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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED JULY 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
HOUSTON INTERWEB DESIGN, INC.
(Exact name of registrant as specified in its charter)
COMMISSION FILE NUMBER: 000-67871
TEXAS 76-0532709
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1770 ST. JAMES PLACE, SUITE 420, HOUSTON, TEXAS 77056
(Address of Principal Executive Office)
713-627-9494
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 past 90 days. Yes [_] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [_]
Issuer had revenues of $994,876 for the 12 months ended July 31, 1999.
As of July 31, 1999 registrant had 17,389,800 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
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Items Page
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS....................................... 1
ITEM 2. DESCRIPTION OF PROPERTIES..................................... 9
ITEM 3. LEGAL PROCEEDINGS............................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS...... 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 11
ITEM 7. FINANCIAL STATEMENTS.......................................... 14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................... 14
PART III
ITEM 9. DIRECTOR, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSON.... 14
ITEM 10. EXECUTIVE COMPENSATION........................................ 15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 16
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.............................. 17
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PART I
Forward-Looking Statement
This Annual Report on Form 10-KSB contains forward-looking statements,
particularly in the "Business" and "Management's Discussion and Analysis"
sections. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, changes
in the regulation of the Internet industry at either the federal and state
levels, competitive pressures in the Internet industry and the company's
response thereto, the company's ability to obtain capital in favorable terms
and conditions, and general conditions in this economy.
ITEM 1. Description of Business
Recent Developments
Private Placement
In October 1999, the company completed a private placement of 187,500 shares
of its Common Stock to an accredited investor for an aggregate purchase price
of $375,000. The investor was granted one demand registration right and
unlimited piggy-back registration rights in connection with the offering. The
company believes this transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act as an isolated transaction by an issuer not
involving a public offering.
Rescission Offer
The company determined that the exemption it relied upon in issuing 166,667
shares of Common Stock to two investors in February 1999 might have not been
available. Accordingly, it offered the purchasers of those shares the
opportunity to rescind their investment. In July 1999, both rescission
offerees elected to retain their investment.
Mergers and Acquisitions
In September 1999, the company acquired all of the assets of Team
Productions, Inc. in exchange for 30,000 shares of company Common Stock. This
transaction was not deemed a significant acquisition, accordingly, separate
historical and pro forma financial statements were not filed with the SEC.
In July 1999, the company acquired certain assets and the client base of
Axis Technologies, Inc., a web site provider, for consideration of 500,000
shares of company Common Stock and up to 125,000 shares of additional Common
Stock provided certain net revenue goals or net cash flows are obtained. In
connection with the acquisition, Michael J. Minihan joined the board of
directors. This transaction was not deemed an acquisition of a "Business,"
accordingly, separate historical and pro forma financial statements were not
filed with the SEC.
In May 1999, the company received 10,000 shares of Common Stock of AMP3.COM,
LLC, an interactive music Internet company, in exchange for cash and services
rendered in the initial launching of the www.amp3.com website.
Business
General
The company was incorporated in the State of Texas in August 1996. The
company is a web development company that specializes in the design, creation
and marketing of cost-effective Internet products. The company
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strives to provide businesses, of all sizes, with interactive Internet web
sites along with marketing services, to create long-term value for its
customers worldwide. Some of the company's marketing services include:
. search engine marketing, which is marketing via advertisements that post
findings on the results page of a search on the Internet,
. news group postings,
. custom statistical counters which provide statistical information about
the visitors to a web site,
. web site tracking logs which record the number of visitors to a web site,
and
. other traditional marketing methods.
In addition, the company develops customized software programs, on various
platforms, that are Internet compatible (i.e. accounting/finance interfaces,
online databases and Oracle/Lotus Internet database interfaces). The company's
long-term strategy is to create valuable interactive web sites, e-commerce
interfaces/sites and Intranets and Extranets, which will empower companies to
utilize the super-efficiencies of the Internet worldwide. The company assists
its customers in improving their Internet presence for products or services
offered. The company uses proprietary technology for the creation of web sites
which increases the chances that the company's customers' web sites are seen
by an Internet user irrespective of the search engine used. Most of the
company's custom web sites have password protected administrative areas that
allow the company's customers to update their site with little or no
programming skills. Although the majority of the company's current revenues
are derived from custom web site design and search engine marketing, the
company is expanding its operations to include a wider variety of interactive
databases, electronic commerce sites, and network security.
The company offers instant web presence through SiteBlazer.com by offering
its customers a tool to build customized, updateable web sites. The company
developed SiteBlazer.com as a solution for mass production of affordable
custom/dynamic web sites. Management expects SiteBlazer.com to provide an
avenue for timely web site production at a reduced cost. The company's
business divisions utilize SiteBlazer.com and the company's proprietary
technology. Customers' web sites are included in the SiteBlazer.net network
search engine if the monthly hosting fee is maintained.
The Internet and World Wide Web
The Internet is a global collection of thousands of computer networks
interconnected to enable commercial organizations, educational institutions,
government agencies and individuals to communicate electronically, access and
share information and conduct business. The Internet was historically used by
a limited number of academic institutions, defense contractors and government
agencies. It was used primarily for remote access to host computers and for
sending and receiving electronic mail. Presently, commercial organizations and
individuals are dominating the use of the Internet. Recent technological
advances, improved microprocessor speed and the development of easy-to-use
graphic user interfaces, combined with cultural and business changes, have
enabled the Internet to be integrated into the operations, strategies, and
activities of countless commercial organizations and individuals.
The Internet and the World Wide Web have introduced fundamental and
structural changes in the way information can be produced, distributed and
consumed, lowering the cost of publishing information and extending its
potential reach. Companies from many industries are publishing product and
company information or advertising materials, collecting customer feedback and
demographic information interactively, and offering their products for sale on
the web. The structure of web documents allows organizations to publish
significant quantities of product information, while simultaneously allowing
each user to view only those elements of the information which are of
particular interest to them. This feature makes possible the dynamic tailoring
of information delivery, to each user's interests, timely and cost effective.
The web, by facilitating the publishing and exchange of information, is
dramatically increasing the amount of information available to users.
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Business Strategy
The mission of each the company division is to become one of the predominant
service providers within each division's respective market niche. The critical
success factors are:
. understanding, developing and applying information technology to the
Internet, interactive media markets, and data access and software tools;
. narrowing market focus while consummating strategic alliances to
complement product and service offerings;
. investing in strategic Internet or interactive media investments or
acquisitions; and
. most importantly, a continued understanding of customers' needs.
Management expects to utilize its expertise in database design/development
and project management to create new database management products, and a suite
of product and service offerings, that will enable sophisticated direct
interactive marketing environments. Management believes these new products
will enable the company to take advantage of the demand for data management
services created from the Internet and interactive media, while continuing to
grow and invest in its design and development of web sites.
The company has adopted a strategy of seeking opportunities to realize gains
through the selective investment in companies whose web sites are designed and
developed by the company. The company believes that this strategy provides the
ability to increase shareholder value, as well as provide diversification
within the company. Additionally, the company plans to continue to develop and
refine the products and services of its businesses, with the goal of
increasing revenue as new products are commercially introduced.
With respect to its businesses, the company will seek to expand its
participation in Internet, and interactive media industries, and increase its
market share. Key elements of this strategy include:
. Utilize the latest technology available to the Internet, including Java,
Javascript, Neoweb script, TCL/TK and Shockwave, to achieve optimum
Internet presence. The company builds web sites without the use of
editors based on hypertext markup language (HTML), which is an authoring
language used to create documents on the World Wide Web. Such editors
often do not support many new additions to the web and use codes designed
for one particular kind of web server that could present problems. The
company is constantly increasing its technological capabilities through
the enhancement of existing software and the re-engineering of the
company's proprietary database software in order to allow the company's
customers greater ability to access, analyze and update their own
databases through the use of the company's computer services and
software.
. Continue to enhance and expand the company's products and services. The
company has invested significant resources in new business ideas or
investments which seek to capitalize on opportunities surrounding the
growth of the Internet and the interactive marketing industry. The
company intends to continue to pursue the growth and development of its
technologies and services and to introduce its products commercially.
. Provide the highest level of customer service. Management plans to create
an Internet presence that adds value to its client's organizations.
. Pursue innovative advertising solutions. The company is actively seeking
to develop innovative ways for advertisers to effectively reach their
target audiences through the Internet. The company designs and offers
customized packages which include the ability to change advertisements
quickly and frequently, to link a specific search term to an
advertisement, to conduct advertising test campaigns with rapid result
delivery and to track daily usage statistics. The company is continuing
its development of software that will provide it with the ability to
target ads based on demographics and usage patterns.
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. Cross-sell products and services. The company is involved in many aspects
of the direct marketing sales cycle. The company has experienced initial
success in increasing the number of products and services purchased by
its existing clients and intends to further this expansion.
Divisions
Custom Web Site Development
The company develops high-end custom web sites, encompassing original
graphics and innovative layouts. The company's business strategy is to develop
and design web sites that achieve growth and organizational optimization for
the company's customers by creating more efficient navigation, utilizing
interactive databases, and by using proprietary technology to increase the
likelihood of being found at or near the top of search engines. Management
believes that its web site pricing is very competitive. The interactive
databases enable customers to self-manage their web sites internally. Many of
the company's proprietary scripting programs are adapted and included in
individual web sites, allowing customers to manage, modify, and maintain their
web sites with little or no programming knowledge. The company currently hosts
one hundred eighty custom web sites which it has developed.
Siteblazer.com
The focus of SiteBlazer.com is to allow companies to build customized,
updateable web sites, within minutes, at a reduced cost. According to
Advertising Age's Netmarketing April 1999 Web Price Index, the median price
for small interactive web sites is $78,000, which does not include fees for
hosting or changes. For approximately $450 plus a $20 per month hosting fee,
SiteBlazer.com offers customers a three page web site. Also through
SiteBlazer.com, the company offers additional options for customers to
purchase and add to their site, i.e., products page, what's new page, press
release page, services page, calendar of events page, interactive forum page
and a wide variety of counters, statistic programs, and shopping cart or e-
commerce solutions. The individual makes changes to the web site, eliminating
any fees for changes. SiteBlazer.com sites also offer an economic avenue to
broaden a client's Internet exposure. SiteBlazer.com offers hundreds of
professional images, templates, and graphic designs. SiteBlazer.com's
templates are constantly replaced, giving web site visitors an appearance of
the site being constantly updated. These changes are randomly selected from a
large collection of templates which are custom designed for specific business
categories. With client-related information and content, SiteBlazer.com can
build a site. SITEBLAZER(TM) sites can be built individually on-line, or data
can be collected and uploaded in batches. With SiteBlazer.com, the company's
customers are given a password which allows them to change information on
their site at any time, at no extra charge. In addition, when web sites are
created, description, title, and keyword tags are automatically embedded in
them to attract major search engines. Management believes SiteBlazer.com's
templates and databases are easily adapted to other SITEBLAZER(TM)
applications and the company plans to license its technology with a desire to
reach a large number of customers. A web site may be in existence for testing
purposes to a limited audience. The launch of a web site is the date the web
site becomes available to the general public. SiteBlazer.com has been in
existence since January 1998 and was launched May 1998. To date, the company
has developed 32,670 SiteBlazer.com web sites, which includes 28,970 web sites
converted for customers acquired from Axis Technologies, Inc. The company's
licensees have developed approximately 45,900 SiteBlazer.com web sites.
Siteblazer Network
The SITEBLAZER(TM) network is a business-to-business web guide/search engine
designed to increase sales for its customers. The SiteBlazer.com program
allows a business to have a stand-alone customized web site and still be part
of the SITEBLAZER(TM) network. The company believes that the SITEBLAZER(TM)
network contains up-to-date information, as each web site must pay a monthly
hosting fee in order to continue to be on the SITEBLAZER(TM) network. The
company is populating the SITEBLAZER(TM) network with SiteBlazer.com web sites
and expects to launch the SITEBLAZER(TM) network as a search engine. At the
time of launch, the SITEBLAZER(TM) network will allow non-SiteBlazer.com web
sites to be included in the SITEBLAZER(TM) network search engine for a nominal
fee.
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Interactive Databases
The company has developed proprietary technology involving interactive
databases. The interactive databases enable customers to self-manage their web
sites internally. Many of the company's proprietary scripting programs are
adapted and included in individual web sites, allowing customers to manage and
modify their web sites. The company's interactive databases offer a cost-
effective alternative to products and services offered by its competitors, and
have been successfully implemented in a wide range of applications and by
Fortune 500 companies, like Union Carbide and CSX.
Political Net.Com
The company's Political Net.com provides what management believes will be a
rapidly growing network of political web sites by including links to existing
sites in the database which are updated on an on-going basis. Visitors can
search for politician's sites, participate in online political discussions,
keep up-to-date with the most recent news or political events, or even cast
their vote in weekly polls. Political Net.com also has chat rooms that focus
on topics of interest ranging from family and education issues to foreign
affairs. The company believes that Political Net.com provides politicians with
a tool to build web sites for themselves quickly and more economically than
ever before. Besides offering politicians inexpensive custom web sites,
Political Net.com supplies sites to political parties at the county level and
above free of charge. Politicians are already operating sites on Political
Net.com.
Political Net.com provides candidates with an opportunity to employ online
questionnaires. Candidates can post up to twenty customized questions on their
site which saves the costs associated with printing and mailing
questionnaires. Potential voters can fill out the questionnaires and submit
them with a keystroke. Candidates receive realtime information on what their
constituents think about the issues, and can tailor their approaches
accordingly. For $500, politicians get a web site with six pages (home page,
more info, newsletter, press releases, a contact form for voters to fill out
for more information, and an interactive forum page where readers can post
their comments or questions) and candidates can post their answers or views.
For additional charges, politicians can load up to three pages of their
existing literature or brochures into their sites. They can also have their
own photo gallery of up to 20 pictures or include up to five minutes of video
clips or campaign commercials. For $120 per year, politicians get a billboard
page that is connected to various search engines and will forward the user to
the politician's website. Political Net.com's technology is derived from the
adaptability of SiteBlazer.com and the SITEBLAZER(TM) network. Political
Net.com provides a gateway for users to search for their local politicians or
candidates and interact with them. Management believes current issues, on-line
voting, news feed and resource links make Political Net.com attractive to the
average Internet user as well as political parties. Political Net.com has been
in existence since July 1998 and was launched in August 1998. The company has
developed 300 Political Net.com web sites, and 200 billboard pages.
Online Accounting Financial Package
The company is currently developing an online accounting financial package
to utilize the Internet to perform accounting work anywhere in the world. The
online accounting financial package will allow a company to maintain its
records online, including receipts and invoices. The online accounting
financial package entails scanning invoices and receipts offsite by existing
employees of the particular company. The online accounting financial package
utilizes the Internet, and its inexpensive costs, to transmit all of its data
throughout the world. All data is archived in a securable database on a secure
Internet server. This system may reduce, or even eliminate, the traveling
expenses of accountants/bookkeepers. Online accounting has been 50% developed.
Expected launch is the summer of 2000. The company is not aware of any
material conditions or uncertainties which need to be resolved prior to
commercialization.
Online Auction System
The company has developed an online auction system which will allow
traditional sealed bids or bids that can be viewed online. The online auction
system allows dealers to view and bid on items online with products
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being sold to the highest bidder. The online auction system is adaptable and
can be altered from a silent auction, to an auction where the highest bid and
bidder are known. In order to utilize the online auction system, a person will
need to be pre-approved by the company based on standards provided by the
entity hosting the auction. Beta-testing is the last stage of testing for a
computer product prior to its commercial release. Beta-testing usually
involves sending the product to test sites outside the company for real-world
exposure. Online auction was successfully beta-tested by CSX in December 1998.
Online auction was launched in February 1999. Online auction needs no
additional development prior to commercialization, and there are no material
conditions or uncertainties which need to be resolved prior to
commercialization. Online auction is currently being used for monthly
auctions. Although originally developed for a sealed bid auction, online
auction has been enhanced with a live bidding process.
Campus Network
The company developed Campus Network to allow individuals of organizations
to build customized, up-datable web sites. Management expects to offer Campus
Network to alumni, student groups and organizations, and fraternities and
sororities. Campus Network will allow each individual to have his own
customized web site, and also to be a part of a group web site. Campus Network
utilizes the SiteBlazer.com program and the SITEBLAZER(TM) network. Campus
Network was fully beta-tested in November 1998. Campus Network was launched in
January 1999. Campus Network needs no additional development prior to
commercialization, and there are no material conditions or uncertainties which
need to be resolved prior to commercialization. Campus Network is currently
being utilized by several colleges, but to date has no revenues.
Hunting and Fishing.Com
The company is developing Hunting and Fishing.com and expects it to become
one of the most comprehensive collections of hunting and fishing resources on
the Internet. The company plans to utilize SiteBlazer.com and the
SITEBLAZER(TM) network technology for classified advertisements on Hunting and
Fishing.com's searchable catalogs to search for: merchandise, hunting and
fishing equipment, hunting and fishing licenses/leases, locations to visit and
where to stay, state parks and wildlife, hunting seasons and hunting and
fishing regulations. Hunting and Fishing.com will allow users to maintain an
independent web site, while at the same time being part of a network. Hunting
and Fishing.com is 80% complete. The expected launch date is Fall 1999. The
company is not aware of any material conditions or uncertainties which need to
be resolved prior to commercialization.
