<PAGE>
As filed with the Securities and Exchange Commission on June 11, 1999
Registration No. 333-67871
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________________________
FORM SB-2
Registration Statement
Under the Securities Act of 1933
__________________________
HOUSTON INTERWEB DESIGN, INC.
(Exact name of Registrant as specified in its charter)
(AMENDMENT NO. 3)
TEXAS 7310 76-0532709
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
HARRY L. WHITE
HOUSTON INTERWEB DESIGN, INC. HOUSTON INTERWEB DESIGN, INC.
1770 ST. JAMES PLACE, SUITE 420 1770 ST. JAMES, SUITE 420
HOUSTON, TEXAS 77056 HOUSTON, TEXAS 77056
(713) 627-9494 (713) 627-9494
(Address and telephone number (Name, address and telephone number
of principal executive offices) of agent for service)
Copies To:
MARGARET C. FITZGERALD
BREWER & PRITCHARD, P.C.
1111 BAGBY, 24TH FLOOR
HOUSTON, TEXAS 77002
PHONE (713) 209-2911
FACSIMILE (713) 209-2921
_________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box
and list the Securities Act registration statement number of earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE BEING OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1)(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock to be resold . 252,633 .0156799 $3,961
Issuance of Common Stock. . 166,667 .0156799 $2,613.32 --
TOTAL . . . . . . . . . . . 419,300 .0156799 $6,574 $100.00
</TABLE>
_________________
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) The book value of the Common Stock, calculated pursuant to Rule 457(f).
(3) Previously paid with the original filing of the Form SB-2 on November 24,
1998.
_________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 11, 1999
HOUSTON INTERWEB DESIGN, INC.
RESALE OF 252,633 SHARES OF COMMON STOCK HELD BY SELLING STOCKHOLDERS
ISSUANCE OF 166,667 SHARES OF COMMON STOCK TO RECISSION OFFEREES
This prospectus relates to the resale of 252,633 shares of company
common stock currently outstanding, which may be sold by the selling
stockholders; and the issuance of up to 166,667 shares of common stock to
rescission offerees.
Currently, there is no market for the company's shares.
____________________
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 2.
____________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
____________________
The date of this prospectus is June 11, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
WE MAY HAVE VIOLATED SECURITIES LAWS; . . . . . . . . . . . . . . . . . . . . . .2
ACCEPTANCE OF THE RESCISSION OFFER COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . .2
WE HAVE A LIMITED OPERATING HISTORY WITH A HISTORY OF LOSSES AND
WE ANTICIPATE LOSSES UNTIL AT LEAST THE YEAR 2000 . . . . . . . . . . . . . . . .2
OUR WORKING CAPITAL REQUIREMENTS MAY REQUIRE US TO PURSUE ADDITIONAL
FINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING WE WILL BE ABLE TO
CONTINUE AS A GOING CONCERN . . . . . . . . . . . . . . . . . . . . . . . . . . .3
OUR BUSINESS MODEL IS UNPROVEN AND DEPENDS ON THE MARKET'S ACCEPTANCE OF OUR
SITEBLAZER NETWORK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ACCEPTANCE OF OUR SITEBLAZER NETWORK. . . . . . . . . . . . . . . . . . . . . . .3
RISK OF SYSTEM FAILURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
OUR ABILITY TO EFFECTIVELY MANAGE GROWTH IN OUR OPERATIONS. . . . . . . . . . . .5
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL . . . . . . . . . . . . . . . . . . . .5
WE DEPEND ON THIRD PARTIES TO DISTRIBUTE OUR PRODUCTS AND SERVICES. . . . . . . .5
WE ARE DEPENDENT ON OUR PROPRIETARY RIGHTS. . . . . . . . . . . . . . . . . . . .5
SHARES ELIGIBLE FOR FUTURE SALE . . . . . . . . . . . . . . . . . . . . . . . . .6
THERE IS NO MARKET FOR OUR COMMON STOCK AND IF ONE DEVELOPS IT WILL LIKELY BE
VOLATILE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
PENNY STOCK REGULATIONS MAY DECREASE YOUR ABILITY TO SELL OUR COMMON STOCK. . . .6
CONTINUED CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS . . . . . . .7
LACK OF DISINTERESTED, INDEPENDENT DIRECTORS. . . . . . . . . . . . . . . . . . .7
Note Regarding Forward-looking Statements. . . . . . . . . . . . . . . . . . . . . .7
Rescission Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Management's Discussion And Analysis of Financial Condition And Results of
Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Shares Eligible For Future Sale. . . . . . . . . . . . . . . . . . . . . . . . . . 24
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
</TABLE>
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ABOUT THE COMPANY THAT DIFFERS FROM, OR ADDS TO, THE
INFORMATION IN THIS PROSPECTUS OR IN OUR DOCUMENTS THAT WE FILED WITH THE
SEC. ACCORDINGLY, IF ANYONE DOES GIVE YOU DIFFERENT OR ADDITIONAL
INFORMATION YOU SHOULD NOT RELY ON IT. IF YOU ARE IN A JURISDICTION WHERE IT
IS UNLAWFUL TO BUY THE SECURITIES OFFERED BY THIS PROSPECTUS, OR IF YOU ARE A
PERSON TO WHOM IT IS UNLAWFUL TO DIRECT SUCH ACTIVITIES, THEN THE OFFER
PRESENTED BY THIS PROSPECTUS DOES NOT EXTEND TO YOU. THE INFORMATION IN THE
PROSPECTUS SPEAKS ONLY AS OF THIS DATE UNLESS THE INFORMATION SPECIFICALLY
INDICATES THAT ANOTHER DATE APPLIES.
