U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
____________________to________________
Commission File Number: 000-24355
WEBQUEST INTERNATIONAL, INC.
-----------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 86-0894019
------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2248 MERIDIAN BLVD., SUITE A, MINDEN, NV 89423-8601
----------------------------------------------------
(Address of principal executive offices)
(775) 782-0350
--------------
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15 (d) of the Exchange Act during the past 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 __
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 9,412,794
shares of common stock, $.001 par value, outstanding as of July 31, 2000.
<PAGE>
WEBQUEST INTERNATIONAL, INCORPORATED
TABLE OF CONTENTS AND INFORMATION REQUIRED IN REPORT
Form 10-QSB for the quarter ended June 30, 2000
PART I FINANCIAL INFORMATION
Item 1 Financial Statements: Page
------
Condensed Balance Sheets as of
June 30, 2000 and September 30, 1999 3
Condensed Statements of Operations for the
three, and nine months ended June 30, 2000 and 1999
and from the Date of Inception on November 5, 1996
through June 30, 2000 5
Statement of Stockholders' Equity
from the Date of Inception on November 5, 1996
through June 30, 2000 6
Condensed Statements of Cash Flows for the
nine months ended June 30, 2000 and 1999 10
Notes to the Condensed Financial Statements 13
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Factors That May Effect Future Results 18
PART II OTHER INFORMATION 24
Item 1 Legal Proceedings 24
Item 2 Changes in Securities and Use of Proceeds 24
Item 3 Defaults upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 25
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURES 25
2
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
CONDENSED BALANCE SHEETS
[Unaudited]
ASSETS
June 30, September 30,
2000 1999
___________ ___________
CURRENT ASSETS:
Cash $1,631,005 $ 2,386
Employee advances 20,500 671
Accounts receivable 9,766 3,980
Prepaid expenses 60,965 -
___________ ___________
Total Current Assets 1,722,236 7,037
___________ ___________
PROPERTY AND EQUIPMENT, net 183,257 53,846
___________ ___________
OTHER ASSETS:
Refundable deposits 3,665 3,201
Internet sites, net 813,747 -
___________ ___________
Total Other Assets 817,412 3,201
___________ ___________
$2,722,905 $ 64,084
___________ ___________
[Continued]
3
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
CONDENSED BALANCE SHEETS
[Unaudited]
[Continued]
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, September 30,
2000 1999
___________ ___________
CURRENT LIABILITIES:
Accounts payable $ 16,189 $ 204,530
Notes payable - related parties - 342,909
Other accrued liabilities 15,886 139,601
Accrued dividends payable - 58,770
Current portion - capital lease
obligation 3,360 3,360
___________ ___________
Total Current Liabilities 35,435 749,170
___________ ___________
CAPITAL LEASE OBLIGATION, less current
portion 3,778 3,778
___________ ___________
Total Liabilities 39,213 752,948
___________ ___________
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par
value, 5,000,000 shares authorized,
no shares outstanding - -
Common stock, $.001 par value,
45,000,000 shares authorized
9,402,794 and 4,870,618 shares
issued and outstanding 9,403 4,871
Capital in excess of par value 8,304,773 2,909,909
Deficit accumulated during the
development stage (5,621,370) (3,567,530)
___________ ___________
2,692,806 (652,750)
Less: Receivable stock subscription (9,114) (36,114)
___________ ___________
Total Stockholders' Equity 2,683,692 (688,864)
___________ ___________
$ 2,722,905 $ 64,084
___________ ___________
NOTE: The balance sheet at September 30, 1999 was taken from the
audited financial statements at that date and condensed.
The accompanying notes are an integral part of these unaudited
financial statements.
4
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
CONDENSED STATEMENTS OF OPERATIONS
[Unaudited]
For the Three For the Nine From Inception
Months Ended Months Ended on November 5,
June 30, June 30, 1996 Through
__________________________ ____________________ June 30,
2000 1999 2000 1999 2000
__________ ____________ ___________ _____________ ___________
REVENUE $ 7,450 $ 2,250 $ 10,975 $ 3,250 $ 32,498
__________ ___________ ___________ _____________ ___________
EXPENSES:
Development,
administrative
and
marketing 905,253 1,191,718 1,784,610 1,701,775 4,994,464
Compensation
expense
recorded in
accordance with
APB 25 for
stock options
issued below
market value - - - - 295,423
Total
Expenses 905,253 1,191,718 1,784,610 1,701,775 5,289,887
__________ ___________ ___________ _____________ ___________
LOSS FROM
OPERATIONS (897,803) (1,189,468) (1,773,635) (1,698,525) (5,257,389)
__________ ___________ ___________ _____________ ___________
OTHER INCOME
(EXPENSE):
Gain (loss)
on sale of
marketable
securities - - - 14,743 25,106
Interest
income 41,105 - 58,581 21 58,602
Interest
(expense) (21,705) (8,557) (146,086) (13,468) (196,219)
License
termination
cost - - (192,700) - (192,700)
__________ ___________ ___________ _____________ ___________
Total Other
Income
(Expense) 19,400 (8,557) (280,205) 1,296 (305,211)
__________ ___________ ___________ _____________ ___________
LOSS BEFORE
INCOME
TAXES (878,403) (1,198,025) (2,053,840) (1,697,229) (5,562,600)
CURRENT TAX
EXPENSE - - - - -
DEFERRED TAX
EXPENSE - - - - -
__________ ___________ ___________ _____________ ___________
NET LOSS $ (878,403) $(1,198,025)$(2,053,840)$ (1,697,229)$(5,562,600)
LESS: PREFERRED
DIVIDEND
REQUIREMENTS - (7,798) - (26,195) (58,770)
__________ ___________ ___________ _____________ ___________
NET LOSS
APPLICABLE
TO COMMON
STOCKHOLDERS
$ (878,403) $(1,205,823)$(2,053,840)$ (1,723,424)$(5,621,370)
__________ ___________ ___________ _____________ ___________
LOSS PER COMMON
SHARE $ (.14) $ (.26)$ (.31)$ (.39)$ (1.37)
__________ ___________ ___________ _____________ ___________
The accompanying notes are an integral part of these unaudited condensed
financial statements.