Legal Net
The company is developing a legal network to utilize the technology of the
SITEBLAZER(TM) network to offer web sites to attorneys and law firms. The
company expects attorneys and law firms to utilize Legal Net to increase the
exposure of their web sites by targeting specific topics which will raise the
likelihood of placement/selection on search engines. Legal Net is complete,
but has not been beta-tested. Legal Net is currently being reformatted and the
expected launch date is Spring 2000. The company is not aware of any material
conditions or uncertainties which need to be resolved prior to
commercialization.
Commerce Partner
ARFRA
The company owns a 30% interest in ARFRA, an Internet provider of pet
medical records. ARFRA provides documented medical records detailing a pet's
medical history in the event that an unexpected medical emergency should
arise, or simply to provide a more organized record of a pet's medical
history. ARFRA provides all participating veterinarians from anywhere in the
continental United States, timely access to a pet's medical history. With
ARFRA, pet-owners have the ability to offer timely, life-saving information to
all emergency veterinary personnel by presenting an ARFRA access card to any
veterinarian and the pet's medical history will
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be available twenty-four hours a day, three hundred and sixty-five days a
year. Each record is securely protected by a personal identification number.
The annual cardmember fee is only $25 per year. Nominal update fees may be
assessed depending upon the veterinarian visited. ARFRA also offers a unique
service called pet-locator. By simply contacting any participating
veterinarian, pet-owners now have the unique ability to immediately post a
"Lost Pet" bulletin to the network. The bulletin will remain a part of the
network records until ARFRA is notified of a pet's recovery. To further assist
in the recovery effort, ARFRA will broadcast a personal e-mail message about a
missing pet to all ARFRA cardmembers in a member's specific area. In addition,
ARFRA allows pet-owners the ability to identify a veterinarian through "Vet
Locator." Vet Locator is a network catalog of licensed veterinarians
throughout the United States that is provided on a complimentary basis to all
members. The company expects to utilize SITEBLAZER(TM) technology, allowing
pet owners and prospective pet owners to design web sites for: the purchase
and sale of pets, grooming/breeding and care of pets, and a pet cemetery. The
sites will be indexed in a search engine specific to ARFRA and with the same
restrictions as the SITEBLAZER(TM) network. ARFRA currently does not have any
revenues, and has not distributed any dividends. In addition, other than test
participants, there are currently no participating pets or vets in the ARFRA
system. The company can provide no assurance that ARFRA will become profitable
in the future.
Affiliated Transaction
NetTrade Online, L.L.C.
In November 1997, the company entered into an agreement with NetTrade
Online, L.L.C., a Texas limited liability company, to design, develop, produce
and install a computer program and related materials consisting of an
interactive web site providing real time/on-line trading of various
commodities, incorporating functions commercially available at the time. The
company agreed to provide all system engineering services necessary to design,
develop, produce, install, and maintain the program and the hardware. These
services include, but are not limited to, special studies, programming and
application design and development, systems analysis and design, conversion
and implementation planning, and installation evaluation. The company intends
to expand this technology to other commodities. NetTrade paid the company
$80,000 in connection with this agreement. Webvest, Inc., a company owned by
Messrs. White, Magness and Finn, has a 20% ownership interest in NetTrade.
NetTrade has been fully beta-tested, and was launched in April 1999.
NetTrade needs no additional development prior to commercialization, and there
are no material conditions or uncertainties which need to be resolved prior to
commercialization. Over three hundred individuals have listed for trading on
NetTrade, and transactions have been consummated.
Sales And Marketing
The company markets its products and services through a marketing staff
using both telemarketing and direct sales. The company advertises its products
and services through several media sources including trade journals and radio
advertising. The company is in the process of developing a television media
campaign. The company attends numerous trade shows in the Internet, high
technology, political and business markets, while further supplementing its
sales efforts with space advertising and product and services listings in
appropriate directories.
Competition
The market for customers, visitors and related products and services are
intensely competitive and such competition is expected to continue to
increase. There are no substantial barriers to entry in this market and the
company believes that its ability to compete depends upon many factors within
and beyond its control, including:
. timing and market acceptance of new products and services developed by
the company and its competitors,
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. customer service and support,
. sales and marketing efforts, and
. the ease of use, performance, price and reliability of the company's
products and services.
The company competes with:
. Internet content providers and ISPs, including web directories,
. search engines,
. shareware archives,
. content sites,
. commercial online services and sites maintained by Internet service
providers,
. as well as thousands of Internet sites operated by individuals and
government and educational institutions.
The company believes that the principal competitive factors in attracting
customers include the amount of traffic on its web site, brand recognition,
customer service, the demographics of the company's customers and viewers, the
company's ability to offer targeted audiences and the overall cost-
effectiveness of the products and services offered by the company. The company
believes that the principal competitive factors in attracting search engines
to a customer's web site include the company's design, title, meta tags
descriptions and key words. The company believes that the number of Internet
companies relying on revenues from their company web site will increase
substantially in the future. In turn, the company will likely face increased
competition, resulting in increased pricing pressures on its web site design
rates which could in turn have a material, adverse effect on the company's
business.
Research and Development
The company develops and markets a variety of Internet related products and
services, as well as a number of database software technologies. These
industries are characterized by rapid technological development. The company
believes that its future success will largely depend upon its ability to
continue the enhancement of its existing products and services and the
development of other products and services which complement existing ones. To
date, the company has incurred nominal research and development expenses. In
order to respond to rapidly changing competitive and technological conditions,
the company expects to incur significant research and development expenses
during the initial development phase of new products and services as well as
on an on-going basis with established products.
Intellectual Property and Proprietary Rights
The company regards its technology as proprietary and attempts to protect it
by relying on trademark, service mark, copyright and trade secret laws and
restrictions on disclosure and transferring title and other methods. The
company currently has no patents or patents pending and has not filed for
patent protection, and does not anticipate that patents will become a
significant part of the company's intellectual property in the future.
The company pursues the registration of its trademarks in the United States
and internationally. The company's application for the trademark of
SITEBALZER(TM) was approved for publication on November 5, 1999. The company
has applied for the registration of the service mark and trademark
SITEBLAZER(TM) and is in the process of applying for the registration of the
trademark Politicalnet in the United States. The company is applying for a
European Community Trademark for international protection of SITEBLAZER(TM) in
every country in the European Community. Effective trademark, service mark,
copyright and trade secret protection may not be available in every country in
which the company's services are distributed or made available through the
Internet, and policing unauthorized use of the company's proprietary
information is difficult.
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The company currently licenses certain technologies to other companies and
utilizes an independent reseller to market and distribute the company's
products and services. The company has entered into the following material
agreements:
. In September 1997, the company entered into an agreement with Websource
Media in which the company agreed to transport Internet protocol packets
from Websource Media to the Internet and from the Internet to Websource
Media. Websource Media paid a setup fee of $480 in connection with this
agreement and pays the company fees based on the number of hits per day.
This agreement automatically renews for successive one-month terms at the
company's then month-to-month rates.
. In January 1999, the company entered into a software reseller agreement
Eduardo F. Azcoitia, d/b/a Proses, in which the company granted Proses
the non-exclusive right to market and distribute software products
manufactured by the company in Mexico, Columbia and the Untied States.
The company receives a percentage of products sold by Proses.
The company enters into confidentiality agreements with respect to its
proprietary technology and limits access to, and distribution of its
proprietary information.
Employees
As of October 29, 1999, the company employed approximately 38 persons on a
full-time basis. None of the company's employees are represented by a labor
union. The company has entered into non-disclosure and non-competition
agreements with its key personnel which provide that upon the termination of
employment with the company for any reason, the individual will not compete
with the company for two years. The company believes the non-compete covenants
comply with state law, however, the company can provide you no assurances that
a state court may determine not to enforce or only partially enforce such
covenants. The company believes that its relations with its employees are
good.
ITEM 2. Description of Property
The company currently leases approximately 9,867 square feet of office space
in Houston, Texas. The lease expires in October 2002 and the monthly rental is
currently $11,761. Management believes that its existing facilities are
adequate to meet its current needs and to accommodate anticipated growth.
ITEM 3. Legal Proceedings
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
9
<PAGE>
PART II
ITEM 5. Market for Common Equity and Related Shareholder Matters
There is currently no public market for the company's Common Stock. The
company hopes to be trading on the OTC bulletin board as soon as practicable.
In August 1996, the company issued an aggregate of 15,279,000 shares of
Common Stock to three individuals and three entities for nominal consideration
in connection with the company's formation. The company believes these
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act as isolated transactions by an issuer not involving a public
offering. These investors were accredited investors as that term is defined in
Regulation D.
From August 1998 through November 1998, the company issued an aggregate of
160,133 shares of Common Stock in consideration for an aggregate of
$197,499.50. The company believes that the foregoing transactions are exempt
from registration as a limited offering pursuant to Rule 504 of Regulation D.
In July 1998, the company issued 750,000 shares of Common Stock to
PinkMonkey.com for nominal consideration and services rendered. The company
believes these transactions were exempt from registration pursuant to Section
4(2) of the Securities Act as isolated transactions by an issuer not involving
a public offering. This investor had access to financial and business
information of the company in substantially similar form as that provided in a
registration statement, and was represented by its officers and directors who
have such knowledge and experience in financial and business matters that they
were able to evaluate the merit and risks of an investment in the company.
In November 1998, the company issued an aggregate of 72,500 shares of Common
Stock to three individuals in consideration for services rendered. The company
believes these transactions were exempt from registration pursuant to Section
4(2) of the Securities Act as isolated transactions by an issuer not involving
a public offering. These investors were consultants and/or employees to the
company and as such they had access to the inner workings of the company,
which would provide them the same kind of information as would be included in
a registration statement. All of the consultants had such knowledge and
experience in financial and business matters that they were able to evaluate
the merits and risks of an investment in the company.
In November 1998, the company issued an aggregate of 20,000 shares of Common
Stock to three employees in consideration for services rendered. The company
believes these transactions were exempt from registration pursuant to Section
4(2) of the Securities Act as transactions by an issuer not involving a public
offering. These investors were consultants and/or employees to the company and
as such they had access to the inner workings of the company, which would
provide them the same kind of information as would be included in a
registration statement. The employees had extensive experience in the internet
industry and had such knowledge and experience in financial and business
matters that they were able to evaluate the merits and risks of an investment
in the company.
In February 1999, the company issued 66,667 shares of company Common Stock
to an accredited individual for $100,000.00. In addition, the company issued
100,000 shares of company Common Stock to an accredited individual for
$150,000.00. The company believes these transactions were exempt from
registration pursuant to Section 4(2) of the Securities Act as isolated
transactions by an issuer not involving a public offering. As accredited
investors these individuals were able to fend for themselves due to their
exceptional business experience.
In June 1999, an accredited investor purchased 4,000 shares of company
Common Stock at a purchase price of $1.50 per share. The company believes this
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act as isolated transactions by an issuer not involving a public
offering. This investor was an accredited investor as that term is defined in
Regulation D.
10
<PAGE>
In July 1999, an accredited investor purchased 400,000 shares of the
company's Common Stock at $1.00 per share and a ten-year warrant to purchase
400,000 shares of Common Stock at an exercise price of $1.00 per share. In
July 1999, an accredited investor purchased 33,333 restricted shares of the
company's Common Stock at $1.50 per share and a two-year warrant for 12,500
shares of Common Stock at an exercise price of $2.00 per share. In July 1999,
the company issued 4,167 shares of Common Stock to an accredited individual
for services rendered. The company believes these transactions were exempt
from registration pursuant to Section 4(2) of the Act as transactions by an
issuer not involving a public offering. As accredited investors these
individuals were able to fend for themselves due to their exceptional business
experience.
In July 1999, the company issued 500,000 shares of company Common Stock to
Axis Technologies, Inc. in connection with the purchase of certain of Axis'
assets. The company believes this transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act as isolated transactions by an
issuer not involving a public offering. Through the due diligence process,
this investor had access to the inner workings of the company, which would
provide it with the same kind of information as would be included in a
registration statement. The investor had extensive experience in the internet
industry and had such knowledge and experience in financial and business
matters that it was able to evaluate the merits and risks of an investment in
the company.
In September 1999, the company issued 30,000 shares of company Common Stock
to an individual in connection with the purchase of Team Productions, Inc. The
company believes this transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act as isolated transactions by an issuer not
involving a public offering. Through the due diligence process, this investor
had access to the inner workings of the company, which would provide it with
the same kind of information as would be included in a registration statement.
The investor had extensive experience in the internet industry and had such
knowledge and experience in financial and business matters that it was able to
evaluate the merits and risks of an investment in the company.
In October 1999, the company issued 186,000 shares of company Common Stock
to various individuals and entities as compensation for services rendered. The
company believes these transactions were exempt from registration pursuant to
Section 4(2) of the Securities Act as transactions by an issuer not involving
a public offering. These investors were consultants and/or employees to the
company and as such they had access to the inner workings of the company,
which would provide them the same kind of information as would be included in
a registration statement. The employees had extensive experience in the
internet industry and had such knowledge and experience in financial and
business matters that they were able to evaluate the merits and risks of an
investment in the company.
In October 1999, the company issued 187,500 shares of company Common Stock
to an entity for $375,000. The company believes this transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act as an
isolated transaction by an issuer not involving a public offering. As an
accredited investor the entity was able to fend for itself.
ITEM 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following analysis compares the financial condition of the company for
the year ended July 31, 1998 as compared to the year ended July 31, 1999.
General
The company recognizes revenue as services are provided, in accordance with
customer agreements. Royalty income from website or other related licensing
agreements is recognized as it is earned per the individual terms of each
royalty agreement, and is generally comprised of a minimum amount which varies
by customer, plus a stated percentage of the applicable licensee's sales.
The company accounts for property and equipment at cost with depreciation
calculated using the straight-line method over its estimated useful lives
ranging from five to ten years. When assets are retired or otherwise
11
<PAGE>
removed from the accounts, any resulting gain or loss is reflected in income
for the period. The cost of maintenance and repairs is charged to expense as
incurred and significant renewals and improvements are capitalized.
The company utilizes the liability method in accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using anticipated tax rates and laws that will be
in effect when the differences are expected to reverse. The realizability of
deferred tax assets are evaluated annually and a valuation allowance is
provided if it is likely that the deferred tax assets will not give rise to
future benefits in the company's tax returns.
Results of Operations
Results of operations for the year ended July 31, 1998 compared with the
results of operations for the year ended July 31, 1999.
Revenues increased from $628,070 for the year ended July 31, 1998 to
$994,876 for the year ended July 31, 1999. The increase of $366,806 or 58% was
primarily due to growth in web sites developed by the company.
Advertising expense increased from $32,620 for the year ended July 31, 1998,
to $47,158 for the year ended July 31, 1999. The increase of $14,538 or 45%
primarily reflects costs of print advertising for the launch of Political
Net.com.
Bad debt expense increased from $0 for the year ended July 31, 1998, to
$318,762 for the year ended July 31, 1999. The increase of $318,762 is
primarily due to the establishment of reserves for outstanding accounts
receivable from AMP3.com, Inc., an affiliate in which the company owns 10%
interest, and WebSource, Inc.
Consulting expense decreased from $749,990 for the year ended July 31, 1998
to $0 for the year ended July 31, 1999. The decrease of $749,990 reflects the
issuance of Common Stock to PinkMonkey.com in exchange for consulting
services. The fair value of these issued shares totaling $749,990 was recorded
as a consulting expense by the company in July 1998.
General and administrative expenses increased from $20,096 for the year
ended July 31, 1998, to $134,819 for the year ended July 31, 1999. The
increase in general and administrative expenses of $114,723 or 571% primarily
reflects the company's emergence from its development stage.
Professional fees increased from $15,288 for the year ended July 31, 1998,
to $489,108 for the year ended July 31, 1999. The increase in professional
fees of $473,820 or 3,099% primarily reflected increases in legal and
accounting expenses associated with SEC filings and outsourcing of a software
license project.
Rent expense increased from $21,105 for the year ended July 31, 1998, to
$73,626 for the year ended July 31, 1999. The increase in rent expenses of
$52,521 or 249% resulted from an increase in rental space due to company
growth.
Salary expense increased from $384,082 for the year ended July 31, 1998, to
$842,948 for the year ended July 31, 1999. The increase in salary expense of
$458,866 or 119% primarily reflected accrual of officer's salaries.
The company had a $781,595 net loss for the year ended July 31, 1998
compared with a net loss of $1,109,898 for the year ended July 31, 1999. The
increased net loss of $328,303 or 42% is due primarily to the creation of
allowance for doubtful accounts mentioned above.
Net loss per share of Common Stock increased from $(.05) to $(.07) for the
year ended July 31, 1998, compared to the year ended July 31, 1999.
12
<PAGE>
The company may in the future experience significant fluctuations in its
results of operations. Such fluctuations may result in volatility in the price
and/or value of the company's Common Stock if any market develops. Results of
operations may fluctuate as a result of a variety of factors, including demand
for the company's design and creation of Internet web sites, the introduction
of new products and services, the timing of significant marketing programs,
the success of reseller and license agreements, the number and timing of the
hiring of additional personnel, competitive conditions in the industry and
general economic conditions. Shortfalls in revenues may adversely and
disproportionately affect the company's results of operations because a high
percentage of the company's operating expenses are relatively fixed.