<PAGE>
PROSPECTUS SUMMARY
To understand this offering fully, you should read the entire prospectus
carefully, including the risk factors and financial statements. The
company's principal executive office is located at 1770 St. James Place,
Suite 420, Houston, Texas 77056, (713) 627-9494. Unless otherwise indicated,
this prospectus reflects a 165-for-one forward stock split that occurred in
August 1998, and assumes purchasers being offered the right to rescind will
elect to retain their shares.
KEY FACTS
<TABLE>
<S> <C>
The Company . . . . . . . . . . . . . . . . Houston Interweb Design is a web
site development company
specializing in the design,
creation and marketing of cost-
effective Internet products.
Common stock to be resold . . . . . . . . . 252,633 shares by selling stockholders.
Common stock subject to rescission offer. . 166,667 shares
Common stock outstanding . . . . . . . . . 16,448,300 shares
Risk factors . . . . . . . . . . . . . . . An investment in the shares of common
stock involves a high degree of risk.
Prospective investors should review
carefully the information set forth
under "Risk Factors" beginning on page 2.
No proceeds . . . . . . . . . . . . . . . . The resale will result in no proceeds
to the company.
Lack of market. . . . . . . . . . . . . . . There is currently no market for the
common stock, and there is no
assurance that any market will
develop. If a market develops for the
company's securities, it will likely
be limited, sporadic and highly
volatile.
</TABLE>
SUMMARY FINANCIAL DATA
THE FINANCIAL INFORMATION PRESENTED BELOW IS DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS OF THE COMPANY FOR THE PERIOD FROM INCEPTION (AUGUST 9,
1996) THROUGH JULY 31, 1997, AND FOR THE YEAR ENDED JULY 31, 1998, AND
UNAUDITED INFORMATION FOR THE SIX MONTHS ENDED JANUARY 31, 1998, AS COMPARED
TO THE SIX MONTHS ENDED JANUARY 31, 1999.
<TABLE>
<CAPTION>
AUDITED UNAUDITED
------- ---------
PERIOD ENDED YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JULY 31, 1997 JULY 31, 1998 JANUARY 31, 1998 JANUARY 31, 1999
------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . $185,994 $628,070 $262,437 $258,747
Total Expenses . . . . . . . . . 225,824 1,402,169 277,069 770,029
-------- --------- -------- ---------
Income (Loss) Before
Federal Income Tax . . . . . . (69,830) (774,099) (14,632) (511,282)
Federal Income Tax (Benefit) . . (4,998) 7,496 1,045 2,498
Net Loss . . . . . . . . . . . . $(64,832) $(81,595) $(13,587) $(508,784)
-------- --------- -------- ---------
-------- --------- -------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
JULY 31, 1997 JULY 31, 1998 JANUARY 31, 1999
------------- ------------- ----------------
<S> <C> <C> <C>
Working Capital Deficits . . $(74,061) $(106,092) $(297,219)
Total Assets . . . . . . . . 88,338 159,369 113,235
Long-Term Liabilities . . . . -- -- --
Shareholders' Deficit . . . . (60,832) (92,427) (278,870)
</TABLE>
RISK FACTORS
WE MAY HAVE VIOLATED SECURITIES LAWS
The company sold 166,667 shares of common stock in February 1999. The
securities sold in February did not have a registration statement on file
with the SEC. The federal securities laws require registration of securities
unless an appropriate exemption from the registration requirements of those
laws is available. If an exemption did not exist for the sale of these
securities, the company may have violated the registration requirements. If
so, purchasers could seek rescission of their purchase and recover money paid
for the securities. The company makes no admission of any violation of
federal securities laws and no investor has sought rescission of any
purchase.
ACCEPTANCE OF RESCISSION OFFER COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR FINANCIAL CONDITION.