5
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION ON NOVEMBER 5, 1996
THROUGH JUNE 30, 2000
[Unaudited]
Deficit
Accumulated
Preferred Stock Common Stock Capital in During the
__________________ _____________________ Excess of Development
Shares Amount Shares Amount Par Value Stage
________ ________ __________ __________ ____________ __________
BALANCE,
November 5,
1996 - $ - - $ - $ - $ -
Shares issued
for cash,
January 1997,
at $.123
per share - - 2,438,333 2,43829 7,562 -
Shares issued
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 -
Shares issued
services,
August 1997,
at $1.00
per share - - 30,000 30 29,970 -
Shares issued
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 -
Issuance of
126,943 shares
preferred and
common stock for
non-cash
consideration,
July, 1998 at
$1.00 per s
share 126,943 127 126,943 127 253,632 -
[Continued]
6
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION ON NOVEMBER 5, 1996
THROUGH JUNE 30, 2000
[Unaudited]
[Continued]
Deficit
Accumulated
Preferred Stock Common Stock Capital in During the
__________________ _____________________ Excess of Development
Shares Amount Shares Amount Par Value Stage
________ ________ __________ __________ ____________ __________
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 -
Shares issued
upon exercise
of options by an
officer,
February 1998,
at $.116
per share - - 50,000 50 5,750 -
Shares issued
upon exercise
of options
by an officer,
July 1998,
at $.116
per share - - 50,000 50 5,750 -
Share issued
to an officer
for cash at
$1.00 per
share,
July, 1998 - - 5,000 5 4,995 -
Shares issued
for consulting
services at $1.00
per share,
May, 1998 - - 62,000 62 61,938 -
Shares issued
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 - - -
[Continued]
7
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION ON NOVEMBER 5, 1996
THROUGH JUNE 30, 2000
[Unaudited]
[Continued]
Deficit
Accumulated
Preferred Stock Common Stock Capital in During the
__________________ _____________________ Excess of Development
Shares Amount Shares Amount Par Value Stage
________ ________ __________ __________ ____________ __________
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)
Shares issued
upon exercise
of warrants at
$1.00 per
share - - 50,000 50 49,950 -
Stock offering
cost - - - - (40,000) -
Shares issued
for interest
valued at
$1.00 per
share - - 20,000 20 19,980 -
Shares issued
for services
valued at $1.00
per share - - 20,000 20 19,980 -
Shares issued
for purchase
of software at
$1.00 per
share - - 26,000 26 25,974 -
Shares issued
for purchase
of software
at $1.75
per share,
May 1999 - - 100,000 100 174,900 -
Assumed mandatory
conversion of
Series B preferred
stock during
the period ended
September 30,
1999 (396,000) (396) 396,000 396 - -
Accrued preferred
dividends for
period ending
September 30,
1999 - - - - - (27,991)
Granting of options
and warrants to
acquire common
stock at below
market value.
Compensation
expense calculated
in accordance
with APB25 - - - - 22,110 -
Granting of warrants
to acquire common
stock at below
market value
in relations
to note payable.
Interest expense
calculated in
accordance with
APB25 - - - - 6,500 -
Net loss for
the year ended
September 30,
1999 - - - - - (1,990,821)
________ ________ __________ __________ ____________ __________
BALANCE,
September 30,
1999 - $ - 4,870,618 $ 4,871 $ 2,909,909 $(3,567,530)
8
<PAGE>
[Continued]
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION ON NOVEMBER 5, 1996
THROUGH JUNE 30, 2000
[Unaudited]
[Continued]
Deficit
Accumulated
Preferred Stock Common Stock Capital in During the
__________________ _____________________ Excess of Development
Shares Amount Shares Amount Par Value Stage
________ ________ __________ __________ ____________ __________
Shares issued
in private
placement for
cash at
$1.25 per
share net
of $489,080
stock offering
cost. - - 3,461,300 3,461 3,834,084 -
Shares cancelled
for non-payment
of subscription
receivable - - (15,000) (15) (14,985) -
Shares issued
for non-cash
consideration
including
services valued
at $1.00 to
$3.00 per
share - - 200,117 200 317,902 -
Shares issued
for cancellation
of license
agreements,
payment of
accounts payables
and notes
payable at $1.00
per share - - 400,000 400 399,600 -
Shares issued
upon exercise
of warrants,
at $.87 to
$1.00 per
share - - 52,500 52 47,572 -
Shares issued for
the acquisition
of a website,
(chessed.com)
at $3.31 per
share - - 40,785 41 134,959 -
Shares issued to
pay accrued
dividends
on preferred
stock - - 57,870 58 57,812 -
Shares issued
for the acquisition
of a web-site,
(winbridge.com)
at $2.25 per
share - - 200,000 200 449,800 -
Shares issued for
conversion of debt at
$1.25 per
share - - 52,104 52 65,078 -
Share issued for
loan incentives
valued at
$1.25 per
share - - 82,500 83 103,042 -
Net loss for
the nine months
ended June 30,
2000 - - - - - (2,053,840)
________ ________ __________ __________ ____________ __________
BALANCE,
June 30,
2000 - $ - 9,402,794 $ 9,403$ 8,304,773 $ (5,621,370)
________ ________ __________ __________ ____________ __________
The accompanying notes are an integral part of these unaudited condensed
financial statements.