Accordingly, the company believes that period to period comparisons of results
of operations should not be relied upon as an indication of future results of
operations. There can be no assurance that the company will be profitable. Due
to the foregoing factors, it is likely that in one or more future periods the
company's operating results will be below the expectations of the investor.
The financial statements included herein have been prepared assuming the
company will be able to continue as a going concern. As shown in the financial
statements, the company incurred a net loss of $1,109,898 for the year ended
July 31, 1999 and has incurred substantial losses since inception. Negative
cash flows from operating activities were $717,752 for the year ended July 31,
1999. These factors, among others, raise doubts about the company's ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing or capital and to refinance its debt and
ultimately attain profitable operations.
Liquidity and Capital Resources
As of July 31, 1999, the company's primary source of liquidity was $163,114
of cash and $129,815 of accounts receivable. The company's working capital
deficit and shareholders' deficit was $106,092 and $92,427 at July 31, 1998,
as compared to a working capital deficit of $168,594 and a shareholders'
equity of $339,825 at July 31, 1999.
Net cash provided by operating activities during the year ended July 31,
1998 was $3,169 compared with net cash used in operating activities of
$717,752 for the year ended July 31, 1999. The increase in net cash used by
operating activities was primarily due to accrued salaries and Common Stock
issued as compensation.
Net cash used in investing activities the year ended July 31, 1998, was
$2,332 compared with net cash used in investing activities of $6,054 for the
year ended July 31, 1999. The increase in the net cash used in investing
activities is attributed to an increase in the purchase of property and
equipment in connection with the company's growth.
Net cash provided by financing activities was $7,947 for the year ended July
31, 1998 compared with net cash provided by financing activities of $867,932
for the year ended July 31, 1999. The increase in net cash provided by
financing activities was primarily due to an increase in the sale of the
company's Common Stock.
The company's internally generated cash flows from operations have
historically been and continue to be insufficient for its cash needs. As of
October 29, 1999, the company's sources of external and internal financing
were limited. It is not expected that the internal source of liquidity will
improve until significant net cash is provided by operating activities, and
until such time, the company will rely upon external sources for liquidity.
The company believes that net proceeds of future anticipated securities
offerings, and giving effect to revenues which are projected to be realized
from operations, should be sufficient to fund ongoing operations and its
business plan. Notwithstanding, there is no assurance that such anticipated
offerings will be undertaken, and if undertaken, will be successful or that
such proceeds derived therefrom, will in fact be sufficient to fund operations
and meet the needs of the company's business plans. Until the company can
obtain monthly sales levels of approximately $90,000 which would be sufficient
to fund current working capital needs, there is uncertainty as to the ability
of the company to expand its business and continue its current operations. The
company believes that it will be able to satisfy its cash requirements for the
next 3 months. Historically, revenues have covered costs. Management believes
that projected revenues from licensees and web site
13
<PAGE>
development will cover costs. There is no assurance that the current working
capital will be sufficient to cover cash requirements for the balance of the
current fiscal year or to bring the company to a positive cash flow position.
Lower than expected earnings resulting from adverse economic conditions or
otherwise, could restrict the company's ability to expand its business as
planned, and if severe enough may shorten the period in which the current
working capital may be expected to satisfy the company's requirements, force
curtailed operations, or cause the company to sell assets. The financial
statements included herein have been prepared assuming the company will be
able to continue as a going concern. The company has a working capital deficit
of $168,594 at July 31, 1999, and experienced significant losses in fiscal
1999 which raise doubts about the company's ability to generate sufficient
cash flow to meet its obligations on a timely basis, to obtain additional
financing or capital and to refinance its debt and ultimately attain
profitable operations.
ITEM 7. Financial Statements
The financial statements prepared in accordance with Item 310 of Regulation
S-B are included in this report commencing on page F-1.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no disagreements concerning matters of accounting principles
or financial statement disclosure between the company and Mann, Frankfort,
Stein and Lipp, P.C. of the type requiring disclosure hereunder.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons.
Directors and Executive Officers
The company's directors and executive officers are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Harry L. White.......... 41 Chairman, Chief Executive Officer, President, Treasurer and Secretary
Richard J. Finn......... 23 Chief Technical Officer and Director
Lee A. Magness.......... 35 Chief Financial Officer, General Counsel and Director
Michael J. Minihan...... 51 Director
</TABLE>
Harry L. White has served as chairman, chief executive officer, president,
secretary and treasurer of the company since inception. Since May 1998, Mr.
White has served as a director of PinkMonkey.com, Inc., an Internet publisher
of educational study aids. From December 1986 through February 1997, Mr. White
worked at Air Products and Chemicals, a hydrogen production company, as the
senior plant technician from December 1996 to February 1997. Mr. White also
served as an ISO 9000 Manager from January 1994 to February 1997.
Richard J. Finn has served as chief technical officer and director of the
company since inception. From December 1995 through February 1997, Mr. Finn
served as the assistant webmaster for Neosoft, Inc., an Internet service
provider. From August 1995 through December 1995, Mr. Finn served as the
assistant network administrator of Cybersim, an Internet service provider.
From October 1994 through August 1995, Mr. Finn served as an assistant network
administrator for Triconex Systems, Inc.
Lee A. Magness has served as chief financial officer, general counsel and
director of the company since inception. Since August 1993, Mr. Magness has
served as a financial consultant to various individuals and corporations.
Prior to receiving his law degree from Thurgood Marshall School of Law, Mr.
Magness served as a senior economic analyst at Transco Energy Corporation.
14
<PAGE>
Michael J. Minihan has served as a director of the company since July 1999.
From November 1997 until the present, Mr. Minihan has served as an asset
manager and economist for The Marketpoint Company, a Texas-based investment
company. From April 1991 until October 1997, Mr. Minihan operated the Texas
Insurance Agency, a state-wide independent property and casualty insurance
agency. Mr. Minihan received a Bachelor of Science in Economics from St.
Mary's University in 1972.
All executive officers of the company are chosen by the board of directors
and serve at the board's discretion. There are no family relationships among
the company's officers and directors. The company plans to reimburse directors
for any expenses incurred in attending board of directors and Year 2000 board
committee meetings.
ITEM 10. Executive Compensation
The following table sets forth information with respect to the chief
executive officer of the company for the fiscal years ended July 31, 1999 and
July 31, 1998 and from inception (August 9, 1996) through July 31, 1997. No
other executive officers of the company received total annual salary and bonus
for the fiscal years ended July 31, 1998 or July 31, 1997 in excess of
$100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Name and Principal Fiscal Other Annual Compensation All other
Position Year Salary(2) Bonus Compensation(1) Options Compensation(3)
------------------ ------ --------- ----- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Harry L. White.......... 1999 $120,000 $800
Chief Executive 1998 $ 70,000 $800
Officer and President 1997 $ 30,000 $800
Richard Finn............ 1999 $120,000 $800
Chief Technology Officer 1998 $ 70,000 $800
1997 $ 30,000 $800
Lee Magness............. 1999 $120,000 $800
Chief Financial Officer 1998 $ 70,000 $800
and General Counsel 1997 $ 30,000 $800
</TABLE>
- --------
(1) The named executive officer did not receive perquisites or other benefits
valued in excess of 10% of the total reported annual salary and bonus.
(2) For the 1999 compensation, the above captioned officers received $59,000
each and the remaining $183,000 is being accrued. The entire $30,000 due
and payable to the above captioned officers in 1997 is being accrued.
(3) Although entitled to this compensation, Messrs. White, Finn and Magness
have not drawn this compensation and it has not accrued.
Employment Agreements
In August 1996, Messrs. White, Finn and Magness entered into five year
written employment contracts that provide for a base salary of $30,000 for the
first year, $70,000 for the second year, and $120,000 annually for years three
through five. In addition, these employment agreements entitle each of these
individuals to an annual bonus of 1% of the company's earnings before income
taxes and depreciation in excess of $5,000,000. In addition to salary,
beginning in August 1998, Messrs. White, Finn and Magness each receive $600
per month as a car allowance and $200 per month for miscellaneous expenses. If
the company terminates an employment contract with cause, such executive will
not engage in certain activities in competition with the company for a period
of six months following such termination. The company believes the non-compete
covenants comply with state law, however, the company can provide you no
assurances that a state court may determine not to enforce or only partially
enforce such covenants.
15
<PAGE>
Stock Options
In August 1998, the Board of Directors and stockholders adopted a stock
option plan under which 500,000 shares of Common Stock have been reserved for
issuance. As of the date of hereof, options to purchase 345,000 shares of
company Common Stock have been granted pursuant to the plan. The company does
not have a defined benefit plan or any retirement or long-term incentive
plans.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table presents certain information regarding the beneficial
ownership of all shares of the company Common Stock by (i) each person who
owns beneficially more than five percent of the outstanding shares of Common
Stock, (ii) each director of the company, (iii) each named executive officer,
and (iv) all directors and officers as a group.
<TABLE>
<CAPTION>
Shares Percentage
Beneficially of Voting
Name of Beneficial Owner(1) Owned Power
--------------------------- ------------ ----------
<S> <C> <C>
Harry L. White.................................. 4,488,000 25.2%
Richard J. Finn................................. 4,488,000 25.2%
Lee A. Magness.................................. 4,207,500 24.5%
Michael J. Minihan.............................. -- --
All directors and officer as a group (4
persons)....................................... 13,183,500 74.9%
</TABLE>
- --------
(1) The business address of each individual is the same as the address of the
company's principal executive offices.
ITEM 12. Certain Relationships and Related Transactions.
In August 1996, the company issued 4,488,000 shares of Common Stock to Harry
L. White, 4,488,000 shares of Common Stock to Richard J. Finn, 4,207,500
shares of Common Stock to Lee A. Magness, 726,000 shares of Common Stock to
Essitam Capital, Ltd., 709,500 shares of Common Stock to Sonsonate Capital,
Ltd., and 660,000 shares of Common Stock to Seyat Capital, Ltd. for nominal
consideration in connection with the company's formation. Peter Eberly is
president and director of Essitam Capital Ltd., Timur Pulatoe is president and
director of Sonsonate Capital, Ltd., and Woodward L. Terry is president and
director of Seyat Capital, Ltd.
In July 1997, Messrs. White and Magness loaned the company $5,378 and
$15,897, respectively. These loans bore interest at the rate of 6% per annum
and were repaid as of July 31, 1998.
In November 1997, the company entered into an agreement with NetTrade for
the design, development, production and installation of a computer program
consisting of an interactive web site on the Internet providing real time/on-
line trading of commodities. The company received $80,000 in connection with
this agreement. Webvest, Inc., a company owned by Messrs. White, Magness and
Finn, has a 20% ownership interest in NetTrade.
In April 1998, Mr. Magness purchased 70,000 shares of PinkMonkey.com Common
Stock in a private placement for an aggregate purchase price of $35,000.
In April 1998, Harry L. White, a director of PinkMonkey.com, was issued a
three year warrant to purchase 100,000 shares of PinkMonkey.com Common Stock
at an exercise price of $.625 per share in consideration for services
rendered.
In July 1998, the company issued 750,000 shares of Common Stock to
PinkMonkey.com in consideration for $10 and services rendered. The company
designed PinkMonkey.coms web page and has continued to provide hosting,
maintenance and marketing services for PinkMonkey.com To date, PinkMonkey.com
has paid the company approximately $266,492 for these services, which was
comprised of $127,025 in marketing and
16
<PAGE>
advertising fees, $14,250 in monthly site hosting, $6,050 in monthly
maintenance and $119,167 in web site design, web site programming, licenses,
set up and equipment fees. PinkMonkey.com has been a customer of the company
since October 1997, and as such assisted in the company's development.
Principals of PinkMonkey.com have provided ongoing business advice to the
company including: (1) assistance in the development of the company's business
plan, (2) budget design, (3) market opportunity identification, and (4)
identification of acquisition and/or merger candidates. For the provision of
these ongoing services by principals of PinkMonkey.com, the company initially
issued PinkMonkey.com approximately 4,550 shares of company Common Stock. The
issuance was made in July 1998. On August 19, 1998, the company effected a
forward stock split of 165 for 1 for shareholders of record as of that date.
Accordingly, the shares of company Common Stock held by PinkMonkey.com
increased from 4,550 to 750,000. The company has valued the Common Stock
issued to PinkMonkey.com at $749,990 in accordance with the Financial
Accounting Standards Board Statement in its Emerging Issues Task Force Issue
96-18, Accounting for Equity Instruments That Are Issued Other Than to
Employees for Acquiring or in Conjunction with Selling, Goods or Services
which requires that shares issued for services rendered be valued similarly to
shares sold by the company within the same time period.
In May 1999, Mr. White resigned as a director of PinkMonkey.com.
In June 1999, Mr. Magness loaned the company $250,000 pursuant to a one-year
promissory note which bears interest at 10% per annum. The note was repaid by
the company in August 1999.
In July 1999, the company acquired certain assets and the client base of
Axis Technologies, Inc., a web site provider, for consideration of 500,000
shares of company Common Stock and up to 125,000 shares of additional Common
Stock provided certain net revenue goals or net cash flows are obtained. In
connection with the acquisition, Michael J. Minihan joined the board of
directors. This transaction was not deemed an acquisition of a "Business",
accordingly; separate historical and pro forma financial statements were not
filed with the SEC.
In September 1999, the company acquired all of the assets of Team
Productions, Inc. from an employee in exchange for 30,000 shares of company
Common Stock.
ITEM 13. Exhibits and Report on Form 8-K
<TABLE>
<CAPTION>
Exhibit
No. Identification of Exhibit
------- ----------------------------------------------------------------------
<C> <S>
2.1(1) Acquisition agreement with Axis Technologies, Inc.
3.1(2) Amended and Restated Articles of Incorporation
3.2(2) Articles of Amendment to the Articles of Incorporation
3.3(2) By-Laws of the company
3.4(2) Articles of Correction to the Amended and Restated Articles of
Incorporation
3.5(2) Articles of Correction to the Articles of Amendment to the Articles of
Incorporation
4.1(2) Form of Specimen of Common Stock
10.1(2) Letter Agreement between the company and PinkMonkey.com, Inc.
10.2(2) Software License and Marketing Agreement between the company and
Websource Media, L.L.C.
10.3(2) Software Reseller Agreement between the company and Harry Bauge
10.4(2) Letter Agreement between the company and Harry Bauge
10.5(2) Agreement between the company and NetTrade Online, L.L.C.
10.6(2) Employment Agreement between the company and Harry White
10.7(2) Employment Agreement between the company and Richard Finn
10.8(2) Employment Agreement between the company and Lee Magness
10.9(2) Lease Agreement
27.1(1) Financial Data Schedule
</TABLE>
- --------
(1) Filed herewith.
(2) Filed as an Exhibit to the company's registration statement on Form SB-2
(File No. 67871) on June 15, 1999, and herein incorporated by reference.
There have been no reports filed on Form 8-K.
17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE COMPANY INTERWEB DESIGN, INC.
/s/ Harry L. White
By:__________________________________
Harry L. White
President and Chief Executive
Officer
DATE: November 15, 1999
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 dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Harry L. White President and Chief November 15, 1999
____________________________________ Executive Officer
Harry L. White
/s/ Richard J. Finn Chief Technical Officer and November 15, 1999
____________________________________ Director
Richard J. Finn
/s/ Lee A. Magness Chief Financial Officer, November 15, 1999
____________________________________ General Counsel and Director
Lee A. Magness
</TABLE>
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Houston InterWeb Design, Inc.
We have audited the accompanying balance sheets of Houston InterWeb Design,
Inc. as of July 31, 1999 and 1998, and the related statements of operations,
changes in stockholders' equity (deficit), and cash flows for the years then
ended. 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 audits 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 Houston InterWeb Design, Inc.
as of July 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $1,109,898 for 1999 and has
incurred substantial net losses since inception. Negative cash flows from
operating activities were $717,752 for the year ended July 31, 1999. These
factors, and the others discussed in Note B, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification
of recorded assets, or the amounts and classification of liabilities that
might be necessary in the event the Company cannot continue in existence.