The company intends to make a rescission offer to the February investors
by means of this prospectus. Should those purchasers accept the rescission
offer, the company would need to pay those investors up to approximately
$250,000 (plus interest and other costs), which could have a material adverse
effect on our financial condition.
WE MAY BE UNABLE TO INSULATE OURSELVES FROM LIABILITY UNDER FEDERAL LAW
To the extent that claims for federal securities violations are not time
barred, we may not be able to insulate ourselves from liability under federal
law because the SEC has taken the position that liability under federal law
is not avoided because the potentially liable person makes a registered
rescission offer.
WE HAVE A LIMITED OPERATING HISTORY WITH A HISTORY OF LOSSES AND WE
ANTICIPATE LOSSES UNTIL AT LEAST THE YEAR 2000
We were incorporated in August 1996, and our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies with limited operating histories, particularly
companies in the new and rapidly evolving markets for the Internet and
Internet services. Although we have experienced revenue growth, growth rates
may not be sustained and are not necessarily indicative of future operating
results. Since our inception, we have had an accumulated deficit of
$1,355,211 and as of January 31, 1999, had cash in the amount of $43,640.
Given the level of planned operating and capital expenditures, we anticipate
that we will continue to incur operating losses at least into the year 2000.
If revenues do not grow at anticipated rates, if increases in operating
expenses precede or are not subsequently followed by commensurate increases
in revenues, or if we are unable to adjust operating expense levels
accordingly, our business, results of operations, and financial condition
will be materially and adversely affected.
OUR WORKING CAPITAL REQUIREMENTS MAY REQUIRE US TO PURSUE ADDITIONAL FINANCING
At January 31, 1999, we had a working capital deficit of $297,219. Our
ability to maintain adequate working capital will be largely dependent upon
our results of operations. Net cash used in the operation of our business
was $275 for the period from inception (August 9, 1996) to July 31, 1997, as
compared to net cash provided by operating activities of $3,169 for the year
ended July 31, 1998. For the six-month period ended January 31, 1998, net
cash provided in the operation of our business was $39,228 and as compared to
net cash used in the operation of our business of $182,992 for the six months
ended January 31, 1999. We may need to raise additional capital to fund
future operations and to satisfy future capital requirements. If we are
unable to secure sufficient capital in the future, our ability to pursue our
business strategy will be limited and our results from operations may be
impaired. The failure to raise any needed additional funds will likely have
a material adverse effect on our company. In addition, it is possible that
raising additional funds will result in substantial additional dilution.
2
<PAGE>
OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING WE WILL BE ABLE TO
CONTINUE AS A GOING CONCERN
The financial statements included herein have been prepared assuming the
company will be able to continue as a going concern. The company had a
working capital deficit of $106,092 and a stockholders' deficit of $92,427 at
July 31, 1998, and experienced significant losses in fiscal 1998 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.
OUR BUSINESS MODEL IS UNPROVEN AND DEPENDS ON THE MARKET'S ACCEPTANCE OF OUR
SITEBLAZER NETWORK
Our business model is to generate revenues by designing and developing
Internet web sites and placing these web sites in the SITEBLAZER network.
The profit potential of our business model is unproven, and, to be
successful, we must, among other things, develop and market programs that
achieve broad market acceptance and recognition by our customers, Internet
advertisers, commerce partners and Internet users. Market acceptance of the
SITEBLAZER network will depend, in large part, on the market's acceptance of
our search engine. Our ability to generate significant revenues from
SiteBlazer.com will depend, in part, on the development of the SITEBLAZER
network and our ability to attract search engines and have web sites generate
sufficient user traffic with characteristics that are attractive to such
search engines.
RISK OF SYSTEM FAILURE
The performance of our servers and networking hardware and the Internet
infrastructure is critical to our business and reputation and our ability to
attract web users, new customers and commerce partners to our web sites. Any
system failure that causes an interruption in service or a decrease in
responsiveness of our web sites could result in less traffic on our web sites
and, if sustained or repeated, could impair our reputation and the
attractiveness of our brand name.
Our servers are vulnerable to computer viruses, break-ins, and similar
disruptions from unauthorized tampering. In addition, our operations are
dependent upon our ability to protect our computer systems against damage
from fire, power loss, telecommunications failures, vandalism and other
malicious acts, and similar unexpected adverse events. Finally, to the
extent we do not effectively address any capacity constraints, such
constraints could cause system failure. The occurrence of any of these
events could result in interruptions, delays or cessation in services.
3
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4
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OUR ABILITY TO EFFECTIVELY MANAGE GROWTH IN OUR OPERATIONS
We have experienced rapid growth in our operations. This rapid growth
has placed, and is expected to continue to place, a significant strain on our
managerial, operational and financial resources. We have grown from three
employees as of August 31, 1996, to 21 employees as of May 3, 1999. We
expect that the number of employees will continue to increase for the
foreseeable future, including the hiring of new programmers, graphic
designers and other personnel. Furthermore, we must continue to improve our
financial and management controls, reporting systems and procedures, and
expand, train and manage our work force.