9
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
CONDENSED STATEMENTS OF CASH FLOWS
[Unaudited]
Net Increase (Decrease) In Cash
For the Nine From Inception
Months Ended on November 5,
June 30, 1996 Through
_____________________ June 30,
2000 1999 2000
___________ ____________ ___________
Cash Flows from Operating Activities:
Net loss applicable to common
stockholders $(2,053,840) $ (1,723,424) (5,621,370)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Depreciation and amortization 51,309 1,023,228 1,171,362
Stock issued for goods and
services 874,564 204,176 1,447,670
APB 25 compensation recorded
for stock options issued below
market value - - 301,923
Changes in assets and liabilities
(Increase) in employee
advances (20,500) - (19,824)
Increase (decrease) in accounts
payable (188,341) 38,869 (4,197)
(Decrease) in advances -
related parties - (5,941) -
Increase (decrease) in accrued
liabilities (123,715) 61,094 (40,591)
Increase (decrease) in accounts
receivable (9,095) - 35,443
(Decrease) in prepaid expenses (56,985) - (56,985)
___________ ____________ ___________
Net Cash (Used) by
Operating Activities (1,526,603) (399,833) (2,786,569)
___________ ____________ ___________
Cash Flows from Investing Activities:
(Increase) in refundable deposits (464) 196 (3,665)
Purchase of equipment (409,467) (46,026) (425,576)
Purchase of software licensing
rights - - (300,000)
Proceeds from marketable
securities sales - 206,624 262,249
___________ ____________ ___________
Net Cash Provided (Used)
by Investing Activities (409,931) 160,794 (466,992)
___________ ____________ ___________
Cash Flows from Financing Activities:
Proceeds from notes payable 1,119,017 290,000 1,395,712
Payments on notes payable (1,396,796) (40,000) (1,395,712)
Payments on capital lease
obligation - (1,738) 7,138
Proceeds from preferred stock
issuance - - 344,750
Proceeds from common stock
issuance 3,901,702 (40,000) 4,532,678
Increase (decrease) in accrued
dividends payable (58,770) 26,195 -
___________ ____________ ___________
Net Cash Provided by
Financing Activities 3,565,153 234,457 4,884,566
___________ ____________ ___________
[Continued]
10
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
CONDENSED STATEMENTS OF CASH FLOWS
[Unaudited]
Net Increase (Decrease) In Cash
[Continued]
For the Nine From Inception
Months Ended on November 5,
June 30, 1996 Through
_____________________ June 30,
2000 1999 2000
___________ ____________ ___________
Net Increase (Decrease) in Cash 1,628,619 (4,852) 1,631,005
Cash at Beginning of Period 2,386 4,682 -
___________ ____________ ___________
Cash at End of Period $ 1,631,005 $ 100 $ 1,631,005
___________ ____________ ___________
Supplemental Disclosures of Cash Flow information:
Cash paid during the year and from inception for:
Interest $ 21,705 $ 4,376 $ 33,638
Income taxes $ - $ - $ -
Supplemental schedule of Non-cash Investing and Financing
Activities:
For the nine month period ended June 30, 2000 (Unaudited):
The Company issued 200,000 shares of common stock valued at
$450,000 for the purchase of the web-site winbridge.com.
The Company issued 200,117 shares of common stock for non-cash
consideration including services rendered valued at $318,102
with prices ranging from $1.00 to $3.00 per share.
The Company issued 400,000 shares of common stock for
cancellation of a license agreement, payment of accounts
payable and a note payable totaling $400,000 (or $1.00 per
share).
The Company issued 52,104 shares of common stock for
conversion of debt valued at $65,130 (or $1.25 per share).
The Company issued 40,785 shares of common stock to acquire a
web-site, www.chessed.com valued at $135,000 (or $3.31 per
share).
The Company issued 57,870 shares of common stock to pay for
accrued dividends.
The Company cancelled 15,000 shares of common stock due to non-
payment of subscription receivable.
The Company issued 82,500 shares as loan incentives, accounted
for as interest expense.
[Continued]
11
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
CONDENSED STATEMENTS OF CASH FLOWS
[Unaudited]
Net Increase (Decrease) In Cash
[Continued]
Supplemental schedule of Non-cash Investing and Financing
Activities:
For the nine month period ended June 30, 1999 (Unaudited):
The Company issued 100,000 shares of common stock valued at
$175,000 for the purchase of the technology rights, source
code, and documentation of iPONG from a related party [See
Note 4]
The Company issued 20,000 shares of common stock valued at
$20,000 for a finder's fee in acquiring $200,000 in
convertible promissory note [See Note 5].
The Company issued 10,000 shares of common stock valued at
$10,000 for the purchase of SCAVENGERnet. The Company issued
10,000 shares of common stock valued at $10,000 for the
purchase of BannerClicks. The Company issued 6,000 shares of
common stock valued at $6,000 for the purchase of Nancy's
Kitchen.
The Company has expensed its remaining software licensing
rights in the net amount of $825,000 due to the termination of
the license agreement.
The Company has accounted for 183,500 shares of common stock
as being issued in the conversion of 183,500 preferred shares.
Amortization of deferred compensation on stock options
amounted to $181,826.
The accompanying notes are an integral part of these unaudited condensed
financial statements.
12
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - WebQuest International, Inc. "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 games on the Internet. The
Company plans on deriving its revenue from tournament fees,
monthly and annual subscriptions, and the sale of advertising.
The Company may also pursue other Internet related businesses.
Condensed Financial Statements - The accompanying financial
statements have been prepared by the Company without audit. In
the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at June
30, 2000 and for all the periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
We suggest that these condensed financial statements be read in
conjunction with the financial statements and notes thereto
included in the Company's September 30, 1999 audited financial
statements. The results of operations for the period ended June
30, 2000 is not necessarily indicative of the operating results
for the full year.
NOTE 2 - RELATED PARTY TRANSACTIONS
Employment Agreements - Kirk Johnson formerly served as our vice
president, secretary, and treasurer. Mr. Johnson was elected by
our Board of Directors to be the Chief Executive Officer of the
Company. On October 1, 1999 the Company entered into an
employment agreement with Mr. Johnson that provides for a base
salary of $130,000 per year for five years. The agreement also
provides for 300,000 stock options at $1.00 per share to purchase
employer common stock. The options vest as follows: 100,000
shares on October 1, 1999, 100,000 shares October 1, 2000,
100,000 shares on October 1, 2001. The agreement also calls for
a monthly auto allowance in the amount of $200.00 per month.
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. The term of the employment agreement shall end
October 1, 2004. Mr. Johnson was also granted incentive stock
options to purchase 1,100,000 shares of common stock at $2.81 per
share on January 19, 2000. On June 22, 2000 the Company cancelled
these options and then granted options to purchase 1,100,000
shares of common stock at prices ranging from $1.35 to $9.00 per
share. The options vest at the rate of 50,000 shares per
quarter.
On January 19, 2000 we hired Frank Howard as President and Chief
Operating Officer. Mr. Howard had previously served as Chairman
of the Board of Directors. The underlying employment agreement
provides for a salary of $130,000 per year for five years. The
agreement also provided for incentive stock options to purchase
1,100,000 shares of common stock at $2.81 per share. On June 22,
2000 the Company cancelled these options and then granted options
to purchase 1,100,000 shares of common stock at prices ranging
from $1.35 to $9.00 per share. The options vest at 50,000 shares
per quarter.