MANN FRANKFORT STEIN & LIPP
Houston, Texas
September 20, 1999
F-1
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
FINANCIAL STATEMENTS
July 31, 1999 and 1998
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................... F-1
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Changes in Stockholders' Equity (Deficit).................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-2
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
July 31,
----------------------
1999 1998
----------- ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash................................................. $ 163,114 $ 18,988
Cash held in escrow.................................. 250,000 --
Accounts receivable--trade--affiliates (net of
allowance for doubtful accounts of $237,160 and $0
at July 31, 1999 and 1998, respectively)............ 3,760 55,259
Accounts receivable--trade--nonaffiliates (net of
allowance for doubtful accounts of $67,359 and $0 at
July 31, 1999 and 1998, respectively)............... 126,055 61,012
Receivable--employee................................. 2,611 --
Other current assets................................. 416 10,445
----------- ---------
TOTAL CURRENT ASSETS............................... 545,956 145,704
PROPERTY AND EQUIPMENT
Office equipment..................................... 7,704 4,056
Furniture and fixtures............................... 42,872 13,072
----------- ---------
50,576 17,128
Less: accumulated depreciation....................... 4,657 3,463
----------- ---------
TOTAL PROPERTY AND EQUIPMENT....................... 45,919 13,665
GOODWILL (net of accumulated amortization of $7,800)... 462,400 --
INVESTMENT UNDER THE EQUITY METHOD..................... -- --
INVESTMENT UNDER THE COST METHOD....................... 100 --
----------- ---------
TOTAL ASSETS........................................... $ 1,054,375 $ 159,369
=========== =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses................ $ 185,897 $ 130,086
Accrued salaries..................................... 273,000 90,000
Due to employee...................................... 3,500 --
Deferred income tax liability........................ -- 2,498
Note payable--line of credit......................... -- 29,212
Customer deposits.................................... 2,153 --
Note payable to stockholder.......................... 250,000 --
----------- ---------
TOTAL CURRENT LIABILITIES.......................... 714,550 251,796
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 5,000,000 shares
authorized. No shares issued or outstanding at July
31, 1999 and 1998................................... -- --
Common stock, no par value, 50,000,000 shares
authorized, 17,389,800 and 16,029,000 shares issued
and outstanding at July 31, 1999 and 1998,
respectively........................................ 2,303,200 754,000
Subscription receivable.............................. (7,050) --
Accumulated deficit.................................. (1,956,325) (846,427)
----------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)............... 339,825 (92,427)
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)... $ 1,054,375 $ 159,369
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
July 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
REVENUES
Affiliates.......................................... $ 571,929 $ 110,951
Nonaffiliates....................................... 422,947 517,119
----------- ----------
TOTAL REVENUES.................................... 994,876 628,070
EXPENSES
Advertising......................................... 47,158 32,620
Bad debt expense.................................... 318,762 --
Computer equipment.................................. 56,700 25,051
Consulting costs.................................... -- 749,990
Contract labor...................................... 33,784 68,198
Depreciation and amortization....................... 9,916 1,896
General and administrative.......................... 134,819 20,096
Interest............................................ 8,125 6,080
Internet service.................................... 41,860 29,019
LEC fees............................................ 5,887 --
Loss on disposal of assets.......................... 1,385 --
Professional fees................................... 489,108 15,288
Rent................................................ 73,626 21,105
Repairs and maintenance............................. 1,515 3,474
Salaries and benefits............................... 842,948 384,082
Supplies............................................ 10,217 26,036
Telephone........................................... 13,320 11,797
Travel.............................................. 18,142 7,437
----------- ----------
TOTAL EXPENSES.................................... 2,107,272 1,402,169
----------- ----------
LOSS BEFORE FEDERAL INCOME TAXES...................... (1,112,396) (774,099)
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Deferred............................................ (2,498) 7,496
----------- ----------
NET LOSS.............................................. $(1,109,898) $ (781,595)
=========== ==========
NET LOSS PER SHARE, BASIC AND DILUTED................. $ (0.07) $ (0.05)
=========== ==========
AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED......... 16,181,595 15,341,535
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
Common Stock
--------------------- Subscription Accumulated
Shares Amount Receivable Deficit Total
---------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1997.. 15,279,000 $ 4,000 $ -- $ (64,832) $ (60,832)
Issuance of common
stock.................. 750,000 750,000 -- -- 750,000
Net loss, year ended
July 31, 1998.......... -- -- -- (781,595) (781,595)
---------- ---------- ------- ----------- -----------
Balance, July 31, 1998.. 16,029,000 754,000 -- (846,427) (92,427)
Issuance of common stock
in connection with
acquisition of Axis
assets and goodwill.... 500,000 500,000 -- -- 500,000
Issuance of common stock
as compensation........ 96,667 145,000 -- -- 145,000
Issuance of common
stock--cash............ 758,000 904,200 -- -- 904,200
Subscriptions
receivable............. 6,133 -- (7,050) -- (7,050)
Net loss, year ended
July 31, 1999.......... -- -- -- (1,109,898) (1,109,898)
---------- ---------- ------- ----------- -----------
Balance, July 31, 1999.. 17,389,800 $2,303,200 $(7,050) $(1,956,325) $ 339,825
========== ========== ======= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------
1999 1998
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.............................................. $(1,109,898) $(781,595)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Provision for bad debt............................... 304,519 --
Loss on disposal of fixed assets..................... 1,385 --
Depreciation and amortization........................ 9,916 1,896
Deferred income tax expense (benefit)................ (2,498) 7,496
Common stock issued as compensation.................. 145,000 749,990
Changes in assets and liabilities:
Customer deposits.................................... 2,153 --
Accounts receivable.................................. (318,063) (59,590)
Receivable--employee................................. (2,611) --
Cash held in escrow.................................. (250,000) --
Notes payable--shareholder........................... 250,000 --
Other current assets................................. 10,028 (7,219)
Accounts payable and accrued expenses................ 55,817 92,191
Due to employee...................................... 3,500 --
Accrued salaries..................................... 183,000 --
----------- ---------
392,146 784,764
----------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES........................................ (717,752) 3,169
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.................... (5,954) (2,332)
Investment in affiliate............................... (100) --
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES.............. (6,054) (2,332)
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments of notes payable....................... -- (21,275)
Net change in line of credit.......................... (29,218) 29,212
Subscription receivable............................... (7,050) --
Proceeds from issuance of common stock................ 904,200 10
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 867,932 7,947
----------- ---------
NET INCREASE IN CASH................................... 144,126 8,784
CASH AT BEGINNING OF PERIOD............................ 18,988 10,204
----------- ---------
CASH AT END OF YEAR.................................... $ 163,114 $ 18,988
=========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid......................................... $ 6,041 $ 6,080
=========== =========
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES
Issuance of 750,000 common shares in exchange for
promotional services................................. $ -- $ 749,990
=========== =========
Issuance of 500,000 common shares in connection with
acquisition of Axis assets and goodwill.............. $ 500,000 $ --
=========== =========
Issuance of stock as compensation for services........ $ 145,000 $ --
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended July 31, 1999 and 1998
NOTE A--NATURE OF OPERATIONS
Houston InterWeb Design, Inc. (the Company) was incorporated in the State of
Texas in August, 1996. The Company is engaged in the design and creation of
internet websites for customers. The Company uses internally developed
technology for the creation of websites, which it licenses to customers, which
ensures that customers websites are brought up in front of an internet user
irrespective of the search engine used.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying financial statements have been
prepared assuming the Company will be able to continue as a going concern. The
Company experienced significant losses in fiscal 1998 and 1999 which raise
doubts about the Company's ability to generate sufficient cash flow to meet
its obligations on a timely basis, to obtain additional financing or capital
and to refinance its debt and ultimately attain profitable operations.
Management's plans include the following:
. Increasing revenues by attracting new customers by increasing its sales
and market operations to develop an awareness by potential customers of
the Company's ability to create valuable interactive web sites.
. The Company recently entered into a contract with a corporation
(reseller) to market and distribute software products manufactured and
hosted by the Company. No revenue as a result of the above contract was
realized in 1999.
. Obtaining equity capital or debt financing.
Cash and Cash Equivalents: For purposes of the Statements of Cash Flows,
cash equivalents include all highly liquid investments with original
maturities of three months or less.
Property and Equipment: Property and equipment is stated at cost with
depreciation calculated using the straight-line method over its estimated
useful lives ranging from five to ten years. When assets are retired or
otherwise removed from the accounts, any resulting gain or loss is reflected
in income for the period. The cost of maintenance and repairs is charged to
expense as incurred and significant renewals and improvements are capitalized.
Revenue Recognition: Revenues are recognized as services are provided, in
accordance with customer agreements. Royalty income from website or other
related licensing agreements is recognized as it is earned per the individual
terms of each royalty agreement, and is generally comprised of a minimum
amount which varies by customer, plus a stated percentage of the applicable
licensee's sales.
Income Taxes: The liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using anticipated tax rates and laws that will be
in effect when the differences are expected to reverse. The realizability of
deferred tax assets are evaluated annually and a valuation allowance is
provided if it is more likely than not that the deferred tax assets will not
give rise to future benefits in the Company's tax returns.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets
F-7
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended July 31, 1999 and 1998
and liabilities and disclosure 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
estimates.
Goodwill: On July 2, 1999, the Company purchased certain assets and customer
base of Axis Technologies Corporation ("Seller") through issuance of 500,000
shares of common stock valued at $1.00 per share, management's estimate of the
fair value of their common stock at that date. At July 31, 1999, goodwill
represents the unamortized portion of the consideration allocated to the
customer base. The intangible asset will be amortized on a straight-line basis
over the useful life which approximates five years. Additional consideration
of 125,000 shares of common stock may be issued if certain earnings
requirements are met. As part of the sales agreement, the Seller agreed to
raise an additional $375,000 in capital for the Company. See subsequent events
at Note O.
Advertising: The Company expenses advertising costs as incurred. Advertising
expense totaled $47,158 and $32,620 in 1999 and 1998, respectively.
Allowance for Doubtful Accounts: Earnings are charged with a provision for
doubtful accounts based on a current review of the collectibility of accounts.
Accounts deemed uncollectible are applied against the allowance for doubtful
accounts.
NOTE C--INVESTMENTS UNDER THE EQUITY METHOD
At July 31, 1998 and 1999, the Company owned a 30% interest in an internet
provider of pet medical records (the investee). The Company obtained this
ownership interest in exchange for providing its internet website search
engine technology to this investee. The Company believes the fair value of
these services provided to this investee to be de minimis, and therefore, has
recorded its 30% ownership interest in this investee at a zero basis on its
balance sheet. Additionally, at July 31, 1999, the activities of the investee
had not commenced.
NOTE D--NOTE PAYABLE
Note payable consist of the following:
<TABLE>
<CAPTION>
July 31,
------------
1999 1998
---- -------
<S> <C> <C>
Revolving line of credit with a bank, providing for $30,000
maximum borrowings; uncollateralized, bearing interest at prime
plus 1%; interest payable monthly, principal payable on
demand.......................................................... $-- $29,212
=== =======
</TABLE>
F-8
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended July 31, 1999 and 1998
NOTE E--INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at July 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
July 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward.................... $559,319 $290,373
Book over tax amortization......................... 1,768 --
Cash to accrual difference......................... 89,624 --
Less: valuation allowance............................ 649,464 290,373
-------- --------
Total gross deferred tax asset....................... 1,247 --
-------- --------
Deferred tax liabilities:
Tax over book depreciation......................... (1,247) (371)
Cash-to-accrual differences........................ -- (2,127)
-------- --------
Total gross deferred tax liabilities................. (1,247) (2,498)
-------- --------
Net current deferred tax asset (liability)........... $ -- $ (2,498)
======== ========
</TABLE>
The Company has net operating loss carryforwards of approximately $1,600,000
as of July 31, 1999, which expire through the year 2019. Valuation allowances
have been provided for all net operating losses due to lack of evidence of
future recoverability at July 31, 1999.
The difference between the reported income tax expense (benefit) and the
income tax expense (benefit) computed by multiplying the loss before income
taxes by the federal statutory income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended July 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Current tax benefit computed at federal statutory
tax rate........................................ $(378,215) $(263,194)
Change in valuation allowance.................... 359,091 285,196
Other............................................ 16,626 (14,506)
--------- ---------
Total income tax expense (benefit)............... $ (2,498) $ 7,496
========= =========
</TABLE>
NOTE F--RELATED PARTY TRANSACTIONS
The Company has a note payable to a stockholder, unsecured, with interest
payable at 10%, maturing June 10, 2000. The proceeds of the note payable were
held in a trust account at July 31, 1999 and were not available for payment of
operating expenses. The funds were accumulated due to a rescission agreement
available to certain investors. The proceeds are represented in the Company
balance sheet as "Other Current Assets". Interest expense on this note totaled
approximately $2,083 in 1999. The following is a summary of note payable to
stockholder:
<TABLE>
<CAPTION>
July 31,
-------------
1999 1998
-------- ----
<S> <C> <C>
Lee Magness................................................. $250,000 $--
======== ===
</TABLE>
F-9
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended July 31, 1999 and 1998
In July 1998, the Company issued 4,545.4545 shares of its common stock to a
publicly traded affiliate (certain officers and stockholders of the Company
are directors and own stock in the affiliate) in exchange for ten dollars cash
consideration and various consulting services provided. After giving effect to
the 165 for 1 common stock split discussed below in Notes H and I, the amount
of shares issued to this affiliate became 750,000. In accordance with
Financial Accounting Standards Board Statement in its Emerging Issues Task
Force Issue 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, $749,990 was recognized to account for the fair value of the
consulting services received from this affiliate.
At July 31, 1999, the Company has receivables from employees of
approximately $2,611. The Company has approximately $3,500 included in
Accounts Payable that is due to an employee.
NOTE G--COMMITMENTS AND CONTINGENCIES
The Company's minimum rental commitments under a noncancelable operating
lease for office space is as follows:
<TABLE>
<CAPTION>
Years Ending July 31,
---------------------
<S> <C>
2000........................................................... $141,129
2001........................................................... 141,129
2002........................................................... 35,282
--------
$317,540
========
</TABLE>
Total rental expense for the years ended July 31, 1999 and 1998 was $73,626
and $21,105, respectively.
The Company has employment agreements with three of its stockholders
providing a base annual salary through August, 2001. The base salary may be
increased at the Company's option. In addition, this employment agreement
entitles each of these stockholders to an annual bonus of 1% of the Company's
earnings (before income taxes and depreciation) in excess of $5,000,000.
Minimum annual commitments under these agreements amount to $360,000. Amounts
accrued by the Company related to these employment agreements were $183,000
and $90,000 for the fiscal year ended July 31, 1999 and $210,000 and $90,000
for the fiscal year ended July 31, 1998, respectively.
NOTE H--EARNINGS PER SHARE
In accordance with Financial Accounting Standards Board Statement 128,
Earnings Per Share, basic earnings per common share amounts are calculated
using the average number of common shares outstanding during each period,
retroactively adjusted to give effect to the 165 for 1 common stock split
discussed previously in Note F, and below in Note I. As there were no dilutive
potential common shares outstanding during the year ended July 31, 1999, or
during the year ended July 31, 1998, basic average shares outstanding and
earnings per share are equal to diluted average shares outstanding and
earnings per share, respectively, for the years ended July 31, 1999 and 1998.
F-10
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended July 31, 1999 and 1998
NOTE I--STOCKHOLDERS' EQUITY
On August 19, 1998, the Company effected a stock split on its common stock
of 165 for 1 for stockholders of record on August 19, 1998. All references to
shares issued have been restated for the above stock split for all periods
presented.
On August 21, 1998, the Company formed an incentive stock option plan for
its employees under which 500,000 shares of common stock will be awarded to
employees based upon criteria established under the plan. During 1999, the
Company granted options for 345,000 shares of common stock to certain
employees. At July 31, 1999, no shares have been issued under this plan.
On September 2, 1998, the Company amended its articles of incorporation to
increase its authorized capital to 50,000,000 common shares of no par value,
and 5,000,000 preferred shares with $.01 par value. No preferred shares have
been issued to date. All references herein have been restated to reflect the
amended amounts.
During 1999, the Company issued 764,133 shares of common stock to
individuals for cash at prices ranging from $1.00 per share to $1.50 per
share, and 96,667 shares of common stock to employees and independent
contractors for services rendered at prices ranging from $1.00 per share to
$1.50 per share.
On July 2, 1999, the Company acquired certain assets and the client base of
Axis Technologies, Inc. for consideration of 500,000 shares of the Company's
common stock and up to 125,000 shares of additional common stock, provided
certain net revenue or cash flows are obtained by December 1999.
NOTE J--OUTSTANDING STOCK WARRANTS
At July 31, 1999, the Company had outstanding warrants to purchase 700,500
shares of the Company's common stock at prices of $1.00 to $2.00 per share.
The warrants became exercisable in 1999 and expire at various dates through
June 30, 2009. At July 31, 1999, 700,500 shares of common stock were reserved
for that purpose.
NOTE K--INVESTMENT AT COST
At July 31, 1999, the Company owned 10,000 shares of a customer, AMP3.COM,
in satisfaction of services rendered. The 10,000 shares represent a 10%
ownership interest in the investee.
NOTE L--CONCENTRATIONS
The Company maintains a cash balance in a bank which, at times, exceeds
federally insured limits. The Company monitors the financial condition of the
bank and has experienced no losses with this account.
During the course of business, the Company extends credit to its customers
supported by contractual agreements for services. Additionally, a significant
portion of the Company's receivables are in the internet industry. Declines in
the industry may make the collection of these receivables doubtful and reduce
the Company's ability to generate future revenues for operation.
F-11
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended July 31, 1999 and 1998
NOTE M--MAJOR CUSTOMERS
During the years ended July 31, 1999 and 1998, the Company provided a
substantial portion of its services to a limited number of customers. For the
year ended July 31, 1999, approximately 75% of the Company's total revenue was
from four customers. Amounts due from these customers at July 31, 1999 in
accounts receivable were $358,000. During the year ended July 31, 1998,
approximately 71% of the Company's total revenue was from five customers.
Amounts due from these customers at July 31, 1998 in accounts receivable were
$60,000. A change in the relationship with these customers could adversely
affect operating results of the Company.
