:
WebQuest International, Inc.
Allen Dunn
1135 Terminal Way, Suite 106
Reno, Nevada 89502
Any notice required or permitted to be given under this
agreement by either of the parties heretoshall be deemed to
have been sufficiently given for all purposeshereto on the
date of mailing as described herein above.
ARTICLE XII
REPRESENTATIONS AND WARRANTIES
12.1 Licensee represents and warrants to Licensor that:
12.1.1 Licensee is duly incorporated under the laws of the
State of Nevada and is in good standing.
12.2.2 Licensee's board of directors and shareholders
existing as of the date of the execution hereof have duly
approved all of Licensee's agreements herein, and
Licensee shall provide Licensor with certified copies of
resolutions showing such action.
12.2 Licensor represents and warrants to Licensee that:
12.2.1 Licensor has not entered into any other agreements,
excepting the license agreement with Hasbro Interactive
as noted herein above, for the use and/or sale of the
Property contrary to the rights and interests granted
herein and has the full authority and right to grant the
license granted herein.
12.2.2 Licensor's grant of the license herein is not in
conflict in any way with its grant of a license to Hasbro
Interactive for use of the Property.
12.2.3 Hasbro Interactive has approved this license for use
of the Property and Licensee's use of the Property is non-
infringing upon the license agreement between Licensor
and Hasbro Interactive.
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12.2.4 Licensor has developed and protected said trade name and
has the exclusive right to use and license others to use
such marks.
12.2.5 Licensor has an unrestricted exclusive right to use,
execute and reproduce the original Property, enhancements
and upgrades thereof, and to sell and distribute the
Property without obligation or restriction of any kind and
that there is no other ownership or proprietary interest
in the Property other than those licensed hereunder,
excepting therefrom the rights of Atari Games Corporation
to the use of the Property for coin operated games, and
a non-exclusive right to create derivative works for play
on personal computers and home game systems.
12.2.6 Licensor is the sole and exclusive owner of and has good
and marketable title to the Property and is duly
authorized and empowered to license all rights thereto
without the consent of any other person or entity; and
there are no debts, liens, encumbrance, or obligations
against the Property and Licensor has paid all taxes,
charges, debts, and other assessments as may be attributed
thereto and that all debts and obligations relating
thereto are and will remain fully satisfied throughout the
term hereof. The Property is not subject to any permits,
licenses, or grants of use or any right whatsoever other
than licensed herein and Licensor has not sold or granted
any interest, whether in total or in part, in any portion
of the Property to any person or entity and the use of the
Property does not conflict or otherwise infringe in any
way with the trade-marks, trade-names, copyright, or other
proprietary rights, nondisclosure or other rights or
interest of any other person or entity.
12.2.7 The Property and its use by Licensee has been and is in
compliance with all applicable laws, rules and regulations.
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12.2.8 Licensor is a corporation duly organized, validly
existing, and in good standing under the laws of the
state of its incorporation and has full corporate power
and authority to enter into this Agreement and to carry
out its obligations hereunder. This Agreement constitutes
a valid and binding obligation of Licensor and performance
hereunder will not violate any provision of its Articles
of Incorporation, Bylaws, or other agreements or
commitments.
ARTICLE XIII
LICENSEE'S RIGHT TO MODIFY
If, during the term of this Agreement, Licensee desires to
modify, enhance or alter the Property in order to more effectively
market Licensee's product, Licensee shall provide the software
version to Licensor for approval thereof, which such approval shall
not be unreasonably withheld. Licensee shall not release any such
version to the public without Licensor's prior approval. Subject to
the terms of this Agreement, Licensee shall retain ownership of
such modifications, enhancements or alterations. There shall be no
use of Licensee's modifications or alterations of the software by
any other party without the specific approval of Licensee. It is
initially understood between the parties that Licensee intends to
make the pong game a more exciting game beyond presently existing
format.
ARTICLE XIV
INDEMNIFICATION
14.1 Licensee hereby agrees to indemnify, defend and hold
Licensor harmless from all liabilities, losses, damages, costs,
expenses, causes of action, claims and/or judgments by reason of
any injury or damage to any person or persons, including without
limitation, Licensee, its servants, agents and employees, or
property of any kind whatsoever and to whomsoever belonging,
resulting from any use, sale or other disposition by Licensee of
the Property licensed hereunder. Licensee hereby waives all claims
against Licensor for damages to property of or for bodily injuries
to Lessee, his agents or any other third persons.
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14.2 Licensee agrees to indemnify, defend and hold Licensor
harmless from any and all liability, damages, loss, cost or expense
including, but not limited to, attorney's fees arising out of any
claim or action based upon the use of the trade names or marks by
Licensee.
14.3 Licensor agrees to indemnify, defend and hold Licensee
harmless from any and all liability, damages, loss, cost or expense
including, but not limited to, attorney's fees arising out of any
claim or action based upon the breach of the warranties and
representations of Licensor set forth in this Agreement.
14.4 Licensor agrees to indemnify, defend and hold Licensee
harmless from any and all liability, damages, loss, cost or expense
including, but not limited to, attorney's fees arising out of any
claim or action related to the use of the Property by Hasbro
Interactive pursuant to the License Agreement between Hasbro
Interactive and Licensor.
ARTICLE XV
MISCELLANEOUS PROVISIONS
15.1 This Agreement contains the entire agreement of the
parties and supersedes all prior agreements, understandings and
negotiations regarding the same and shall only be amended by a
written instrument by both parties.
15.2 If any part of this Agreement shall be held unenforceable
by a court of competent jurisdiction, the remainder of the
Agreement shall nevertheless remain in full force and effect.
15.3 This Agreement shall be governed and construed in
accordance with the laws of the State of California. Any action
commenced by either party arising from any disputes hereunder shall
be brought in the State of California, in and for the County of
Santa Clara.
15.5 The waiver by either party of a breach of any provision
contained herein shall be in writing and shall in no way be
construed as a waiver of the present or any succeeding breach of
any such provision or the waiver of the provision itself.
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15.6 In the event of any litigation between the parties
arising out of this Agreement, the prevailing party shall be
entitled to recover its attorney's fees and costs of suit incurred
therein.
15.7 Each of the parties represents to the other parties that
no broker or finder has acted for them in connection with this
Agreement and agrees to indemnify and hold harmless the other
parties against any fee, loss, or expense arising out of claims by
brokers or finders employed or alleged to have been employed by
such party.
IN WITNESS WHEREOF, the parties have hereunto set their hands
the day and year first above written.
LICENSOR:
ATARI, a division of JTS CORPORATION,
a Delaware Corporation
By: /s/John Skruch
LICENSEE:
WEBQUEST INTERNATIONAL, INC.
By: William J. Bradley
Secretary/Treasurer
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