13
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 2 - RELATED PARTY TRANSACTIONS [CONTINUED]
On April 1, 2000 we entered into an employment agreement, to end
on September 30, 2002, with Scott Berry whereby he serves as our
Chief Financial Officer. Mr. Berry is entitled to receive a base
salary of $85,000 annually, payable one-half in cash and one-half
in restricted common stock, at $1.00 per share, issued quarterly.
Mr. Berry was also granted options to purchase 300,000 shares of
our common stock at $2.81 per share on January 19, 2000. The
options vest as follows: 25,000 shares on January 19, 2000 and
25,000 shares vesting quarterly starting on June 30, 2000. The
options have a three-year life after vesting. On June 22, 2000
the Company cancelled these options and then granted options to
purchase 300,000 shares of common stock at prices ranging from
$1.25 to $5.00 per share. Mr. Berry served as our Chief
Financial Officer on a part-time basis from October 4, 1999 until
March 31, 2000.
NOTE 3 - NOTES PAYABLE - RELATED PARTIES
June 30, September 31,
2000 1999
_________ ___________
Notes payable to a shareholder
of the Company, annual
compounding interest at 12%,
due upon demand, unsecured $ - $ 17,062
Notes payable to a shareholder
of the Company, interest at
10% and 12%, due upon demand,
unsecured - 4,294
Note payable to a shareholder
of the Company,
interest at 12%, due upon demand,
unsecured - 4,313
Note payable to an entity related
to a shareholder of the Company,
annual compounding interest
at 12%, due upon demand, unsecured - 2,240
12% unsecured demand notes payable
to a shareholder of the Company - 40,000
12% unsecured convertible notes
payable to minority shareholders
of the Company, due upon demand on
or after June 1, 2000 - 200,000
12% Unsecured demand note payable
to a shareholder of the Company - 15,000
12% unsecured demand note payable
to a shareholder of the Company - 10,000
12% unsecured demand note payable
to a related entity, which is a
shareholder of the Company - 50,000
_________ ___________
$ - $ 342,909
_________ ___________
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 4 - CAPITAL STOCK
Settlement Agreement - On October 27, 1999, the Company issued
400,000 shares of its common stock to HomeSeekers.com, Inc. for
payment of a $50,000 note payable, $3,800 of accrued interest on
the note $153,500, to outstanding payables for programming
services and $192,700 for termination of the previous programming
contract, that included a 7% royalty on gross revenues.
Private Placement of Securities - During December 1999 the
Company started offering for sale to persons who are "accredited
investors", no minimum and a maximum of 4,000,000 shares of its
previously authorized but unissued common stock for $1.25 per
share for gross proceeds of up to $5,000,000. As of June 30,
2000 the Company had successfully sold 3,461,300 shares of stock
for gross proceeds of $4,326,625, less stock offering cost of
$489,080.
Receipt of Stock Subscription - During the nine months ended June
30, 2000, the Company received $27,000 for payment of
subscription receivables.
Acquisition - On January 13, 2000, the Company closed a purchase
agreement with an individual to purchase the chessed.com web-
site. The total purchase price of the transaction was $192,500,
$57,500 was paid with cash and the Company issued 40,785 shares
of its common stock at an agreed upon value of $3.31 per share,
or $135,000. The Company also issued 200,000 shares of common
stock for the purchase of the winbridge.com web-site, which were
valued at $2.25 per share.
Stock Option Plan - On January 19, 2000, the Board of Directors
of the Company adopted the 2000 Stock Option Plan. The plan
provides for the granting of awards of up to 5,000,000 shares of
common stock to officers, directors, and employees. Awards under
the plan will be granted as determined by the board of directors.
As of June 30, 2000, a total of 3,103,500 options had been issued
under the plan.
The Company issued 200,117 shares of common stock for non-cash
consideration including services rendered valued at $318,102 with
prices ranging from $1.00 to $3.00 per share.
The Company issued 57,870 shares of common stock to pay for
accrued dividends.
The Company issued 82,500 shares of common stock as loan
incentives that have been accounted for as interest expense in
the amount of $103,125.
The Company issued 52,104 shares of common stock for conversion
of debt at $1.25 per share.
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 Accounting
for Income Taxes [SFAS 109]. SFAS 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 June 30, 2000,
the total of all deferred tax assets was approximately
$1,900,000. 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 deferred tax assets and the valuation allowance of
approximately $1,900,000 as of June 30, 2000, which has been
offset against the deferred tax assets. The net change in the
valuation allowance during the nine months ended June 30, 2000
amounted to approximately $500,000.
NOTE 6 - 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 periods ended June 30, 2000 and 1999 and from inception on
November 5, 1996 through June 30, 2000:
For the Three For the Nine From Inception
Months Ended Months Ended on November 5,
June 30, June 30, 1996 Through
__________________________ ____________________ June 30,
2000 1999 2000 1999 2000
__________ ____________ ___________ _____________ ____________
Income (loss)
from continuing
operations
applicable
to common
stock $ (878,403) $ (1,198,025)$(2,503,850) $ (1,697,229)$(5,562,610)
Less:
preferred
dividends - (7,798) - (26,195) (58,770)
__________ ____________ ___________ _____________ ___________
Income (loss)
available to
common stockholders
used in earnings (loss)
per
share $(878,403) $ (1,205,823)$(2,503,850)$ (1,723,424) $(5,621,380)
__________ ____________ ___________ _____________ ___________
Weighted average
number of common
shares outstanding
used in earnings
(loss) per
share during
the
period 7,984,265 4,513,151 7,297,333 4,408,821 4,252,606
__________ ____________ ___________ _____________ ___________
Dilutive earnings (loss) per share was not presented, as its
effect is anti-dilutive.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-looking Statements
Certain statements contained in this section and elsewhere in this
Form 10-QSB regarding matters that are not historical facts are
forward-looking statements (as such term is defined in the Private
Securities Litigation Reform Act of 1995). Because such forward-
looking statements include risks and uncertainties, actual results
may differ materially from those expressed or implied by such
forward-looking statements. All statements that address operating
performance, events or developments that management expects or
anticipates to incur in the future, including statements relating
to sales and earnings growth or statements expressing general
optimism about future operating results, are forward-looking
statements. The forward-looking statements are based on
management's current views and assumptions regarding future events
and operating performance. Many factors could cause actual results
to differ materially from estimates contained in management's
forward-looking statements. The difference may be caused by a
variety of factors, including but not limited to adverse economic
conditions, competitive pressures, inadequate capital, unexpected
costs, lower revenues, net income differing from forecasts, the
possibility of fluctuation and volatility of our operating results
and financial condition, inability to carry out marketing and sales
plans, loss of key employees, among other things. The "Factors
That May Effect Future Results", discussed below, may also cause
our actual results to differ materially from these estimates by
management.