NOTE N--STOCK BASED COMPENSATION PLAN
Employees of the Company have been granted stock options in 1999 under the
Company's 1998 Incentive Stock Option Plan for Employees. Pursuant to the
Plan, 500,000 shares were authorized for issuance of which 345,000 shares were
outstanding as of July 31, 1999. The options granted are subject to three year
vesting requirements and expire five and ten years from their date of grant.
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25") and related
interpretations in accounting for its stock-based compensation arrangements as
opposed to the alternative fair value accounting provided for under SFAS No.
123, Accounting for Stock-Based Compensation. Under APB No. 25, no
compensation expense is recognized because the exercise price of the Company's
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant.
The Board of Directors is responsible for administering the Plan,
determining the terms upon which options may be granted, prescribing, amending
and rescinding such interpretations and determinations and granting options to
employees, directors and officers.
The following table presents a summary of stock option transactions during
the year ended July 31, 1999:
<TABLE>
<CAPTION>
Common Weighted Average
Shares Exercise Price
------- ----------------
<S> <C> <C>
Outstanding at July 31, 1998..................... -- $ --
Granted.......................................... 345,000 1.59
Exercised........................................ -- --
------- -----
Outstanding at July 31, 1999..................... 345,000 $1.59
======= =====
</TABLE>
Of the 345,000 outstanding options at July 31, 1999, 57,500 options were
exercisable with the remaining 287,500 options vesting over a period of up to
10 years.
While the Company will continue to use APB No. 25, proforma information
regarding net income and earnings per shares is required by SFAS No. 123,
which also requires that the information be determined as if the Company has
accounted for its employee stock options granted subsequent to December 31,
1994 under the fair value method prescribed by SFAS No. 123.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, the model requires the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics different from those
of traded options, and because changes in input
F-12
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended July 31, 1999 and 1998
assumptions can materially affect the fair value estimate, the existing model
may not necessarily provide the only measure of fair value for the employee
stock options. The fair value for these options was estimated at the date of
grant using the following weighted-average assumptions: risk-free interest
rates of 4.65%; 26.67% dividend yield; a volatility factor of the expected
market price of the Company's common stock of 103.23%; and a weighted-average
expected life of the options of 5 years.
No compensation cost was actually charged to operations for those
individuals for the year ended July 31, 1999. The impact of applying and
recognizing compensation costs pursuant to SFAS No. 123 is immaterial to the
Company's financial position and results of operations and did not change the
earnings per share amounts currently disclosed.
NOTE O--SUBSEQUENT EVENTS
In August 1999, the recision agreement described in Note F expired with no
shares rescinded. Accordingly, the note payable stockholder in the amount of
$250,000 was repaid by the Company.
On September 15, 1999, the Company entered into a warrant agreement with an
employee to purchase 50,000 shares of the Company's common stock at $2.00 per
share.
On September 15, 1999, the Company acquired all of the assets of Team
Productions, Inc. for consideration of 30,000 shares of common stock.
In October 1999, the Company issued 186,000 shares of Company common stock
to various individuals and entities as compensation for services rendered. The
Company believes these transactions were exempt from registration pursuant to
Section 4(2) of the Securities Act as transactions by an issuer not involving
a public offering. These investors were consultants and/or employees to the
Company and as such they had access to the inner workings of the Company,
which would provide them the same kind of information as would be included in
a registration statement. The employees had extensive experience in the
internet industry and had such knowledge and experience in financial and
business matters that they were able to evaluate the merits and risks of an
investment in the Company.
In October 1999, the Company completed a private placement of 187,500 shares
of its common stock to an accredited investor for an aggregate purchase price
of $375,000. The investor was granted one demand registration right and
unlimited piggy-back registration rights in connection with the offering. The
Company believes this transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act as an isolated transaction by an issuer not
involving a public offering. The transaction represents the fulfillment of the
commitment made by Axis Technologies Corporation as described in Note B.
F-13
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EXHIBIT 2.1
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement, dated as of _____________, 1999 (this
"Agreement" or the "Purchase Agreement"), is by and between HOUSTON INTERWEB
DESIGN, INC., a Texas corporation ("Purchaser"), and AXIS TECHNOLOGIES CORP., a
Texas corporation ("Seller").
BACKGROUND
WHEREAS, Purchaser desires to acquire from Seller, and Seller desires to sell
to Purchaser (the "Purchase and Sale"), the Purchased Assets (defined below), on
the terms and subject to the conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the agreements and covenants herein
contained, the sufficiency of which is hereby acknowledged, and subject to the
satisfaction of the conditions set forth herein, Purchaser and Seller agree as
follows:
ARTICLE I: PURCHASE AND SALE
SECTION 1.01. SALE AND PURCHASE OF ASSETS. (A) On the Closing Date (as
defined in Section 5.01), Seller shall sell, transfer, grant, convey, assign and
set over to Purchaser, and its successors and assigns forever, and Purchaser
shall purchase and receive from Seller, free and clear of any and all liens,
security interests, mortgages, pledges, covenants, easements, encumbrances,
defects in title, agreements and claims and rights of third parties except for
those specifically set forth on SCHEDULE 2.01(C), the following assets (the
"Purchased Assets"):
(1) The fixed and tangible personal property listed on the attached SCHEDULE
1.01(A)(1) (the "Fixed Assets");
(2) All right, title and interest of Seller in those certain custom web site
accounts ("Custom Web Site Accounts") listed on the attached SCHEDULE
1.01(A)(2) accruing subsequent to the Closing;
(3) All right, title and interest of Seller in those certain standard web site
accounts ("Standard Web Site Accounts" and collectively with the Custom Web
Site Accounts, the "Web Site Accounts") listed on the attached SCHEDULE
1.01(A)(3) accruing subsequent to the Closing;
(4) All right, title and interest of Seller in those certain contracts (the
"Assumed Contracts") listed on the attached SCHEDULE 1.01(A)(4); and
(5) All of Seller's books, records and files relating to any of the foregoing.
As the same shall exist on the date hereof, but subject to such additions and
dispositions as shall occur in the ordinary course of business after the date
hereof or as shall otherwise occur with the written consent of Purchaser.
(B) EXCLUDED ASSETS. So as to be absolutely clear, notwithstanding the
foregoing, the Purchased Assets do not include, and Seller shall retain all
rights, titles and interests in and to (collectively, the "Excluded Assets") all
trade and other accounts, accounts receivable and rights to revenues and
billings generated by and relating to the Web Site Accounts (including any
holdbacks or retainages of same by any
<PAGE>
enhanced billing service providers or any other person or entity) prior to the
Closing Date, including, without limitation, those set forth on SCHEDULE
1.01(B);
SECTION 1.02. ASSUMPTION OF LIABILITIES. Subject to consummation of the
transactions contemplated by this Agreement, Purchaser agrees, beginning at the
Effective Time of Closing, to assume responsibility for and discharge, pay or
perform when due in accordance with the terms thereof, only those obligations
and liabilities of Seller relating to the Purchased Assets. Purchaser agrees
also to assume the responsibility for all obligations and liabilities relating
to the Purchased Assets as of and after the Effective Time of Closing.
Seller agrees to remain liable for all other liabilities not expressly and
specifically assumed by Purchaser which existed or arose prior to the Effective
Time of Closing.
SECTION 1.03. RETAINED LIABILITIES. Except as specifically set forth
above in Section 1.02, Purchaser does not and will not assume, and shall in no
event be liable for, and Seller retains and shall retain responsibility for, and
be liable to pay, satisfy and discharge in accordance with their respective
terms, any indebtedness, liabilities, obligations, commitments or payments
("Liabilities") of Seller, including, but not limited to, any commissions that
may be due or which may come due in the future to any broker or telemarketer
with respect to any Web Site Account. Such non-excluded Liabilities are
hereinafter sometimes collectively referred to as the "Retained Liabilities".
SECTION 1.04. CLOSING CONSIDERATION. In consideration of Seller's sale of
the Purchased Assets to Purchaser as aforesaid, on the Closing Date (defined
below) Purchaser shall deliver to Seller a certificate or certificates issued in
the name of Seller (i) representing 500,000 shares of common stock, no par
value, of Purchaser ("Common Stock," and the Common Stock delivered by Purchaser
to Seller on the Closing Date shall be referred to as the "Closing Shares").
SECTION 1.05. CONDITIONAL CONSIDERATION. As additional consideration for
Seller's sale of the Purchased Assets to Purchaser as aforesaid, at expiration
of six (6) calendar months following the Closing Date, Purchaser shall, if the
condition stated in the next sentence has been met, deliver to Seller a
certificate or certificates issued in the name of Seller representing 125,000
shares of Common Stock (the "Conditional Shares"). Purchaser shall be obligated
to deliver the Conditional Shares to Seller if, and only if, the Net Revenue
generated by the Web Site Accounts over the stated six month period exceeds 95%
of $192,629 and/or if Net Operating Cash Flow from the Web Site Accounts exceeds
95% of $126,590. For purposes of this Section, Net Revenue means gross revenues
generated by the Web Site Accounts less all billing and collection fees, local
exchange carrier ("LEC") chargebacks and clearinghouse credits. Net Operating
Cash Flow means the aggregate of the Monthly Net Operating Cash Flow for each of
the six consecutive calendar months commencing July 1, 1999. Monthly Net
Operating Cash Flow means (i) Net Revenue generated in the subject month, less
(ii) that month's revenues generated from LEC billed Web Site Accounts less all
LEC billing and collection fees ("Net LEC Revenues"), plus (iii) 25% of the Net
LEC Revenues generated in the fourth month prior to the subject month, 25% of
the Net LEC Revenues generated in the third month prior to the subject month and
50% of the Net LEC Revenues generated in the second month prior to the subject
month.
SECTION 1.06. NON-ASSIGNED ASSUMED CONTRACTS. From and after the
Closing, Seller shall: (i) hold in trust for the benefit of Purchaser all Non-
Assigned Assumed Contracts (as defined below), (ii) remit (promptly upon receipt
thereof) to Purchaser all amounts paid to Seller thereunder in respect of the
performance thereof, (iii) cooperate with Purchaser in any reasonable
arrangement designed to provide for Purchaser the benefits thereunder, and (iv)
insofar as and when permissible, assign to Purchaser each of such Non-Assigned
Assumed Contracts. Purchaser agrees to perform, in the name and on behalf of
Seller, all Non-Assigned Assumed Contracts as to which the foregoing provisions
have been complied with. For
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purposes of this Agreement, the term "Non-Assigned Assumed Contracts" means and
includes those Assumed Contracts as to which (x) the consent of a party thereto
(other than a Related Party) is required for an assignment thereof, and (y) such
consents are not obtained on or before the Closing Date.
ARTICLE II: REPRESENTATIONS AND WARRANTIES
SECTION 2.01. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby
represents and warrants to Purchaser as follows, and acknowledges and confirms
that Purchaser is relying upon such representations and warranties in connection
with its execution, delivery and performance of this Agreement, notwithstanding
any investigation made by Purchaser or on its behalf:
(A) ORGANIZATION AND GOOD STANDING. Seller is a corporation duly organized,
validly existing and in good standing under the laws of State of Texas and is
duly qualified to transact business and is in good standing as a foreign
corporation in the jurisdictions wherein it is conducting business. Seller has
the full corporate power and authority to own, lease and operate its properties
and assets and to carry on its businesses as presently conducted.
(B) AUTHORITY. The execution, delivery and performance of this Agreement by
Seller and each agreement and instrument to be executed, delivered and performed
by Seller pursuant hereto have been duly authorized and approved by the board of
directors of the Seller, and shall be authorized and approved by the
Shareholders of the Seller on or before the Closing. Neither the execution and
delivery of this Agreement and such other agreements and instruments nor the
consummation of the transactions contemplated hereby or thereby and compliance
with or fulfillment of the terms and provisions hereof or thereof will (a)
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, articles of incorporation or bylaws of Seller or
any judgment, order, award, decree or other restriction of any kind to which
Seller is a party or by which it is bound or to which any of the Purchased
Assets are subject, (b) except as set forth on SCHEDULE 2.01(B), require the
approval, consent, authorization or other order or action of, or any filing
with, any person or entity, including without limitation any court, governmental
authority or regulatory body, (c) give any party with rights under any mortgage,
security agreement, judgment, order, award or decree the right to terminate or
otherwise materially change the rights under such mortgage, security agreement,
judgment, order, award or decree, or (d) result in the imposition of any
mortgage, security interest, lien, easement, pledge, servitude, encumbrance or
claim of any kind on any of the Purchased Assets, except for those security
interests expressly assumed, granted or agreed to by Purchaser in connection
with the transactions contemplated hereunder. Seller has full corporate power
and authority to do and perform all acts and things required to be done by it
under this Agreement. This Agreement and any other agreements and instruments
required to be delivered hereunder by Seller, when duly executed and delivered,
will constitute legal, valid and binding obligations of Seller and will be
enforceable against it in accordance with their respective terms, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium and similar
laws relating to or affecting creditors' rights generally, and subject to
general principles of equity.
(C) PURCHASED ASSETS. Except as set forth on SCHEDULE 2.01(C) to the
contrary, all of the Purchased Assets are owned by Seller free and clear of all
mortgages, security interests, financing statements, liens, notices of violation
of law, ordinance or regulation, pledges, consents, preferential purchase
rights, encumbrances or other title defects of any kind. Each Web Site Account
included in the Purchased Assets is in full force and effect, there has been no
notice of cancellation or termination of any such Web Site Account received by
Seller as of the Date of Closing. Seller has not assigned its interest under any
such Web Site Account. Seller has the right to transfer all of its right, title
and interest in the Web Site Accounts without any consent or approval, and such
transfer as contemplated hereby will not in any way affect their validity or
enforceability. All of the Assumed Contracts are in full force and effect, and
Seller has paid all amounts currently due thereunder and satisfied all other
material obligations accrued to date thereunder and, except as set forth on
SCHEDULE 2.01(C), Seller not has received any written notice of default in any
respect and is unaware of
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<PAGE>
any event or circumstance that with the passage of time would create or be
deemed a default thereunder. Other than as disclosed by Seller to Buyer in
writing, to the knowledge and belief of Seller no other party is in default in
any respect of any Contract. All of the Assumed Contracts were entered into the
ordinary course of business or otherwise in furtherance of the business or
operation of Seller.
(D) TAXES. Except as set forth on SCHEDULE 2.01(D), Seller has duly and
timely filed all income, excise, corporate, franchise, real and personal
property, sales, payroll, withholding and other tax returns and reports required
to be filed by it as of the date hereof, and has paid or established adequate
reserves for all taxes (including penalties and interest) pursuant to such
returns and any assessments that have been received by it to the extent due. All
such tax returns and reports accurately reflect the taxes of Seller that were
due for the period covered thereby; Seller is not delinquent in the payment of
any tax assessment or governmental charge, there are no tax deficiencies or
delinquencies asserted against Seller, and there are no unpaid assessments,
proposals for additional taxes, deficiencies, or delinquencies in the payment of
any of the taxes due from Seller. No audit of any governmental authority is
pending or, to the knowledge of Seller, threatened, and the results of any
completed audits are properly reflected in the Financial Statements. Seller has
not granted any extension to any taxing authority of the limitation period
during which any tax liability may be asserted. All amounts of money required to
be withheld by Seller from employees or collected from customers for income
taxes, social security and unemployment insurance taxes and sales, excise and
use taxes, and the portion of any such taxes to be paid by Seller, have been
collected or withheld and either paid or set aside in accounts for such purpose,
or such monies have been approved, reserved against and entered upon the books
of Seller.
(F) COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS. (i)
Seller is in compliance with each material federal, state, local, municipal,
foreign, international, multinational, or other administrative order,
constitution, law, ordinance, principle of common law, regulation, statute, or
treaty (a "Legal Requirement") that is or was applicable to the use of any of
the Purchased Assets, and (ii) no event has occurred or circumstance exists that
(with or without notice or lapse of time) (A) may constitute or result in a
violation by Seller or a failure on its part to comply with any Legal
Requirement, or (B) may give rise to any obligation on their part to undertake
or to bear all or any portion of the cost of, any remedial action of any nature.
(G) GOVERNMENTAL AUTHORIZATIONS. SCHEDULE 2.01(G) contains a complete and
accurate list of each approval, consent, license, permit, waiver, or other
authorization issued, granted, given, or otherwise made available by or under
the authority of any governmental body or pursuant to any Legal Requirement
("Governmental Authorization") that is held by Seller or that otherwise relates
to any of the Purchased Assets. Each Governmental Authorization listed or
required to be listed in SCHEDULE 2.01(G) is valid and in full force and effect,
Seller is in full compliance with each Governmental Authorization, and no event
has occurred or circumstance exists that may (with or without notice or lapse of
time) (A) constitute or result directly or indirectly in a violation of or a
failure to comply with any term or requirement of any Governmental Authorization
listed or required to be listed in SCHEDULE 2.01(G), or (B) result directly or
indirectly in the revocation, withdrawal, suspension, cancellation, or
termination of, or any modification to, any Governmental Authorization listed or
required to be listed in SCHEDULE 2.01(G). All applications required to have
been filed for the renewal of the Governmental Authorizations listed or required
to be listed in SCHEDULE 2.01(G) have been duly filed on a timely basis, and all
other filings required to have been made with respect to such Governmental
Authorizations have been duly made on a timely basis.