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL
Our future success depends, in significant part, upon the continued
service of our key technical, sales and senior management personnel,
particularly Harry L. White, chief executive officer and chairman of the
board of directors, Lee A. Magness, chief financial officer, and Richard J.
Finn, chief technology officer, all of whom have entered into employment
agreements which expire in August 2001. The loss of the services of one or
more of the our key personnel could have a material adverse effect on our
business, results of operations and financial condition. We do not maintain
"key man" life insurance policies for Messrs. White, Magness and Finn. Our
future success also depends on our continuing ability to attract and retain
highly qualified technical, sales and marketing, customer support, financial
and accounting, and managerial personnel.
WE DEPEND ON THIRD PARTIES TO DISTRIBUTE OUR PRODUCTS AND SERVICES
We rely on arrangements with independent resellers and licensees to
market and distribute our software products. Under our arrangements with
independent resellers and licensees, we typically grant a non-exclusive
license to distribute our software technology and restrict the
reseller's/licensee's ability to distribute software programs in competition
with us. These independent resellers and licensees have only recently begun
to offer our products and, as such, have extremely limited experience in
distributing our software technology. We currently have agreements with
Websource Media, L.L.C. Harry Bauge, Eduardo F. Azcoitia, West Marketing
Services Corp. and Axis Technologies Corp. For the fiscal year ended July
31, 1998, Websource Media and Bauge accounted for an aggregate of $288,572 or
46% of revenues. The loss of one or more of the licensees or resellers that
represent a material portion of our revenues could have a material adverse
effect on our business, results of operations and financial condition. In
addition, the non-payment or late payment of amounts due by a significant
licensee or reseller could have a material adverse effect on our business.
We cannot accurately predict the timing or the extent of the success of these
resellers and licensees.
WE ARE DEPENDENT ON OUR PROPRIETARY RIGHTS
We regard our intellectual property as critical to our success, and we
expect to rely upon trademark, service mark, copyright and trade secret laws
in the United States and other jurisdictions to protect our proprietary
rights. If our trademark registrations are not approved or granted due to
the prior issuance of trademarks to third parties or for other reasons, we
may not be able to enter into arrangements with such third parties on
commercially reasonable terms allowing the company to continue to use such
trademarks. Trademark, copyright and trade secret protection may not be
available in every country in which our programs are available. In addition,
although we plan to protect our proprietary rights through confidentiality
agreements with employees, consultants, advisors, licensees, resellers and
others, the confidentiality agreements may not provide adequate protection
for our proprietary rights.
5
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of May 3, 1999, a total of 16,448,300 shares of common stock were
outstanding. The 252,633 shares of common stock held by the selling
shareholders will be eligible for immediate resale in the public market. All
of the remaining 16,195,667 shares of common stock outstanding will be
subject to resale pursuant to the provisions of Rule 144. Sales of common
stock in the public market may have an adverse effect on prevailing market
prices for the common stock.
THERE IS NO MARKET FOR OUR COMMON STOCK AND IF ONE DEVELOPS IT WILL LIKELY BE
VOLATILE
Prior to this offering, there has been no public market for the
company's common stock and there can be no assurance that an active public
market for the common stock will develop. The market prices for securities
of Internet related companies have been highly volatile and the market has
experienced significant price an volume fluctuations that are unrelated to
the operating performance of Internet related companies. In the past,
following periods of volatility in the market place of a specific company's
securities, securities class action litigation has often been brought against
that company. In the event such litigation were to be brought against the
company it could result in substantial costs and divert management's
attention and resources, which could have a material adverse effect upon the
company's business, financial condition and result of operations.
PENNY STOCK REGULATIONS MAY DECREASE YOUR ABILITY TO SELL OUR COMMON STOCK
If our common stock trades below $5.00 per share, it may become subject
to the penny stock regulations. If our shares are subject to the penny stock
regulations, the market liquidity in them could be adversely affected because
the rules require broker-dealers to make a special suitability determination
for the purchaser and have received the purchaser's written consent prior to
the sale. This makes it more difficult administratively for broker-
6
<PAGE>
dealers to buy and sell stock subject to the penny stock regulations on
behalf of their customers. Consequently, the regulations may affect the
ability of broker-dealers to sell our shares and may affect the ability of
holders to sell them in the secondary market.
CONTINUED CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
Mr. White owns 4,448,000 shares of company common stock, Mr. Finn owns
4,448,000 shares of company common stock, and Mr. Magness owns 4,207,000
shares of company common stock, which is collectively approximately 81% of
the outstanding common stock. As a result, these stockholders could exercise
control over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions.