RESULTS OF OPERATIONS
Revenue
Revenue for the quarter ended June 30, 2000 was minimal, totaling
$7,450, compared to $2,250 for the quarter ended June 30, 1999.
This revenue was generated from banner advertising services on the
Internet. We anticipate revenues to increase nominally for the
three months ending September 30, 2000 and then to increase
significantly starting with the three months ending December 31,
2000. We plan to roll out our subscription-based services and fee-
based game tournaments during the three months ending December 31,
2000.
Development, Administrative and Marketing Expenses
Development, administrative and marketing expenses totaled $905,000
for the quarter ending June 30, 2000, a decrease of $287,000, or
24% from the $1,192,000 for the same quarter in 1999. The primary
reason for this decrease was from a one-time, non-cash expense
during 1999 of $950,000 to expense the purchase cost of our iPong
game. Without this one-time expense, 1999 expenses would have
totaled $242,000. Employee payroll costs increased from $69,000
during the three months ending June 30, 1999 to $248,000 during
2000. Increased payroll costs resulted from an increase in 14
employees, from 4 employees in June 1999 to 18 employees in June
2000. Employee increases were needed to ramp-up our Internet sites
from two sites in June 1999 (ipong.com and nancyskitchen.com) to
six sites as of June 2000 (iseekwisdom.com, freehoroscopes.com,
ipong.com, chessed.com, winbridge.com and nancyskitchen.com). We
are also working on the following sites and anticipate launching
these sites during the three months ending December 31, 2000:
ilovewebgames.com, ilovetrivia.com, iplayfreecasino.com and
biddles.com. We now have 11 employees working on Internet site
development and maintenance, 2 employees in marketing and 5
employees in administration.
We spent approximately $84,000 during the three months ending June
30, 2000 to develop our Internet "branding" strategy. We also
spent approximately $225,000 to increase the awareness of our
Company to potential customers and potential investors during this
quarter. We anticipate that our marketing costs will increase
significantly over the next six months as we attempt to attract
players to our fee-based Internet game tournaments and game sites.
Other Income and Expense
Interest income of $41,000 for the quarter ending June 30, 2000
resulted from our average cash balance of approximately $2.6
million during the quarter. We had no interest income during the
prior-year quarter, as our cash balance was minimal.
Net Loss
Our net loss decreased from $1,198,000 for the quarter ended June
30, 1999 to $878,000 for the quarter ending June 30, 2000. This
decrease was primarily due to the change in expenses as described
above.
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Liquidity and Capital Resources
At June 30, 2000 our cash balance was $1,631,000, an increase of
$1,629,000 from September 30, 1999. This increase was the result
of cash raised to date from our $5 million private stock offering.
We have historically funded our cash-flow deficits through
borrowing and issuances of securities and we expect to fund future
operating deficits in the same manner.
We repaid $962,500 in convertible debt and converted $62,500 of
convertible debt into common stock during the three months ending
June 30, 2000.
Prepaid expenses were -0- as of September 30, 1999 and increased to
$61,000 as of June 30, 2000. The June 30, 2000 balance included
$27,000 for prepaid marketing promotion costs and $30,000 for
prepaid insurance.
Our Property and Equipment, net of accumulated depreciation,
increased $129,000 from $54,000 as of September 30, 1999 to
$183,000 as of June 30, 2000. This increase was from the purchase
of computers and office furniture for our employees.
The cost of our Internet sites, net of accumulated amortization,
increased from -0- as of September 30, 1999 to $814,000 as of June
30, 2000. We purchased our chessed.com site in January 2000 for
$57,500 and 40,785 shares of common stock and we purchased our
winbridge.com site in April 2000 for $200,000 and 200,0000 shares
of common stock.
Our current liabilities decreased by $714,000 from September 30,
1999 to June 30, 2000. This decrease resulted from the reduction
of $343,000 in short-term debt, a decrease in accounts payable and
accrued liabilities of $312,000 and payment, in the form of common
stock, of $59,000 in accrued preferred stock dividends.
Stockholders' equity increased from a deficit of $689,000 as of
September 30, 1999 to a positive balance of $2,684,000 as of June
30, 2000. This increase resulted primarily from the $3,944,000,
net of commissions, received for common stock sold this fiscal
year, less our fiscal year-to-date net loss of $2,054,000.
Our ability to meet our liquidity requirements is dependent on our
ability to attract capital on terms acceptable to us, if at all.
If we are unable to raise sufficient capital there would be a
material adverse effect on our business and results of operations.
Factors That May Effect Future Results
Need for Additional Capital
Our business is capital intensive, particularly with respect
to product development costs associated with the design and
creation of interactive Internet sites, and our plan to grow
through acquisitions and strategic alliances. Accordingly, we may
require additional capital to support and expand our operations.
To the extent that revenues from operations are insufficient and
additional funding is required, public or private financing may not
be available when needed or may not be available on terms favorable
or acceptable to us, if at all. Failure to secure additional
financing, if and when needed, may have a material adverse affect
on our ability to implement our proposed business strategy.
Uncertainty of Product and Technology Development; Technological
Factors
We have not completed development and testing of certain of
our proposed products and proposed enhancements to our products,
some of which are still in the planning stage or in relatively
early stages of development. Our success will depend in part upon
the ability of our proposed products to meet targeted performance
and cost objectives, and will also depend upon their timely
introduction into the marketplace. We will be required to commit
considerable time, effort and resources to finalize development of
our proposed products and product enhancements. Although we
anticipate that the development of our products and technology will
be successfully concluded, our product development efforts are
subject to all of the risks inherent in the development of new
products and technology (including unanticipated delay, expenses
and difficulties, as well as the possible insufficiency of funding
to complete development). There can be no assurance as to when, or
whether, such product development efforts will be successfully
completed. In addition, there can be no assurance that our
products will satisfactorily perform the functions for which they
are designed, that they will meet applicable price or performance
objectives or that unanticipated technical or other problems will
not occur which would result in increased costs or material delay
in their development. There can be no assurance that, despite
testing by us and by current and potential end users, problems will
not be found in new products after the commencement of customer
use, resulting in loss of, or delay in, market acceptance.