(H) LEGAL PROCEEDINGS; ORDERS. Except as set forth in SCHEDULE 2.01(H),
there is no pending legal proceeding, including any administrative proceeding
(i) that has been commenced by or against Seller, or that otherwise relates to
or may affect any of the Purchased Assets owned or used by, Seller; or (ii) that
challenges, or that may have the effect of preventing, delaying, making illegal,
or otherwise interfering with, any of the transactions contemplated hereby, and
to the knowledge of Seller, no such proceeding has been
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<PAGE>
threatened, and no event has occurred or circumstance exists that may give rise
to or serve as a basis for the commencement of any such proceeding. Seller has
made copies of all pleadings, correspondence, and other documents relating to
each proceeding listed in SCHEDULE 2.01(H) available to Purchaser. Except as set
forth in SCHEDULE 2.01(H), there is no order of any court or administrative
order affecting any of the Purchased Assets, and neither Seller or any of its
officers, directors, agents, or employees is subject to any order that prohibits
or restrains any conduct, activity, or practice relating to the transactions
contemplated hereby.
(I) BROKERS OR FINDERS. Seller and its agents have incurred no
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement.
(J) COMPLETENESS OF SCHEDULES AND OTHER INFORMATION. The Schedules attached
hereto completely and correctly present the information required by this
Agreement to be set forth therein. Such Schedules and all other certificates
delivered pursuant hereto do not as of the respective dates thereof contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein not misleading. To the extent requested
by Purchaser, originals or true and complete copies of all documents or other
written materials underlying items listed in the Schedules have heretofore been
furnished to Purchaser in the form in which each of such documents is in effect.
(K) NON-DISTRIBUTIVE INTENT. Seller represents and warrants that it is
receiving the Closing Shares for long-term investment for its own account and
not with a view toward distribution, resale, pledge, or other disposition of the
Closing Shares. Seller acknowledges that its ability to transfer the Closing
Shares is restricted, which includes restrictions against transfer, unless the
transfer is not in violation of the Securities Act of 1933, the Securities
Exchange Act of 1934, or applicable state and securities laws. Seller represents
that it is aware that the Closing Shares have not been registered under the Act,
nor under the securities laws of any state. Accordingly, Seller will make no
sale, transfer, assignment, pledge, hypothecation or other disposition of the
Closing Shares or any part thereof, unless and until either: (i) the Closing
Shares to be disposed of have been duly and effectively registered for resale
under the Act, as well as under any then applicable state securities laws; or
(ii) Seller delivers to Purchaser of a written opinion satisfactory to
Purchaser's counsel that an exemption from such registration requirements is
then available with respect to any such proposed sale or disposition, or (iii)
sale of the Stock is permitted under Rule 144. Seller recognizes and agrees that
a legend will be placed on the certificate representing the Closing Shares that
reads as follows:
"The shares represented by the within certificate have not been
registered under the Securities Act of 1933, as amended ("Act"), have
been taken for investment, and may not be sold or offered for sale
unless a registration statement under the Act with respect to such
stock is then in effect or an exemption from the registration
requirements of such Act is then in fact applicable to such offer or
sale."
Seller acknowledges that a "Stop Transfer" order may also be placed against any
transfer of the Closing Shares until the conditions set forth in the above
legend have been met.
(L) ACCREDITED INVESTOR. Seller represents and warrants that it is an
accredited investor as that term is defined in Rule 501 of Regulation D.
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SECTION 2.02. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser
hereby represents and warrants to Seller as follows, and acknowledges and
confirms that Seller is relying upon such representations and warranties in
connection with their execution, delivery and performance of this Agreement,
notwithstanding any investigation made by Seller or on its behalf:
(A) ORGANIZATION AND GOOD STANDING. The attached SCHEDULE 2.02(A)(1)
contains a complete and accurate list of the states of incorporation of
Purchaser. Purchaser is a corporation duly organized, validly existing, and in
good standing under the laws of its jurisdiction of incorporation, with full
corporate power and authority to conduct its business as it is now being
conducted and to own or use the properties and assets that it purports to own or
use. Purchaser is duly qualified to do business as a foreign corporation and is
in good standing under the laws of each state or other jurisdiction in which
either the ownership or use of the properties owned or used by it, or the nature
of the activities conducted by it, requires such qualification. Purchaser has
delivered to Seller copies of its articles of incorporation, any and all
amendments thereto (the "Articles of Incorporation") and its by-laws as
currently in effect.
(B) AUTHORITY. Purchaser has the absolute and unrestricted authority to
execute and deliver this Agreement and to perform its obligations hereunder.
All corporate action on the part of Purchaser necessary for the authorization,
execution and delivery of this Agreement and the performance of the transactions
contemplated hereby has been duly taken. This Agreement constitutes a valid and
legally binding obligation of Purchaser, enforceable in accordance with its
terms, subject to laws of general application relating to bankruptcy, insolvency
and the relief of debtors and rules of law governing specific performance,
injunctive relief and other equitable remedies. The Closing Shares and the
Conditional Shares, when issued in accordance with the terms of the Sections
1.04 and 1.05, are or will be validly issued, fully paid and nonassessable, and
have or will have the rights, preferences and privileges described in
Purchaser's Articles of Incorporation; and will be free of any restrictions on
transfer except as provided in the Articles of Incorporation and applicable
securities laws. Neither the Closing Shares nor the Conditional Shares are
subject to any preemptive rights or rights of first refusal. Neither the
execution and delivery of this Agreement and such other agreements and
instruments nor the consummation of the transactions contemplated hereby or
thereby and compliance with or fulfillment of the terms and provisions hereof or
thereof will (a) conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, articles of incorporation or
bylaws of Purchaser or any judgment, order, award, decree or other restriction
of any kind to which Purchaser is a party or by which it is bound or to which
any of the assets of Purchaser are subject, (b) except as set forth on SCHEDULE
2.02(B), require the approval, consent, authorization or other order or action
of, or any filing with, any person or entity, including without limitation any
court, governmental authority or regulatory body, (c) give any party with rights
under any mortgage, security agreement, judgment, order, award or decree the
right to terminate or otherwise materially change the rights under such
mortgage, security agreement, judgment, order, award or decree, or (d) result in
the imposition of any mortgage, security interest, lien, easement, pledge,
servitude, encumbrance or claim of any kind on any asset of the Purchaser.
(C) CAPITALIZATION. The authorized capital stock of Purchaser consists
of 50,000,000 shares of common stock, no par value, and 5,000,000 shares of
preferred stock, $.01 par value per share (collectively, the "Capital Stock").
SCHEDULE 2.02(C) sets forth the ownership of all of the outstanding shares of
Capital Stock on the date hereof. Except for this Agreement and the agreements
set forth on SCHEDULE 2.02(C), there are no agreements or understandings by
Purchaser relating to the issuance or sale of any Capital Stock or securities of
Purchaser, and there are no outstanding options, convertible securities or other
rights to acquire shares of Capital Stock.
(D) FINANCIAL STATEMENTS. Purchaser has delivered to Seller a copy of
its registration statement on Form SB-2/A filed with the SEC on June 15, 1999
(the "SB-2/A") which includes: (a) audited
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balance sheets of Purchaser as of July 31, 1996, 1997 and 1998 and the related
statements of income, changes in stockholders' equity, and cash flow for each of
the fiscal years then ended, together with the report thereon of Purchaser's
independent certified public accountants, and (b) a balance sheet of Purchaser
as of January 31, 1999 (the "Latest Balance Sheet"), and the related statements
of income and notes thereto (collectively, the "Financial Statements"). The
Financial Statements fairly present the financial condition and the results of
operations, changes in stockholders' equity, and cash flow of Purchaser as of
the respective dates of and for the periods referred to in such financial
statements, all in accordance with generally accepted accounting principles
applied on a consistent basis.
(E) BOOKS AND RECORDS. The books of account, minute books, stock
record books, and other records of Purchaser contain accurate and complete
records of all meetings held of, and corporate action taken by, the
stockholders, the Board of Directors, and committees of the Board of Directors
of Purchaser, and no meeting of any such stockholders, Board of Directors, or
committee has been held for which minutes have not been prepared and are not
contained in such minute books.
(F) NO UNDISCLOSED LIABILITIES. Other than disclosed in the SB-2/A,
Purchaser has no liabilities or obligations of any nature except for liabilities
or obligations reflected or reserved against in the Latest Balance Sheet and
current liabilities incurred in the ordinary course of business since the Latest
Balance Sheet.
(G) TAXES. Except as set forth on SCHEDULE 2.02(G), Purchaser has duly
and timely filed all income, excise, corporate, franchise, real and personal
property, sales, payroll, withholding and other tax returns and reports required
to be filed by it as of the date hereof, and has paid or established adequate
reserves for all taxes (including penalties and interest) pursuant to such
returns and any assessments that have been received by it to the extent due.
All such tax returns and reports accurately reflect the taxes of Purchaser that
were due for the period covered thereby; Purchaser is not delinquent in the
payment of any tax assessment or governmental charge, there are no tax
deficiencies or delinquencies asserted against Purchaser, and there are no
unpaid assessments, proposals for additional taxes, deficiencies, or
delinquencies in the payment of any of the taxes due from Purchaser. No audit
of any governmental authority is pending or, to the knowledge of Purchaser,
threatened, and the results of any completed audits are properly reflected in
the Financial Statements. Purchaser has not granted any extension to any taxing
authority of the limitation period during which any tax liability may be
asserted. All amounts of money required to be withheld by Purchaser from
employees or collected from customers for income taxes, social security and
unemployment insurance taxes and sales, excise and use taxes, and the portion of
any such taxes to be paid by Purchaser, have been collected or withheld and
either paid or set aside in accounts for such purpose, or such monies have been
approved, reserved against and entered upon the books of Purchaser.
(H) NO MATERIAL ADVERSE CHANGE. Since the date of the Latest Balance Sheet
there has not been any material adverse change in the business, operations,
properties, prospects, assets, or condition of Purchaser and no event has
occurred or circumstance exists that may result in such a material adverse
change.
(I) COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS. (i)
Purchaser is in compliance with each material federal, state, local, municipal,
foreign, international, multinational, or other administrative order,
constitution, law, ordinance, principle of common law, regulation, statute, or
treaty (a "Legal Requirement") that is or was applicable to it or to the conduct
or operation of its business or the ownership or use of any of its assets, and
(ii) no event has occurred or circumstance exists that (with or without notice
or lapse of time) (A) may constitute or result in a violation by Purchaser or a
failure on its part to comply with any Legal Requirement, or (B) may give rise
to any obligation on their part to undertake or to bear all or any portion of
the cost of, any remedial action of any nature.
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(J) GOVERNMENTAL AUTHORIZATIONS. SCHEDULE 2.02(J) contains a complete and
accurate list of each approval, consent, license, permit, waiver, or other
authorization issued, granted, given, or otherwise made available by or under
the authority of any governmental body or pursuant to any Legal Requirement
("Governmental Authorization") that is held by Purchaser or that otherwise
relates to the business of, or to any of the assets owned or used by, Purchaser.
Each Governmental Authorization listed or required to be listed in SCHEDULE
2.02(J) is valid and in full force and effect, Purchaser is in full compliance
with each Governmental Authorization, and no event has occurred or circumstance
exists that may (with or without notice or lapse of time) (A) constitute or
result directly or indirectly in a violation of or a failure to comply with any
term or requirement of any Governmental Authorization listed or required to be
listed in SCHEDULE 2.02(J), or (B) result directly or indirectly in the
revocation, withdrawal, suspension, cancellation, or termination of, or any
modification to, any Governmental Authorization listed or required to be listed
in SCHEDULE 2.02(J). All applications required to have been filed for the
renewal of the Governmental Authorizations listed or required to be listed in
SCHEDULE 2.02(J) have been duly filed on a timely basis, and all other filings
required to have been made with respect to such Governmental Authorizations have
been duly made on a timely basis.
(K) LEGAL PROCEEDINGS; ORDERS. Except as set forth in SCHEDULE 2.02(K),
there is no pending legal proceeding, including any administrative proceeding
(i) that has been commenced by or against Purchaser, or that otherwise relates
to or may affect the business of, or any of the assets owned or used by,
Purchaser; or (ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the transactions
contemplated hereby, and to the knowledge of Purchaser, no such proceeding has
been threatened, and no event has occurred or circumstance exists that may give
rise to or serve as a basis for the commencement of any such proceeding.
Purchaser has made copies of all pleadings, correspondence, and other documents
relating to each proceeding listed in SCHEDULE 2.02(K) available to Seller.
None of the items set forth on SCHEDULE 2.02(K), if determined adversely to
Purchaser, would have a material adverse effect on the business, operations,
assets, conditions or prospects of Purchaser, on a consolidated basis. Except
as set forth in SCHEDULE 2.02(K), there is no order of any court or
administrative order affecting Purchaser, or any of its assets or business
operations, and neither Purchaser or any of its officers, directors, agents, or
employees is subject to any order that prohibits or restrains any conduct,
activity, or practice relating to the business of Purchaser.
(L) ABSENCE OF CERTAIN CHANGES AND EVENTS. Since the date of the Latest
Balance Sheet, except as set forth on SCHEDULE 2.02(L), Purchaser has conducted
its businesses only in the ordinary course, consistent with past practices, and
there has not been any:
(1) change in the Capital Stock; grant of any stock option or right to
purchase shares of Capital Stock; issuance of any security convertible into
Capital Stock; grant of any registration rights; purchase, redemption,
retirement, or other acquisition by Purchaser of any shares of Capital Stock; or
declaration or payment of any dividend or other distribution or payment in
respect of shares of Capital Stock;
(2) amendment to the Articles of Incorporation or By-laws of Purchaser;
(3) payment or increase by Purchaser of any bonuses, salaries, or other
compensation to any stockholder, director, officer, or (except in the ordinary
course of business) employee or entry into any employment, severance, or similar
contract with any director, officer, or employee;
(4) adoption of, or increase in the payments to or benefits under, any
profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, or other employee benefit plan for or with any employees of
Purchaser;
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(5) damage to or destruction or loss of any asset or property of Purchaser,
whether or not covered by insurance, materially and adversely affecting the
properties, assets, business, financial condition, or prospects of Purchaser,
taken as a whole;
(6) sale (other than sales of inventory in the ordinary course of
business), lease, or other disposition of any asset or property of Purchaser or
mortgage, pledge, or imposition of any lien or other encumbrance on any material
asset or property of Purchaser, including the sale, lease, or other disposition
of any of the Intellectual Property Assets (as defined below);
(7) cancellation or waiver of any claims or rights of Purchaser;
(8) change in the accounting methods used by Purchaser; or
(9) agreement, whether oral or written, by Purchaser to do any of the
foregoing.
[(M) INTENTIONALLY OMITTED.]
(N) LABOR RELATIONS; COMPLIANCE. Purchaser has not been or is not a
party to any collective bargaining or other labor contract, and there is not
presently pending or existing, and there is not threatened, (a) any strike,
slowdown, picketing, work stoppage, or employee grievance process, (b) any
proceeding against or affecting Purchaser relating to the alleged violation of
any Legal Requirement pertaining to labor relations or employment matters,
including any charge or complaint filed by an employee or union with the
National Labor Relations Board, the Equal Employment Opportunity Commission, or
any comparable governmental body, organizational activity, or other labor or
employment dispute against or affecting either Purchaser or their premises, or
(c) any application for certification of a collective bargaining agent. No
event has occurred or circumstance exists that could provide the basis for any
work stoppage or other labor dispute. There is no lockout of any employees by
Purchaser, and no such action is contemplated. Purchaser has complied in all
respects with all Legal Requirements relating to employment, equal employment
opportunity, nondiscrimination, immigration, wages, hours, benefits, collective
bargaining, the payment of social security and similar taxes, occupational
safety and health, and plant closing. Purchaser is not liable for the payment
of any compensation, damages, taxes, fines, penalties, or other amounts, however
designated, for failure to comply with any of the foregoing Legal Requirements.
(O) EMPLOYEE BENEFITS. SCHEDULE 2.02(O) lists all Benefit Arrangements and
Employee Benefit Plans of Purchaser or with respect to which Purchaser may have
any liability (whether or not funded) under ERISA or otherwise. No such plan
listed on SCHEDULE 2.02(O) is a "multi-employer plan" within the meaning of
3(37) of ERISA or a "multi-employer welfare arrangement" within the meaning of
Section 3(40) of ERISA. Each plan is currently and has in the past been, in all
material respects, operated and administered in accordance with its provisions
and all Legal Requirements. Each plan is qualified within the meaning of
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and any related trust is exempt from taxation under Section 501(a) of the Code.
No such plan is a defined benefit plan, and no such plan or, to Purchaser's
knowledge, any trustee, administrator or other fiduciary of such plan has
engaged in any transaction that would subject Purchaser, the plan or the trust
to any liability. Purchaser has not provided or offered to provide health
insurance coverage or benefits to any individual, or to the family of any
individual, for any period beyond such individual's employment, except to the
minimum extent required by health care continuation coverage ("COBRA")
provisions in ERISA and the Code.
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(P) INTELLECTUAL PROPERTY.