This concentration of ownership may have the effect of delaying or preventing
a change in control.
LACK OF DISINTERESTED, INDEPENDENT DIRECTORS
All of our directors have a direct financial interest in the company.
While we believe that our current directors will be able to exercise their
fiduciary duty, we intend to add independent, disinterested directors to
serve on the board of directors in the near future.
FOR ALL OF THESE REASONS, AND OTHERS SET FORTH BELOW, ANY PURCHASE OF
THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER
CAREFULLY THESE RISK FACTORS TOGETHER WITH ALL OF THE OTHER INFORMATION
INCLUDED IN THIS PROSPECTUS BEFORE YOU DECIDE TO PURCHASE SHARES OF OUR
COMMON STOCK. OUR FAILURE TO ADDRESS ANY OF THESE RISKS COULD HAVE AN
ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus, in particular in
the "Risk Factors" and "Business sections, discuss future expectations,
contain projections of results of operation or financial condition or state
other "forward-looking" information. These statements are subject to known
and unknown risks, uncertainties, and other factors that could cause the
actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and
is derived using numerous assumptions. In our opinion, important factors
which may cause actual results to differ from projections include:
- the success or failure of our management's efforts to implement their
business strategy;
- our ability to enter into joint ventures or partnerships with
established industry participants;
- our ability to raise sufficient capital to meet operating
requirements;
- the uncertainty of consumer demand for our technology;
- our ability to protect our intellectual property rights;
- our ability to compete with major established companies;
- the effect of changing economic conditions;
- the effect of changing technology;
- our ability to attract and retain quality employees; and
- other risks which may be described in future filings with the SEC.
We do not promise to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could affect
those statements.
7
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THE RESCISSION OFFER
BACKGROUND
In February, 1999, the company sold 166,667 shares of common stock (the
"Rescission Securities") to two purchasers in a private offering (the
"Rescission Offerees"). The Rescission Securities were sold to the
Rescission Offerees in order to provide the company with working capital.
The Rescission Securities were not registered under the 1933 Act or the
securities laws of any state, therefore, the Rescission Offerees may have the
right under the 1933 Act and applicable state securities laws to rescind
their purchases of the Rescission Securities to the extent an exemption from
registration was not available. The Company estimates that if all Rescission
Offerees accept the Rescission Offer, the Company would pay approximately
$250,000, exclusive of interest, to repurchase all of the Rescission
Securities.
LEGAL RIGHTS OF RESCISSION OFFEREES AND CONSEQUENCES OF ACCEPTANCE OR
NON-ACCEPTANCE
Under federal and state securities laws, the sale of securities, such as
the Rescission Securities, must either be registered or exempt from
registration. Absent the availability of an exemption from registration, the
sale of securities in an unregistered transaction is a violation of federal
and state securities laws; the purchaser's remedy for this violation is to
bring an action against the seller for rescission within the period specified
under the applicable statute of limitations. If successful, a purchaser
would receive the price paid for the security plus interest at the statutory
rate less any distributions made with respect to the security or, if the
purchaser previously sold the security, the purchaser would receive the price
paid for the security plus interest at the statutory rate less the proceeds
received upon sale. Under federal law, an action for rescission must be
brought within one year of the issuance of the shares in violation of the
registration provisions, but in no event more than three years after the
shares were offered to investors. State statutes of limitation vary.
The company is making the Rescission Offer in an attempt to insulate the
company from future civil liability for rescission. Under many state
statutes, the Rescission offer, if carried out in compliance with the
applicable statutes, extinguishes civil liability for rescission, regardless
of whether the rescission offer is accepted.
The company may not be able to insulate itself from liability under
federal securities laws because the SEC has taken the position that liability
under federal law is not avoided because a potentially liable person makes a
registered rescission offer. Rescission Offerees should be aware, however,
that because the company, pursuant to the Rescission Offer, is
unconditionally offering to Rescission Offerees exactly what they could
receive in an action for rescission, under relevant case law there is
authority that suggests that Rescission Offerees may be estopped from
bringing any future claim for rescission. The company expects to defend any
future action for rescission on this basis. Alternatively, there is some
authority that holds that Rescission Offerees may be deemed to have released
the company from future liability. In any event, Rescission Offerees who
subsequently bring a rescission action may be limited in their recovery to no
more than they would have received had they accepted the Rescission Offer.
Thus, a Rescission Offeree who accepts the Rescission Offer may retain a
federal cause of action but may not be entitled to additional damages and, in
the view of the SEC, a Rescission Offeree who does not accept the Rescission
Offer may retain a federal cause of action for rescission but any action may
be subject to the defenses described above. In addition, in making a
decision to accept or reject the Rescission Offer, Rescission Offerees should
be cognizant of the statute of limitations and the possibility that the
company may claim that an exemption from registration was available with
respect to a given sale of Rescission Securities.