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<PAGE>
Challenges of Growth
We anticipate a period of rapid growth that is expected to
place a strain on our administrative, financial and operational
resources. Our ability to manage any staff and facilities growth
effectively will require us to continue to improve our operational,
financial and management controls, reporting systems and
procedures, to install new management information and control
systems and to train, motivate and manage our employees. However,
there can be no assurance that we will install such management
information and control systems in an efficient and timely manner
or that the new systems will be adequate to support our future
operations. If we are unable to hire, train and retain qualified
systems engineers and consultants to implement these services or
are unable to manage the post-sales process effectively, our
ability to attract repeat sales could be materially adversely
affected, thereby limiting our growth opportunities. If our
management is unable to manage growth effectively, such as if our
sales and marketing efforts exceed our capacity to install,
maintain and service our products or if new employees are unable to
achieve adequate performance levels, our business, operating
results and financial condition could be materially adversely
affected.
Penny Stocks
The Securities and Exchange Commission has adopted regulations
that generally define a "penny stock" to be any equity security
that has a market price (as defined) of less than $5.00 per share,
subject to certain exceptions. Our common stock may be deemed to
be a "penny stock" and thus may become subject to rules that impose
additional sales practice requirements on broker/dealers who sell
such securities to persons other than established customers and
accredited investors, unless the common stock is listed on the
NASDAQ Small Cap Market. Consequently, the "penny stock" rules may
restrict the ability of broker/dealers to sell our securities, and
may adversely affect the ability of holders of the common stock to
resell their shares in the secondary market.
We are dependent on the continued development of the Internet
infrastructure
Our industry is new and rapidly evolving. Our business would be
harmed if Internet usage does not continue to grow. Internet usage
may be inhibited for a number of reasons, including:
* inadequate Internet infrastructure;
* inconsistent quality of service; and
* unavailability of cost-effective, high-speed service.
If Internet usage grows, the Internet infrastructure may not be
able to support the demands placed on it by this growth, or its
performance and reliability may decline. In addition, web sites,
including ours, have experienced interruptions in their service as
a result of outages and other delays occurring throughout the
Internet network infrastructure. We anticipate that these outages
or delays will occur from time to time in the future and, if they
occur frequently or for extended periods of time, Internet usage,
including usage of our web site, could grow more slowly or decline.
Our long-term success depends on the development of the electronic
commerce market, which is uncertain.
Our future revenues substantially depend upon the widespread
acceptance and use of the Internet as an effective medium of
commerce by consumers. Demand for recently introduced products and
services over the Internet is subject to a high level of
uncertainty. Although independent market research firms forecast
that the number of Internet users worldwide will grow
substantially in the next few years, we cannot be certain that
this growth will occur or that our sales will grow at the same
rate. The development of the Internet as a viable consumer
marketplace is subject to a number of risks including:
* potential customers may be unwilling to shift their purchasing
from traditional sources to online sources;
* insufficient availability of, or changes in, telecommunications
services could result in slower response times, which could
delay the acceptance of the Internet as an effective commerce
medium;
* continued growth in the number of Internet users;
* concerns about transaction security;
* continued development of the necessary technological
infrastructure;
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* development of enabling technologies; and
* uncertain and increasing government regulations.
Rapid technological change could render our web sites and systems
obsolete and require significant capital expenditures
The Internet and the electronic commerce industry are
characterized by rapid technological change, sudden changes in
customer requirements and preferences, frequent new product and
service introductions incorporating new technologies and the
emergence of new industry standards and practices that could render
our existing web sites and transaction processing systems obsolete.
The emerging nature of these products and services and their rapid
evolution will require that we continually improve the performance,
features and reliability of our online services, particularly in
response to competitive game and possibly, tournament offerings.
Our success will depend, in part, on our ability:
* to enhance our existing games and services; and
* to respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis.
The development of web sites and other proprietary technology
entails significant technical and business risks and requires
substantial expenditures and lead-time. We may be unable to use new
technologies effectively or adapt our web sites, proprietary
technology and transaction-processing systems to customer
requirements or emerging industry standards that could harm our
business. Updating our technology internally and licensing new
technology from third parties may require significant additional
capital expenditures and could affect our results of operations.
We will be exposed to risks associated with electronic commerce
security and credit card fraud, which may reduce collections and
discourage online transactions
Consumer concerns about privacy or the security of transactions
conducted on the Internet may inhibit the growth of the Internet
and electronic commerce. To securely transmit confidential
information, such as customer credit card numbers, we will rely on
encryption and authentication technology that we will license from
third parties. We cannot predict whether the algorithms we will use
to protect customer transaction data will be compromised.
Furthermore, our servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. We may
need to expend significant additional capital and other resources
to protect against a security breach or to alleviate problems
caused by any security breaches. The measures we take to protect
against security breaches may not be successful. Our failure to
prevent security breaches could harm our business.
Under current credit card practices, a merchant is liable for
fraudulent credit card transactions where, as will be the case with
the transactions we will process, that merchant does not obtain a
cardholder's signature. A failure to adequately control fraudulent
credit card transactions could affect our revenues and harm our
business.
We could face liability for information displayed on and
communications through our web site
We may be subject to claims for defamation, negligence,
copyright or trademark infringement or other claims relating to the
information we publish on our web sites. These types of claims have
been brought, sometimes successfully, against Internet companies as
well as print publications in the past. We also utilize email as a
marketing medium, which may subject us to potential risks, such as:
* liabilities or claims resulting from unsolicited email;
* lost or misdirected messages; or
* illegal or fraudulent use of email.
These claims could result in substantial costs and a diversion of
our management's attention and resources, which could harm our
business.
Efforts to regulate or eliminate the use of mechanisms that
automatically collect information on visitors to our web site may
interfere with our ability to target our marketing efforts.
Web sites typically place a small tracking program on a user's
hard drive without the user's knowledge or consent. These programs
automatically collect data about any visits that a user makes to
various web sites. Web site operators use these mechanisms for a
variety of purposes, including the collection of data derived from
users' Internet activity.
20
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Most currently available Internet browsers allow users to elect
to remove these tracking programs at any time or to prevent this
information from being stored on their hard drive. In addition,
some commentators, privacy advocates and governmental bodies have
suggested limiting or eliminating the use of these tracking
mechanisms. Any reduction or limitation in the use of this software
could limit the effectiveness of our sales and marketing efforts.