(1) Definitions. The term "Intellectual Property Assets" shall
include:
(i) all fictional business names, trading names, registered and
unregistered trademarks, service marks, and applications (collectively,
"Marks");
(ii) all patents, patent applications, and inventions and discoveries
that may be patentable (collectively, "Patents");
(iii) all copyrights in both published works and unpublished works
(collectively, "Copyrights");
(iv) all rights in mask works (collectively, "Rights in Mask Works");
and
(v) all know-how, trade secrets, confidential information, customer
lists, software, technical information, data, process technology, plans,
drawings, and blue prints (collectively, "Trade Secrets"); owned, used, or
licensed by Purchaser as licensee or licensor.
(2) Intellectual Property Agreements. SCHEDULE 2.02(P)(2) contains a
complete and accurate list and summary description, including any royalties,
commissions, or other consideration paid or received by Purchaser, of all
contracts (including, but not limited to license agreements) relating to the
Intellectual Property Assets to which Purchaser is a party or by which any of
them is bound, except for any license implied by the sale of a product and
perpetual, paid-up licenses for commonly available software programs with a
value of less than $5,000 under which Purchaser is the licensee. There are no
outstanding and no threatened disputes or disagreements with respect to any such
agreement.
(3) Know-How Necessary for the Business.
(i) The Intellectual Property Assets are all those necessary for the
operation of the businesses of Purchaser as such businesses are currently
conducted. Purchaser is the owner or licensee of all right, title, and interest
in and to each of the Intellectual Property Assets, free and clear of all liens,
security interests, charges, encumbrances, equities, and other adverse claims,
and has the right to use without payment to a third party all of the
Intellectual Property Assets.
(ii) Except as set forth in SCHEDULE 2.02(P)(3), all former and
current employees of Purchaser have executed written contracts with Purchaser
that assign to Purchaser all rights to any inventions, improvements,
discoveries, or information relating to the business of Purchaser. No employee
of Purchaser has entered into any contract that restricts or limits in any way
the scope or type of work in which the employee may be engaged or requires the
employee to transfer, assign, or disclose information concerning his work to
anyone other than Purchaser.
(4) Trademarks.
(i) SCHEDULE 2.02(P)(4) contains a complete and accurate list and
summary description of all Marks. Purchaser is the owner of all right, title,
and interest in and to each of the Marks, free and clear of all liens, security
interests, charges, encumbrances, equities, and other adverse claims.
(ii) All Marks that have been registered with the United States
Patent and Trademark Office are currently in compliance with all formal legal
requirements (including the timely post-registration filing of affidavits of use
and incontestability and renewal applications), are valid and
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enforceable, and are not subject to any maintenance fees or taxes or actions
falling due within ninety days after the Closing Date.
(iii) No Mark has been or is now involved in any opposition,
invalidation, or cancellation and, to Purchaser's knowledge, no such action is
threatened with the respect to any of the Marks.
(iv) There is no potentially interfering trademark or trademark
application of any third party.
(v) No Mark is infringed or, to Purchaser's knowledge, has been
challenged or threatened in any way. None of the Marks used by Purchaser
infringes or is alleged to infringe any trade name, trademark, or service mark
of any third party.
(vi) All products and materials containing a Mark bear the
proper federal registration notice where permitted by law.
(5) Copyrights.
(i) SCHEDULE 2.02(P)(5) contains a complete and accurate list and
summary description of all Copyrights. Purchaser is the owner of all right,
title, and interest in and to each of the Copyrights, free and clear of all
liens, security interests, charges, encumbrances, equities, and other adverse
claims.
(ii) All the Copyrights have been registered and are currently in
compliance with formal legal requirements, are valid and enforceable, and are
not subject to any maintenance fees or taxes or actions falling due within
ninety days after the date of Closing.
(iii) No Copyright is infringed or, to Purchaser's knowledge, has
been challenged or threatened in any way. None of the subject matter of any of
the Copyrights infringes or is alleged to infringe any copyright of any third
party or is a derivative work based on the work of a third party.
(iv) All works encompassed by the Copyrights have been marked
with the proper copyright notice.
(6) Trade Secrets.
(i) Purchaser has taken all reasonable precautions to protect the
secrecy, confidentiality, and value of their Trade Secrets.
(ii) Purchaser has good title and an absolute (but not necessarily
exclusive) right to use the Trade Secrets. The Trade Secrets are not part of
the public knowledge or literature, and, to Purchaser's knowledge, have not been
used, divulged, or appropriated either for the benefit of any person or entity
(other than Purchaser) or to the detriment of Purchaser. No Trade Secret is
subject to any adverse claim or has been challenged or threatened in any way.
(Q) CERTAIN PAYMENTS. No director, officer, agent, or employee of
Purchaser or any other person or entity associated with or acting for or on
behalf of Purchaser, has directly or indirectly (a) made any contribution, gift,
bribe, rebate, payoff, influence payment, kickback, or other payment to any
person or entity, private or public, regardless of form, whether in money,
property, or services (i) to obtain
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favorable treatment in securing business, (ii) to pay for favorable treatment
for business secured, (iii) to obtain special concessions or for special
concessions already obtained, for or in respect of either Purchaser, or (iv) in
violation of any Legal Requirement, (b) established or maintained any fund or
asset that has not been recorded in the books and records of Purchaser.
(R) BROKERS OR FINDERS. Purchaser and its agents have incurred no
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement.
(S) COMPLETENESS OF SCHEDULES AND OTHER INFORMATION. The Schedules of
Purchaser as required by this Section 2.02 and attached hereto completely and
correctly present the information required by this Agreement to be set forth
therein. Such Schedules and all other certificates delivered pursuant hereto do
not as of the respective dates thereof contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein not misleading. To the extent requested by Seller, originals
or true and complete copies of all documents or other written materials
underlying items listed in the Schedules have heretofore been furnished to
Seller in the form in which each of such documents is in effect.
ARTICLE III: CERTAIN COVENANTS
SECTION 3.01. ACCESS TO PROPERTIES AND RECORDS, ETC. (A)(1) Seller shall
give Purchaser and its counsel, accountants, appraisers, employees, agents and
representatives such access (during normal business hours) to, and opportunity
to examine, the Purchased Assets and the books, records, files, documents of
Seller relating thereto and/or to the Assumed Liabilities, and cause the
officers, directors, employees, agents, representatives, legal counsel,
accountants, auditors and actuaries of Seller to furnish such financial and
operating data and other information with respect thereto, in each case, as
Purchaser shall from time to time reasonably request. (2) After the Closing
Date, Purchaser shall give Seller and its agents and representatives access
(during normal business hours) to, and opportunity to examine, such books,
records, files and documents relating to the Purchased Assets, and/or Assumed
Liabilities as Seller shall from time to time reasonably request in connection
with any tax-related, regulatory or other matters involving its business prior
to the Closing. Any investigation pursuant to this Section 3.01(a)(2) shall be
conducted in such manner as not to interfere unreasonably with the ordinary
course of the business and operations of Purchaser.
(B) Purchaser shall give Seller and its counsel, accountants,
appraisers, employees, agents and representatives such access (during normal
business hours) to, and opportunity to examine, the Purchaser's books, records,
files, documents relating to its businesses, and cause the officers, directors,
employees, agents, representatives, legal counsel, accountants, auditors and
actuaries of Purchaser to furnish such respective financial and operating data
and other information with respect thereto, in each case, as Seller shall from
time to time reasonably request. Without limiting the generality of the
foregoing, Purchaser shall authorize such access to the work papers and other
records of Purchaser's accountants prepared in connection with the preparation
of any of the Financial Statements. Any investigation pursuant to this Section
3.01(b) shall be conducted in such manner as not to interfere unreasonably with
the ordinary course of the business and operations of Purchaser or with the
confidentiality respecting the transactions contemplated by this Agreement.
SECTION 3.02. CONFIDENTIALITY. Except as expressly permitted by this
Agreement or as necessary for consummation of the transactions contemplated
herein, the parties agree that each party will not, directly or indirectly
(without the prior written consent of the other party) disclose or cause to be
disclosed any information or data regarding the businesses of any other party
any documents or instruments executed in connection therewith or any
confidential information which any party has obtained or may obtain from any
other party or its agents which concerns the affairs of the other party. If
Closing fails to occur, each party agrees promptly to
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return to the other party all written materials relating to this transaction in
such party's possession furnished by the other party or its agents.
Notwithstanding the foregoing, however, the parties agree that prior to the
anticipated date of Closing, each party may disclose without restriction any
confidential information of the other party to its officers, directors,
shareholders, advisers, consultants and lenders.
SECTION 3.03. CONSENTS AND NOTICES. Promptly after the date hereof, the
parties hereto shall use their respective best efforts to obtain all consents
and give all notices which may be necessary or advisable in order to consummate
the Purchase and Sale on or before _____________, 1999. The parties hereto
shall otherwise cooperate with each other in discharging their respective
obligations under this Section 3.03, and shall promptly advise the other parties
hereto of any difficulties encountered in obtaining any such consents or giving
any such notices.
SECTION 3.04. BEST EFFORTS TO SATISFY CONDITIONS. Each of the parties
hereto shall use its best efforts to cause the conditions to the Closing set
forth in Article IV hereof to be satisfied, to the extent that the satisfaction
of such conditions is in the control of such party, as soon as practicable after
the date hereof; provided, however, the foregoing shall not constitute a
limitation upon the covenants and obligations of any party otherwise expressly
set forth in this Agreement.
SECTION 3.05. COMPETING TRANSACTIONS. Seller and Purchaser shall not, and
shall use their respective best efforts to cause their respective officers,
directors, employees, agents and representatives not to (x) solicit an offer
from, or enter into any negotiations, agree in principle, commit to or contract
with, any other person or entity with respect to, or (y) take any other action,
directly or indirectly, to cause, promote or authorize, any transaction
competing or interfering with, or which may have the effect of frustrating, the
Purchase and Sale.
SECTION 3.06. TERMINATION OF LIENS. Seller shall obtain releases and
terminations of all liens affecting the Purchased Assets within sixty (60) days
from the date hereof.
ARTICLE IV: CONDITIONS TO CLOSING
SECTION 4.01. CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligation of
Purchaser to consummate the Purchase and Sale is subject to the satisfaction of
the following conditions, each of which may be waived by Purchaser.
(A) REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. The
representations and warranties of Seller set forth in Article II shall be true
and correct on the Closing Date as if made on and as of the Closing Date.
Seller shall have performed the agreements and obligations required to be
performed by it under this Agreement prior to the Closing Date. Seller shall
have executed and delivered to Purchaser a certificate or certificates
certifying to their compliance with the foregoing, in form and substance
reasonably satisfactory to Purchaser (or its counsel).
(B) CHARTER, BYLAWS, ETC. Seller shall have delivered to Purchaser a
certificate signed by one or of more its officers certifying to: (i) a true,
correct and complete copy of Seller's certificate or articles of incorporation,
(ii) a true, correct and complete copy of Seller's bylaws, (iii) a true, correct
and complete copy of all resolutions of the Board of Directors and (inasmuch as
the Purchase and Sale will constitute a sale of all, or substantially all, of
Seller's property otherwise than in the usual and regular course of business
within the meaning of the Texas Business Corporations Act) shareholders of
Seller adopted in connection with this Agreement and/or the Purchase and Sale,
and (iv) the identity and signature of its officer or officers who shall have
executed this Agreement or any other documents related hereto in the name or on
behalf of Seller on or before the Closing Date.
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(C) CONSENTS AND NOTICES. All Consents and Notices which may be necessary
or appropriate in order for Purchaser to consummate the Purchase and Sale, to
vest in Purchaser good and marketable title to the Purchased Assets free and
clear of all Liens (except for those set forth in SCHEDULE 2.01(C)), and to
continue in effect, and/or assure that Purchaser shall be entitled to have and
enjoy the benefits of, all Assumed Contracts and all other Purchased Assets from
and after the Closing shall have been duly obtained (in the case of Consents) or
given (in the case of Notices) and shall be unconditional and in full force and
effect.
(D) LEGAL RESTRAINTS. There shall not have been proposed or enacted any
Laws, or any change in any existing Laws, which prohibits or delays, or
threatens to prohibit or delay, the consummation of the Purchase and Sale or
which could reasonably be expected to result in a material adverse change to the
Purchased Assets. No action, suit, claim or proceeding shall have been commenced
or threatened by any governmental authority or private party (i) seeking to
restrain, enjoin or hinder, or to seek damages from Purchaser or any affiliate
thereof on account of the consummation of, this Agreement, the Purchase and Sale
or any matter in relation thereto, or (ii) which could reasonably be expected to
result in a material adverse change to the Purchased Assets.
(E) NO MATERIAL ADVERSE CHANGE. There shall have been no material
adverse change to the Purchased Assets since the date of this Agreement.
(F) INSTRUMENTS OF TRANSFER. Seller shall have executed and
delivered to Purchaser a Bill of Sale and Assumption in the form acceptable to
Purchaser and Seller (the "Bill of Sale and Assumption") and such other
instruments of transfer as Purchaser shall reasonably request in order to
further evidence and/or effect, of record or otherwise, the sale, assignment and
transfer by Seller to Purchaser of the Purchased Assets.
(G) INVESTMENT BANKING SERVICES AGREEMENT. Seller shall have caused a
third party satisfactory to Purchaser to have executed and delivered to
Purchaser an investment banking services agreement or similar document in a form
acceptable to Purchaser, providing for the engagement of such party to guaranty
the sale of $350,000 worth of equity securities of the Purchaser within 90 days
of the execution thereof.
(H) LIENS. Seller shall have caused the liens affecting the Purchased
Assets to be discharged and shall have presented evidence to Purchaser of same.
(I) OTHER MATTERS. Seller shall have furnished or caused to be furnished
to Purchaser, in form and substance reasonably satisfactory to Purchaser or its
counsel, such certificates and other evidences as Purchaser may reasonably
request as to the satisfaction of the conditions contained in this Section 4.01.
SECTION 4.02. CONDITIONS TO OBLIGATIONS OF SELLER. The obligation of
Seller to consummate the Purchase and Sale is subject to the satisfaction of the
following conditions, each of which may be waived by Seller.
(A) REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. The
representations and warranties of Purchaser set forth in Article II shall be
true and correct on the Closing Date as if made on and as of the Closing Date.
Purchaser shall have performed the agreements and obligations required to be
performed by it under this Agreement prior to the Closing Date. Purchaser shall
have executed and delivered to Seller a certificate or certificates certifying
to its compliance with the foregoing, in form and substance reasonably
satisfactory to Sellers (or its counsel).
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(B) CHARTER, BYLAWS, ETC. Purchaser shall have delivered to Seller a
certificate signed by one or more of its officers certifying to: (i) a true,
correct and complete copy of Purchaser's certificate or articles of
incorporation, (ii) a true, correct and complete copy of Purchaser's bylaws,
(iii) a true, correct and complete copy of all resolutions of the Board of
Directors and shareholders, if any, adopted in connection with this Agreement
and/or the Purchase and Sale, and (iv) the identity and signature of its officer
or officers who shall have executed this Agreement or any other documents
related hereto in the name or on behalf of Purchaser on or before the Closing
Date.
(C) CONSENTS AND NOTICES. All Consents and Notices which may be necessary
or appropriate in order for Seller to consummate the Purchase and Sale shall
have been duly obtained (in the case of Consents) or given (in the case of
Notices) and shall be unconditional and in full force and effect.
(D) LEGAL RESTRAINTS. There shall not have been proposed or enacted any
Laws, or any change in any existing Laws, which prohibits or delays, or
threatens to prohibit or delay, the consummation of the Purchase and Sale. No
action, suit, claim or proceeding shall have been commenced or threatened by any
governmental authority or private party seeking to restrain, enjoin or hinder,
or to seek damages from Seller or any affiliate thereof on account of the
consummation of, this Agreement, the Purchase and Sale or any matter in relation
thereto.
(E) NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in the business of the Purchaser, including but not limited to the
liabilities, costs, revenues, condition (financial or otherwise) or prospects of
Purchaser since the date of this Agreement.
(F) CLOSING CONSIDERATION. Purchaser shall have delivered to Seller the
Closing Shares in the manner provided in Section 1.04.
(G) BILL OF SALE AND ASSUMPTION. Purchaser shall have executed and
delivered to Seller the Bill of Sale and Assumption.
(H) BOARD OF DIRECTORS. Any and all requisite shareholder and board of
director action shall have been taken by Purchaser to elect a representative of
Seller to the Board of Directors of Purchaser.
(I) REGISTRATION RIGHTS AGREEMENT. Purchaser shall have executed and
delivered to Seller a registration rights agreement in favor of Seller, the
terms and conditions of which are acceptable to Purchaser and Seller.
(J) OTHER MATTERS. Purchaser shall have furnished or caused to be
furnished to Seller, in form and substance reasonably satisfactory to Seller or
its counsel, such certificates and other evidences as Seller may reasonably
request as to the satisfaction of the conditions contained in this Section 4.02.
ARTICLE V: CLOSING AND TERMINATION
SECTION 5.01. CLOSING. The closing of the Purchase and Sale and
other transactions contemplated hereby (the "Closing" or "Closing Date") shall,
unless another place is agreed to by Purchaser and Seller, take place at the
offices of Purchaser, at 10:00 A.M., local time, (the "Effective Time of
Closing") on such date mutually agreed upon by Purchaser and Seller. The
parties hereto shall use their respective best efforts to effect the Closing on
or before ______________ or (failing that) as soon as practicable thereafter.