Rescission Offerees should also be aware that if they successfully
allege that a material misrepresentation or omission occurred in connection
with the sale of the Rescission Securities, they may have additional causes
of action with respect to the sale of the Rescission Securities under the
antifraud provisions of state and federal securities laws. If a material
misrepresentation of fact or omission of fact occurred in connection with the
sale of the Rescission Securities, causes of action for common law fraud may
also exist.
TAX CONSEQUENCES
The federal income tax consequences of accepting the Rescission Offer
are uncertain, and the consequences to each Rescission Offeree will depend,
in part, on the circumstances and status of the Rescission Offeree.
Generally, Rescission Offerees who transfer their Rescission Securities to
the company in exchange for the price paid by the Rescission Offeree for the
Rescission Securities, plus interest at the statutory rate, less any
distributions with respect to the Rescission Securities, will realize gain
equal to the excess of (a) the aggregate amount paid by the company to the
Rescission Offeree for the Rescission Securities, over (b) the price
originally paid by the Rescission Offeree for such securities. If the
Rescission Offeree previously sold the Rescission Securities, the Rescission
Offeree who accepts the Rescission Offer will realize gain an amount equal to
the aggregate amount paid by the company to the Rescission Offeree.
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Any gain realized as a result of accepting the Rescission Offer must be
recognized. There is no direct authority, however, regarding the character
of the gain for federal income tax purposes. Nevertheless, under general
federal income tax principles, Rescission Offerees who hold their Rescission
Securities as a capital asset on the date of the exchange (or, in the case of
a prior sale of Rescission Securities, Rescission Offerees who held their
Rescission Securities as a capital asset on the date of the prior sale or
exchange), should be entitled to report gain recognized as a result of
accepting the Rescission Offer as a distribution in redemption of, or in
exchange for, the Rescission Securities, subject to the provisions and
limitations of Section 302 of the Internal Revenue Code of 1986, as amended.
The discussion concerning certain federal income tax matters does not
address all potentially relevant federal income tax matters, or the
consequences to persons who, because of their circumstances or status are
subject to special federal income tax treatment. The discussion does not
address state, local or foreign tax issues, and is not intended as tax advice
to any person. Consequently, RESCISSION OFFEREES ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF ACCEPTING THE
RESCISSION OFFER, INCLUDING TAX REPORTING REQUIREMENTS, THE APPLICATION AND
EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS, AND THE
IMPLICATIONS OF ANY CHANGES IN THE TAX LAWS.
RESCISSION OFFER
The company hereby offers the Rescission Offerees the right to rescind
their purchases of the Rescission Securities. Rescission Offerees who accept
the Rescission Offer shall be entitled to exchange their Rescission
Securities for cash in the amount of the price paid, plus simple interest at
the rate of 9% per annum, from the date the Rescission Securities were
purchased, less the Rescission Securities. Rescission Offerees who accept
the Rescission Offer but disposed of their Rescission Securities at a price
less than the original purchase price paid to the company are entitled to
receive cash in the amount of such difference, plus simple interest at the
rate of 9% per annum on the difference from the date of disposition. As of
the effective date of the prospectus $250,000 will be held in escrow with Texas
Commerce Bank, N.A. for payment to Rescission Offerees who elect to rescind
their purchases.
The Rescission Offer will terminate at 5:00 p.m. local time, Houston,
Texas on July 27, 1999 (the "Rescission Expiration Date"). Accordingly,
Rescission Offerees will have thirty (30) business days to respond to the
Rescission Offer. Rescission Offerees who have not previously disposed of
their Rescission Securities may accept the Rescission Offer only be
completing the Rescission Agreement accompanying this prospectus as
Attachment A and returning it to the company by 5:00 p.m. on the Rescission
Expiration Date, together with the certificates and documents evidencing the
Rescission Securities, as adjusted to give effect to any distributions paid
with respect to such Rescission Securities, properly endorsed for transfer.
Rescission Offerees who have previously disposed of their Rescission
Securities may accept the Rescission Offer only by completing the Rescission
Agreement accompanying this prospectus and returning it to the company by
5:00 p.m. on the Rescission Expiration Date.
Any Rescission Offeree who fails to return a signed Rescission Agreement
or, if required, fails to tender the Rescission Securities by the Rescission
Offer Expiration Date shall be deemed to have rejected the Rescission Offer.
All questions as to the validity, form, eligibility (including time of
Receipt) and acceptance of the Rescission Agreement will be determined by the
company, which determination will be final and binding. The company reserves
the absolute right to reject any or all Rescission Agreements not properly
completed or if their acceptance, in the opinion of the counsel to the
company, would be unlawful. The company also reserves the right to waive any
irregularity in the Rescission Agreement. The company's interpretation of
the terms and conditions of the Rescission Agreement (including the
instructions in the Rescission Agreement) shall be final and binding. The
company shall not be under any duty to give notification of defects in
connection with Rescission Agreements or incur any liability for failure to
give such information.