We could face additional burdens associated with government
regulation of and legal uncertainties surrounding the Internet
New Internet legislation or regulation or the application of
existing laws and regulations to the Internet and electronic
commerce could harm our business, financial condition and results
of operations. We are subject to regulations applicable to
businesses generally and laws or regulations directly applicable to
communications over the Internet and access to electronic commerce.
Although there are currently few laws and regulations directly
applicable to electronic commerce, it is possible that a number of
laws and regulations may be adopted with respect to the Internet
covering issues such as user privacy, pricing, content, copyrights,
distribution, antitrust, taxation and characteristics and quality
of products and services. For example, the United States Congress
recently enacted Internet laws regarding children's privacy,
copyrights and transmission of sexually explicit material. In
addition, the European Union recently enacted its own Internet
privacy regulations. Furthermore, the growth and development of the
market for electronic commerce may prompt calls for more stringent
consumer protection laws that may impose additional burdens on
those companies conducting business online. The adoption of any
additional laws or regulations regarding the Internet may decrease
the growth of the Internet or electronic commerce, which could, in
turn, decrease the demand for our games and services and increase
our cost of doing business. In addition, if we were alleged to have
violated federal, state or foreign civil or criminal law, we could
be subject to liability, and even if we could successfully defend
such claims, they may involve significant legal compliance and
litigation costs.
Uncertainty of Emerging Technology and Business
The Internet based games and leisure activities industry is an
emerging business characterized by an increasing number of market
entrants who have introduced or are developing an array of new
products and services. As is typically the case in an emerging
industry, demand and market acceptance for newly introduced
products and services is subject to a high level of uncertainty. In
light of the evolving nature of this industry, there can be no
assurance as to the ultimate level of demand or market acceptance
for our products and services. In addition, there can be no
assurance that we will successfully implement our business
strategies, expand our capacity, maintain the cost and
technological competitiveness of our products and services, meet
our current marketing objectives or succeed in positioning us as
the preferred Internet games and entertainment services provider.
There can also be no assurance that the present trends in growth of
Internet use and users will continue or that capacity of the
Internet in general will be sufficient to meet anticipated demands
or that the present pricing structure for Internet access will be
maintained in the future.
Dependence on and Uncertain Acceptance of the Internet as a Medium
for Commerce or Advertising
Use of the Internet by consumers is at an early stage of
development, and market acceptance of the Internet as a medium for
commerce is subject to a high degree of uncertainty. Our future
success will depend on its ability to significantly increase
revenues, which will require the further development and widespread
acceptance of the Internet as a medium for commerce and
advertising. There is no assurance that the Internet will become a
successful retailing channel. The Internet may not prove to be a
viable commercial marketplace because of inadequate development of
the necessary infrastructure, such as reliable network backbones or
complementary services, such as high-speed modems and security
procedures for financial transactions. The viability of the
Internet may prove uncertain due to delays in the development and
adoption of new standards and protocols (for example, the next
generation Internet Protocol) to handle increased levels of
Internet activity or due to increased government regulations. If
use of the Internet does not continue to grow, or if the necessary
Internet infrastructure or complementary services are not developed
to effectively support growth that may occur, our business, results
of operations and financial condition could be materially adversely
affected. Further, there is no assurance that advertisers and
advertising agencies will accept the Internet as an advertising
medium. If Internet advertising is not widely accepted by, or if we
are not successful in generating significant advertising revenues
from, advertisers, our business, results of operations and
financial condition could be materially and adversely affected.
Uncertain Acceptance of Our Internet Content
There can be no assurance that our content will be attractive
to a sufficient number of users to generate significant revenues.
There can also be no assurance that we will be able to anticipate,
monitor and successfully respond to rapidly changing consumer needs
and preferences to attract a sufficient number of users to our Web
sites.
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If we are unable to develop Internet content that allows us to
attract, retain and expand a loyal user base, our business,
results of operations and financial condition will be materially
and adversely affected.
Security Risks
Despite the implementation of network security measures by us,
our infrastructure is potentially vulnerable to computer break-ins
and similar disruptive problems caused by our customers or others.
Consumer concern over Internet security has been, and could
continue to be, a barrier to commercial activities requiring
consumers to send their credit card information over the Internet.
Computer viruses, break-ins or other security problems could lead
to misappropriation of proprietary information and interruptions,
delays or cessation in service to our customers. Further, until
more comprehensive security technologies are developed, the
security and privacy concerns of existing and potential customers
may inhibit the growth of the Internet as a merchandising medium.
Government Regulation and Legal Uncertainties
We are subject, both directly and indirectly, to various laws
and governmental regulations relating to our business. We believe
that we are currently in compliance with such laws and that they do
not have a material impact on our operations. Moreover, there are
currently few laws or regulations directly applicable to access to,
or commerce on the Internet. However, due to increasing popularity
and use of the Internet, it is possible that a number of laws and
regulations may be adopted with respect to the Internet. Such laws
and regulations may cover issues such as user privacy, pricing and
characteristics and quality of products and services. The enactment
of any such laws or regulations in the future may slow the growth
of the Internet, which could in turn decrease the demand for our
services and increase our cost of doing business or otherwise have
an adverse effect on our business, results of operations and
financial condition. In addition, the applicability to the Internet
of existing laws governing issues such as property ownership, libel
and personal privacy is uncertain and could expose us to
substantial liability for which we might not be indemnified by
content providers. We believe that our use of material on our Web
sites is protected under current provisions of copyright law.
However, legal rights to certain aspects of Internet content and
commerce are not clearly settled. There is no assurance that we
will be able to continue to maintain rights to information. The
failure to be able to offer such information would have a material
adverse effect on our business, results of operations and financial
condition.
Legality of providing for-pay game tournaments on the Internet
We believe that our iPong game and the game of trivia are games
of skill, and when included in an entry fee tournament format, do
not fall under the category of gambling on the Internet for Federal
legal purposes and in most states within the U.S. We believe that
for-pay tournaments are probably not permitted in Arizona,
Arkansas, Delaware, Florida, Iowa, Louisiana, Maryland and
Tennessee. We will block residents from these eight states from
playing our for-pay tournaments by blocking out users with zip
codes within these states. We believe the balance of the states in
the U.S. do not prohibit this type of activity. However, should a
state or Federal agency determine otherwise, we could incur
significant legal expenses contesting this issue, or could find
that some of the remaining 42 states will not allow this type of
pay-for-play tournaments within their state.