SECTION 5.02. TERMINATION OF AGREEMENT. This Agreement may, by notice
given on or prior to the Closing Date, in the manner hereinafter provided, be
terminated and abandoned:
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(a) By mutual written agreement of Seller and Purchaser; or
(b) By either party hereto, by notice to the other party hereto, if
the Closing shall not have occurred on or before ___________,
1999 (the "Dropdead Date"); provided that: (i) Purchaser shall
not be permitted to terminate this Agreement under this Section
5.02(b) if the Closing shall not have occurred by the Dropdead
Date by reason of its failure to use its best efforts to cause
the conditions set forth in Article IV hereof that are within its
control to be satisfied, and (ii) Seller shall not be permitted
to terminate this Agreement under this Section 5.02(b) if the
Closing shall not have occurred by the Dropdead Date by reason of
its failure to use its best efforts to cause the conditions set
forth in Article IV hereof that are within its control to be
satisfied.
ARTICLE VI: INDEMNIFICATION
SECTION 6.01. BY SELLER. (A) Subject to the limitations set forth
below in this Section 6.01, from and after the Closing Date Seller shall
indemnify Purchaser and its directors, officers, shareholders, representatives
and agents and their respective successor and assigns (collectively, the
"Purchaser Indemnified Persons"), against, and hold the Purchaser Indemnified
Persons harmless from, any and all Losses (as defined in Section 6.03) directly
or indirectly incurred, suffered, sustained or required to be paid by, or sought
to be imposed upon, any of the Purchaser Indemnified Persons resulting from,
relating to or arising out of: (i) any breach of any of the representations or
warranties of Seller set forth in Article II hereof, (ii) any breach of any
covenant or agreement made by Seller under this Agreement, and/or (iii) any
Retained Liability.
(B) The right to indemnification under this Section 6.01 is subject to
the following limitations:
(1) The indemnification rights under this Section 6.01 shall expire at
the respective times set forth in Section 6.05, and Seller shall have no
liability under this Section 6.01 or otherwise in connection with the
Purchase and Sale unless a Purchaser Indemnified Person gives written
notice to Seller asserting a claim for Losses, including reasonably
detailed specific facts and circumstances pertaining thereto, before the
expiration of the periods of time that the underlying representations,
warranties, covenants and agreements survive under Section 6.05 hereof.
(2) Indemnification for claims under this Section 6.01 shall be
payable hereunder only if and to the extent that the aggregate amount of
all Losses of the Purchaser Indemnified Persons to which this Section 6.01
hereof applies shall exceed $10,000, and shall not be payable in any event
with respect to the first $10,000 of such Losses; provided, however, that
the foregoing limitations shall not apply with respect to claims under
clause (iii) of Section 6.01(a).
(3) The liability for all claims under this Section 6.01 of Seller
shall in no event exceed the total fair market value of the Purchased
Assets as of the date of this Agreement ("Total Consideration Value");
provided, however, that the foregoing limitation shall not apply with
respect to claims under clause (iii) of Section 6.01(a).
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SECTION 6.02. BY PURCHASER. (A) Subject to the limitations set forth below
in this Section 6.02, from and after the Closing Purchaser shall indemnify
Seller and its respective directors, officers, shareholder, representatives and
agents and their respective successor and assigns (collectively, the "Seller
Indemnified Persons"), against, and hold the Seller Indemnified Persons harmless
from, any and all Losses directly or indirectly incurred, suffered, sustained or
required to be paid by, or sought to be imposed upon, any of the Seller
Indemnified Persons resulting from, relating to or arising out of: (i) any
breach of any of the representations or warranties of Purchaser set forth in
Article II hereof, (ii) any breach of any covenant or agreement made by
Purchaser under this Agreement, and/or (iii) any Assumed Liability.
(B) The right to indemnification under this Section 6.02 is subject to
the following limitations:
(1) The indemnification rights under this Section 6.02 shall expire at
the respective times set forth in Section 6.05, and Purchaser shall have no
liability under this Section 6.02 or otherwise in connection with the
Purchase and Sale unless a Seller Indemnified Person gives written notice
to Purchaser asserting a claim for Losses, including reasonably detailed
specific facts and circumstances pertaining thereto, before the expiration
of the periods of time that the underlying representations, warranties,
covenants and agreements survive under Section 6.05 hereof.
(2) Indemnification for claims under this Section 6.02 shall be
payable hereunder only if and to the extent that the aggregate amount of
all Losses of the Seller Indemnified Persons to which this Section 6.02
hereof applies shall exceed $10,000, and shall not be payable in any event
with respect to the first $10,000 of such Losses; provided, however, that
the foregoing limitations shall not apply with respect to claims under
clause (iii) of Section 6.02(a).
(3) The liability for all claims under this Section 6.02 of Purchaser
shall in no event exceed the Total Consideration Value; provided, however,
that the foregoing limitation shall not apply with respect to claims under
clause (iii) of Section 6.02(a).
SECTION 6.03. "LOSSES" DEFINED. In this Agreement, the term "Losses"
means and includes all losses, claims, liabilities, damages (including, without
limitation, punitive, consequential and special damages awarded to any third-
party claimant), judgments, liabilities, payments, obligations, costs and
expenses (including, without limitation, any reasonable costs of investigation,
remediation or cleanup, and any reasonable legal fees and costs and expenses
incurred after the Closing Date in defense of or in connection with any alleged
or asserted liability, payment or obligation as to which indemnification may
apply hereunder), regardless of whether or not any liability, payment,
obligation or judgment is ultimately imposed against the Purchaser Indemnified
Persons or Seller Indemnified Persons and whether or not the Purchaser
Indemnified Persons or Seller Indemnified Persons are made or become parties to
an action, suit or proceeding in respect thereof, voluntarily or involuntarily.
SECTION 6.04. NOTICE OF CLAIMS. With respect to any matter as to which any
person or entity (the "Indemnified Person") is entitled to indemnification from
any other person or entity (the "Indemnifying Person") under this Article VI,
the Indemnified Person shall have the right, but not the obligation, to contest,
defend or litigate, and to retain counsel of its choice in connection with, any
claim, action, suit or proceeding by any third party alleged or asserted against
the Indemnified Person in respect of, resulting from, relating to or arising out
of such matter, and the costs and expenses thereof shall be subject to the
17
<PAGE>
indemnification obligations of the Indemnifying Person hereunder; provided,
however, that if the Indemnifying Person acknowledges in writing its obligation
to indemnify the Indemnified Person in respect of such matter to the fullest
extent provided by this Article VI, the Indemnifying Person shall be entitled,
at its option, to assume and control the defense of such claim, action, suit or
proceeding at its expense through counsel of its choice if it gives prompt
notice of its intention to do so to the Indemnified Person. Neither an
Indemnified Person nor an Indemnifying Person shall be entitled to settle or
compromise any such claim, action, suit or proceeding without the prior written
consent of the other parties hereto, which consent shall not be unreasonably
withheld, delayed or conditioned.
SECTION 6.05. SURVIVAL OF PROVISIONS. All representations and
warranties contained herein or made pursuant to this Agreement shall survive the
Closing for a period of two years after the Closing Date. All covenants and
agreements of the parties contained in or made pursuant to this Agreement and
required to be performed prior to the Closing Date shall survive the Closing for
a period of one year. All other covenants and agreements contained in or made
pursuant to this Agreement (including Sections 6.01 and 6.02) shall survive the
Closing for so long as any claim may be made in respect of such matters under
any applicable statute of limitations.
SECTION 6.06. NO PUNITIVE DAMAGES. Notwithstanding anything to the
contrary set forth in this Agreement, no party hereto shall have any liability
to any other party hereto, any Purchaser Indemnified Person or any Seller
Indemnified Persons for any punitive, exemplary, consequential, incidental or
special damages by virtue of any breach of any representation, warranty,
covenant or agreement in or pursuant to this Agreement, or any other agreement,
document or instrument executed and delivered pursuant hereto or in connection
herewith or the Closing; provided that the foregoing shall not (i) be deemed to
limit the obligation of any party hereunder to indemnify for Losses constituting
punitive, consequential or special damages awarded to any third-party claimant,
or (ii) apply with respect to claims for fraud or fraud in the inducement or
similar claims.
SECTION 6.07. EXCLUSIVE REMEDY. Each party hereto agrees that the sole
liability of any other party hereto for any claim with respect to the
transactions contemplated under this Agreement from and after the Closing Date
shall be limited to indemnification under this Article VI; provided, however,
that the foregoing shall not (iii) be deemed to prohibit or restrict the
availability of any equitable remedies (including specific performance) in the
event of any breach (or threatened breach) of (x) the obligations by a party to
effect the Purchase and Sale, or (y) Section 3.02, or (iv) apply with respect to
claims for fraud or fraud in the inducement or similar claims.
ARTICLE VII: MISCELLANEOUS
SECTION 7.01. FURTHER ACTIONS. From time to time after the Closing
Date, the parties hereto shall execute and deliver (or cause to be executed and
delivered) such other and further agreements, instruments, certificates or other
documents and shall take (or cause to be taken) such other and further actions,
as any other party hereto may reasonably request in order to further effect
and/or evidence the Purchase and Sale or to otherwise consummate and give effect
to the covenants and agreements set forth herein.
SECTION 7.02. EXPENSES. Except as otherwise expressly set forth
herein, each party hereto shall bear its own costs and expenses, including but
not limited to legal fees, accountants' fees, and other costs and expenses with
respect to the negotiation, execution and the delivery of this Agreement and the
consummation of the Purchase and Sale.
SECTION 7.03. ENTIRE AGREEMENT. This Agreement and any other documents
executed in connection herewith contain the entire agreement among the parties
hereto with respect to the subject matter
18
<PAGE>
hereof and thereof, and supersede all prior agreements, arrangements and
understandings with respect thereto.
SECTION 7.04. NOTICES. Any notice or other communication which is
required or permitted hereunder shall be in writing and shall be deemed to have
been delivered and received (x) on the day of (or, if not a business day, the
first business day after) its having been personally delivered or telecopied to
the following address or telecopy number, (y) on the first business day after
its having been sent by overnight delivery service to the following address, or
(z) if sent by regular, registered or certified mail, when actually received at
the following address:
If to Purchaser:
[c/o] Houston Interweb Design, Inc.
Attn: Lee Magness
1770 St. James, Suite 420
Houston, Texas 77056
Telecopier No. (713) 627-2744
Telephone No. (713) 627-9494
If to Seller (prior to Closing):
Axis Technologies Corp.
Attn: Mike Minihan
9800 Centre Parkway, Suite 800
Houston, Texas 77036
Telecopier No. (713) 773-0095
Telephone No. (713) 773-1200
If to Seller (after Closing):
[c/o] Mike Minihan
4800 Sugar Grove Blvd., Suite 100
Stafford, Texas 77477
Telecopier No. (281) 491-9249
Telephone No. (281) 491-5240
Any party may by notice change the address or telecopier number to which notices
or other communications to it are to be delivered, telecopied or sent.
SECTION 7.05. GOVERNING LAW; MEDIATION. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas (other than the
choice of law principles thereof). In the event of any dispute arising from or
in any manner connected with this Agreement the parties will first endeavor, in
good faith, to promptly resolve the dispute through informal negotiation. If
the parties are unable to resolve such dispute within a 45 day period (or within
such extended period of time as the parties shall agree upon in writing), the
parties will then submit the matters to mediation to be conducted in Houston,
Texas and will have 5 business days from the end of such 45 day (or longer if
jointly extended) period to submit to each other a written list of acceptable
qualified mediators not affiliated with any of the parties. Within 10 days from
the date of receipt of such list, the parties shall attempt to agree on a
mediator. If no mediator has been selected under this procedure, the parties
agree jointly to request a State or Federal District Judge of their choosing in
Houston, Texas (or if they cannot agree, the Administrative Judge of Harris
County, Texas) to supply a list of potential qualified mediators. Within 5
business days of receipt of the list, the parties shall rank the proposed
19
<PAGE>
mediators in numerical order of preference, shall simultaneously exchange such
list and shall select as the mediator the individual receiving the highest
combined ranking. If such mediator is not available to serve, they shall
proceed to contact the mediator who was next highest in ranking until they are
able to select a mediator. Mediation, as that term is used herein, means a
forum in which the mediator conducts a non-binding conference to facilitate
communication between the parties to promote a voluntary settlement of their
dispute. The parties agree to participate in the mediation procedure to its
conclusion. The mediation shall be terminated (i) by the execution of a
settlement agreement by the parties, (ii) by a declaration of the mediator that
the mediation is terminated, or (iii) by a written declaration of a party to the
effect that the mediation process is terminated at the conclusion of one full
day's mediation session. Even if the mediation is terminated without a
resolution of the dispute, the parties agree not to terminate negotiations and
not to commence any legal action or seek other remedies prior to the expiration
of five days following the mediation. All fees and costs of the mediation will
be assessed and paid, in the absence of the parties' agreement to the contrary,
equally by all parties. Notwithstanding the foregoing, any party may commence
litigation prior to the expiration of any applicable time period described above
if litigation could be barred by an applicable statute of limitations or in
order to request any equitable relief, including, without limitation, an
injunction to prevent irreparable harm.
SECTION 7.06. ASSIGNMENT. This Agreement, and the respective rights and
obligations of the parties hereunder, may not be assigned or delegated otherwise
than by operation of law by any party hereto without the prior written consent
of the other party hereto. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and permitted
assigns.
SECTION 7.07. REMEDIES. (A) The parties hereto acknowledge that the
remedy at law for any breach of their respective obligations to effect the
Purchase and Sale is and will be insufficient and inadequate and that the
parties hereto shall be entitled to equitable relief, in addition to remedies at
law. Each party hereto hereby waives the defense that there is an adequate
remedy at law in the event of any action to enforce the provisions of this
Agreement to effect the Purchase and Sale. Seller hereby acknowledges that the
Purchased Assets are unique and cannot be obtained on the open market. Without
limiting any remedies that any party hereto may otherwise have hereunder or
under applicable law in the event that any other party hereto refuses to perform
its obligations under this Agreement to consummate the Purchase and Sale, such
parties shall have, in addition to any other remedy at law or in equity, the
right to specific performance.
(B) Each party hereto hereby acknowledge that any violation or
threatened violation by it of Section 3.02 will cause irreparable harm to the
other party hereto and that the remedy at law for any such violation or
threatened violation will be inadequate. Each party therefore agrees that the
other party hereto shall be entitled to temporary and permanent injunctive
relief for any such violation or threatened violation without the necessity of
proving (i) that such other party will be irreparably injured thereby, (ii) that
the remedy at law for such violation or threatened violation is inadequate or
(iii) actual damages.
SECTION 7.08. WAIVERS AND AMENDMENTS. Any waiver of any term or condition
of this Agreement, and any amendment or supplementation of this Agreement, shall
be effective only if expressed in a writing executed by each of the parties
hereto. A waiver of any breach or failure to enforce any of the terms or
conditions of this Agreement shall not in any way affect, limit or waive a
party's rights hereunder at any time to enforce strict compliance thereafter
with every term or condition of this Agreement. No failure or delay by any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.
SECTION 7.09. THIRD PARTY RIGHTS. Notwithstanding any other provision of
this Agreement, this Agreement shall not create benefits on behalf of any
employee, agent or representative of any person or entity not party hereto
(including, without limitation, any counsel, accountant, broker, finder,
appraiser or
20
<PAGE>
investment banker), and this Agreement and the shall be effective only as
between the parties hereto, their successors and permitted assigns.
SECTION 7.10. ILLEGALITIES. In the event that any provision contained in
this Agreement shall be determined to be invalid, illegal or unenforceable in
any respect for any reason, the validity, legality and enforceability of any
such provision in every other respect, and the remaining provisions of this
Agreement, shall not, at the election of the party for whose benefit the
provision exists, be in any way impaired.
SECTION 7.11. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement. This Agreement shall become effective when each party hereto shall
have received counterparts hereof signed by all of the other parties hereto.
In Witness Whereof, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective authorized officers as of the
day and year first above written.
SELLER: PURCHASER:
AXIS TECHNOLOGIES CORP. HOUSTON INTERWEB DESIGN, INC.
By: By:
------------------------------ -------------------------------
Mike Minihan Lee Magness
President Chief Financial Officer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HOUSTON
INTERWEB DESIGN, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 163,114
<SECURITIES> 0
<RECEIVABLES> 434,334
<ALLOWANCES> 304,519
<INVENTORY> 0
<CURRENT-ASSETS> 545,956
<PP&E> 50,576
<DEPRECIATION> 4,657
<TOTAL-ASSETS> 1,054,375
<CURRENT-LIABILITIES> 714,550
<BONDS> 0
0
0
<COMMON> 2,303,200
<OTHER-SE> (7,050)
<TOTAL-LIABILITY-AND-EQUITY> 1,054,375
<SALES> 994,876
<TOTAL-REVENUES> 994,876
<CGS> 0
<TOTAL-COSTS> 2,107,272
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 304,519
<INTEREST-EXPENSE> 8,125
<INCOME-PRETAX> (1,112,396)
<INCOME-TAX> (2,498)
<INCOME-CONTINUING> (1,112,396)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,109,898)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