Upon the terms and subject to the conditions of the Rescission Offer,
payment of the purchase price and interest to Rescission Offerees who elect
to rescind will be made as soon as practicable after receipt by the Company
of the Rescission Agreement and the certificates and/or documents evidencing
the Rescission Securities.
Rescission Offerees who elect not to accept the Rescission Offer need
not submit a response to the Rescission Offer. Rescission Offerees who do
not respond to the Rescission Offer will continue to be the owners of the
Rescission Securities and will hold Rescission Securities subject to the
restrictions which were in effect at the time of their issuance.
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UNDER TEXAS LAW, RESCISSION OFFEREES MAY NOT SUE FOR LIABILITY UNDER
ARTICLE 581-33 OF VERNON'S ANN. TEXAS CIV. ST. UNLESS THEY ACCEPT THE
RESCISSION OFFER AND DO NOT RECEIVE THE AMOUNT OF THE OFFER, OR THEY REJECT
THE RESCISSION OFFER IN WRITING WITHIN 30 DAYS OF ITS RECEIPT AND EXPRESSLY
RESERVE IN THE REJECTION THE RIGHT TO SUE, IN WHICH CASE THEY MAY SUE WITHIN
ONE YEAR FROM THE REJECTION.
USE OF PROCEEDS
The company will not receive any proceeds from the resale of common
stock by the selling stockholders.
DIVIDEND POLICY
The company has not paid any dividends on its common stock and expects
to retain any future earnings for use in its business. Future dividend
policy will be determined by the board of directors and will depend on a
number of factors, including the company's future earnings, capital
requirements, financial condition and future prospects, restrictions on
dividend payments pursuant to any of the company's future credit or other
agreements, and such other factors as the board of directors may deem
relevant.
CAPITALIZATION
The following table sets forth the capitalization of the company at
January 31, 1999. This table should be read in conjunction with the
company's financial statements and notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
JANUARY 31, 1999
<S> <C>
Long-term debt . . . . . . . . . . . . . . . . . . . . . . $ -
Shareholders deficit:
Common Stock, no par value,
50,000,000 shares authorized; 16,281,633
shares issued and outstanding. . . . . . . . . . . . . 1,090,950
Stock subscription receivables . . . . . . . . . . . . (14,609)
Accumulated deficit. . . . . . . . . . . . . . . . . . (1,355,211)
-----------
-----------
Total shareholders' equity (deficit) . . . . . . . . . $ (278,870)
-----------
-----------
Total capitalization . . . . . . . . . . . . . . . . . . . $ (812,080)
</TABLE>
__________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the financial
statements and notes contained in this prospectus.
GENERAL
The following analysis compares the financial condition of the company
for the period from inception (August 9, 1996) to July 31, 1997 and the year
ended July 31, 1998, and for the six months ended January 31, 1998, as
compared to the six months ended January 31, 1999.
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The company recognizes revenue as services are provided, in accordance
with customer agreements. For the year ended July 31, 1998, approximately
24% and 22% of the company's total revenues were derived from Websource
Media, a company licensee, and Bauge, an independent reseller, respectively.
Royalty income from software licensing agreements is recognized as it is
earned per the individual terms of each royalty agreement, and is generally
comprised of a minimum amount plus a stated percentage of the applicable
licensee's sales. The company uses the direct write-off method in accounting
for bad debts, the results of which are not materially different from the
allowance method.
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 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 PERIOD FROM INCEPTION TO JULY 31, 1997
COMPARED WITH THE RESULTS OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1998, AND
FOR THE SIX MONTHS ENDED JANUARY 31, 1998 COMPARED WITH THE SIX MONTHS ENDED
JANUARY 31, 1999.
Revenues increased from $185,994 for the period from inception through
July 31, 1997 to $628,070 for the year ended July 31, 1998. The increase of
$442,076 or 238% was primarily due to growth in web sites developed and
SITEBLAZER license sales. Revenues decreased from $262,437 for the six
months ended January 31, 1998, to $258,797 for the six months ended January
31, 1999. The decreased amount is $3,690 and is attributable to decreased
dial up resales.
Consulting expense increased from $-0- for the period from inception
through July 31, 1997 to $749,990 for the year ended July 31, 1998. The
increase 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.
Advertising expense increased from $12,173 for the six months ended
January 31, 1998, to $33,173 for the six months ended January 31, 1999. The
increase of $21,000 or 173% primarily reflects costs of print advertising for
the launch of Political Net.com.