We believe that only a small percentage of potential worldwide
users will not be allowed to play our for-pay tournaments due to
local legal restrictions. However, if we are wrong, the failure to
be able to offer this game to enough people to make our tournaments
profitable would have a material adverse effect on our business
potential, future results of operations and our future financial
condition.
Liability for Information Retrieved from the Internet
Since material may be downloaded from Web sites and may be
subsequently distributed to others, there is a potential that
claims will be made against us for defamation, negligence,
copyright or trademark infringement or other theories based on the
nature and content of such material. Such claims have been brought,
and sometimes successfully pressed, against on-line services in the
past. In addition, we could be exposed to liability with respect to
the material that may be accessible through our branded products
and Web sites. Although we carry general liability insurance, our
insurance may not cover potential claims of this type or may not be
adequate to cover all costs incurred in defense of potential claims
or to indemnify us for all liability that may be imposed. Any costs
or imposition of liability that is not covered by insurance or in
excess of insurance coverage could have a material adverse effect
on our business, results of operations and financial condition. We
are currently not aware of any such claims.
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Dependence on Executive Officers and Other Key Employees
Our success will depend upon the services of our directors,
executive officers and certain key employees. There can be no
assurance that we will be successful in attracting and retaining
such personnel, and our inability to attract such personnel could
have a material adverse effect on us.
There can be no assurance that our directors, executive officers,
or key employees will remain associated with us in any particular
capacity, or that they will not compete, directly or indirectly,
with us. The exception is that our Chief Executive Officer, our
President and our Chief Financial Officer have agreed, in their
respective employment contract, to not compete with us for two
years from termination of employment.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
We issued 252,000 shares of common stock during the quarter for
gross proceeds of $315,000. These share sales were made under our
$5,000,000 private equity offering to accredited investors at $1.25
per share. These shares of common stock were issued to accredited
investors pursuant to the exemptions from registration requirements
of the Securities Act provided by Section 4(2) thereof.
We issued 50,000 shares of common stock during the quarter as
partial compensation for loan finders fees pursuant to our $1.5
million convertible debt offering to accredited debt holders. These
shares of common stock were issued pursuant to the exemptions from
registration requirements of the Securities Act provided by Section
4(2) thereof.
We issued 52,104 shares of common stock during the quarter as
conversion of $62,500 convertible debt and $2,630 of accrued
interest. These shares of common stock were issued pursuant to the
exemptions from registration requirements of the Securities Act
provided by Section 4(2) thereof.
We issued 200,000 shares of common stock during the quarter,
negotiated at $3.00 per share, and recorded on our books at the
market price, on April 13, 2000, of $2.25 per share, as partial
consideration to an individual, for the www.winbridge.com Internet
site. These shares of common stock were issued to this individual
pursuant to the exemptions from registration requirements of the
Securities Act provided by Section 4(2) thereof.
We issued 44,535 shares of common stock during the quarter as
partial payment for services rendered to our Chief Financial
Officer, to our Controller, and to an outside programmer for
programming services. These shares of common stock were issued to
these three individuals pursuant to the exemptions from
registration requirements of the Securities Act provided by Section
4(2) thereof.
We issued stock options to employees to purchase 2,723,500 shares
of common stock during the quarter at prices ranging from $.63 per
share to $9.00 per share. These options vest over three to five
years and have a life of three years. We also canceled stock
options to employees to purchase 2,515,000 shares of common stock
during the quarter at prices ranging from $2.25 per share to $2.81
per share. These stock options were issued to employees pursuant
to the exemption from registration requirements of the Securities
Act provided by Section 4(2) thereof.
We issued stock warrants to an individual, as partial consideration
for the www.winbridge.com Internet site, to purchase 50,000 shares
of common stock at prices between $3.00 and $4.00 per share. These
stock warrants vest immediately and have a three-year life. These
stock warrants were issued pursuant to the exemption from
registration requirements of the Securities Act provided by Section
4(2) thereof.
We issued stock warrants to our two outside directors to purchase
400,000 shares of common stock at $2.25 per share. These stock
warrants vest 50% immediately and 50% on April 12, 2001, and all
have a three-year life. We also cancelled a previously issued
stock warrant to one director to purchase 100,000 shares at $3.25
per share. These stock warrants were issued pursuant to the
exemption from registration requirements of the Securities Act
provided by Section 4(2) thereof.
We issued warrants to purchase 600,000 shares of common stock at
prices between $2.50 and $5.50 per share, as partial consideration
to individuals who assisted us in raising $2,485,625 under our $5
million equity offering. These stock warrants vest immediately and
have a three-year life. These stock warrants were issued pursuant
to the exemption from registration requirements of the Securities
Act provided by Section 4(2) thereof.
Item 3. Defaults upon Senior Securities
None.
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Item 4. Submission of matters to a vote of Security Holders
On June 16, 2000 we held our Annual Meeting of Stockholders. Our
shareholders elected Kirk Johnson, Frank Howard, Brad Rotter and
Nolan Bushnell as directors until the next Shareholders' Meeting,
adopted our 2000 Stock Option Plan and ratified the appointment of
Pritchett, Siler & Hardy, P.C. as our independent auditors for the
fiscal year ending September 30, 2000. Our shareholder voting
results are as follows:
Name Nolan Bushnell
For Against Abstain
Shares 5,896,182 49,803 694,07
Name Frank Howard
For Against Abstain
Shares 5,894,582 55,400 690,073
Name Kirk Johnson
For Against Abstain
Shares 5,915,782 36,200 688,073
Name Brad Rotter
For Against Abstain
Shares 5,900,212 49,800 690,043
Adoption of Stock Option Plan
For Against Abstain
Shares 5,449,673 349,311 900,071
Appointment of Auditors
For Against Abstain
Shares 6,617,346 2,300 20,409
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
Current report on Form 8-K filed on April 25, 2000 reporting
Item 2 (Acquisition or Disposition of Assets): Asset purchase
Agreement closed on April 13, 2000, whereby WebQuest International,
Inc. purchased the Internet web site www.winbridge.com from an
individual. No financial statements were required to be filed with
this report.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned as duly authorized.
WebQuest International, Inc.
(Registrant)
/s/ Scott Berry
-------------------------
Scott Berry
Chief Financial Officer
Dated: August 14, 2000
25
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