General and administrative expenses increased from $3,605 for the period
from inception through July 31, 1997 to $20,096 for the year ended July 31,
1998. The increase in general and administrative expenses of $16,491 or 457%
primarily reflects the company's emergence from its development stage.
General and administrative expenses increased from $3,152 for the six months
ended January 31, 1998 to $47,803 for the six months ended January 31, 1999.
The increase in general and administrative expenses of $44,651 or 1,417%
primarily reflects the company's emergence from its development stage.
The company had a ($64,832) net loss for the period from inception
through July 31, 1997 compared with a net loss of ($781,595) for the year
ended July 31, 1998. The increased net loss of $716,763 or 1,106% is due
primarily to the promotional expense recorded by the company in July 1998 for
the fair value of common stock issued to PinkMonkey.com. The company had a
($13,587) net loss for the six months ended January 31, 1998 compared with a
net loss of ($508,784) for the six months ended January 31, 1999. The
increased net loss of $495,197 or 3,644% is due primarily to the increase in
professional fees associated with this registration statement and an increase
in salaries of $197,816.
Net loss per share of common stock increased from $(.00) to $(.05) for
the period from inception (August 9, 1996) through July 31, 1997, compared to
the year ended July 31, 1998.
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
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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. The company has a
working capital deficit of $106,092 and a stockholders' deficit of $92,427 at
July 31, 1998, and experienced significant losses in fiscal 1998 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.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1999, the company's primary source of liquidity was
$43,640 of cash and $51,246 of accounts receivable. The company's working
capital deficit and shareholders' deficit was $81,969 and $74,419 at January
31, 1998, as compared to a working capital deficit of $297,219 and a
shareholders' deficit of $278,870 at January 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 $275
for the period from inception through July 31, 1997. The increase in net
cash provided by operating activities was primarily due to the decreased net
loss after backing out the effect of the consulting expenses recorded in July
1999 described herein. Net cash used in operating activities during the six
months ended January 31, 1999 was $182,992 compared with net cash provided
by operating activities of $39,228 for the six months ended January 31, 1998.
The increase in net cash used in operating activities was primarily due to
the increase in net loss for the six months ended January 31, 1999 of
$495,187, offset by common stock issued as compensation and a decrease in
accounts receivable.
Net cash used in investing activities the year ended July 31, 1998, was
$2,332 compared with net cash used in investing activities of $14,796 for the
period from inception to July 31, 1997, respectively. The decrease in the
net cash used in investing activities is attributed to the decrease in the
purchase of property and equipment. Net cash used in investing activities
was $2,332 and $5,954 for the six months ended January 31, 1998 and the six
months ended January 31, 1999, respectively. The increase in the net cash
used in investing activities was attributed to an increase in purchases of
property and equipment.
Net cash provided by financing activities was $25,275 for the period
from inception (August 9, 1996) through July 31, 1997 compared with net cash
provided by financing activities of $7,947 for the year ended July 31, 1998.
The decrease in net cash provided by financing activities was primarily due
to the repayment of a note. Net cash provided by financing activities was
$5,414 for the six months ended January 31, 1998 compared with net cash
provided by financing activities of $213,598 for the six months ended January
31, 1999. The increase in net cash provided by financing activities was
primarily due to proceeds from issuance of common stock of $198,200.
The company's internally generated cash flows from operations have
historically been and continue to be insufficient for its cash needs. As of
May 3, 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 has an unsecured revolving line of credit in the amount of
$30,000 with Texas Commerce Bank, and to date has $30,000 available. In June
1999, Mr. Magness loaned the company $250,000 pursuant to a one year
promissory note which bears interest at 10% per annum in order to finance
potential payment to Rescission Offerees. In the event the Rescission Offer is
accepted, payment to the Rescission Offerees could have a material adverse
effect on the company's financial condition. If the company is unable to
repay the note when due, it may need to obtain additional financing. There
can be no assurance that the company will be able to obtain additional
financing on reasonable terms, if at all. 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 12 months. Historically, revenues have covered costs. Management
believes that projected revenues from licensees 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
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<PAGE>
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 $106,092 and a stockholders' deficit of $92,427 at July
31, 1998, and experienced significant losses in fiscal 1998 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.
ABANDONMENT OF THE DISTRIBUTION
The SEC and state securities boards detailed a substantial number of
requirements in order to effectuate the distribution of 750,000 shares of
company common stock held by PinkMonkey.com. The company determined that the
time and costs to comply with these requirements outweighed the benefits of
the distribution. Management believes the main benefit of the distribution
was that the company would become a reporting company under the Exchange Act.
By registering the resale of the 252,633 shares of company common stock held
by the selling stockholders, the company becomes a reporting company upon
effectiveness of this registration statement. Although a portion of the
consideration paid by PinkMonkey.com was the distribution of the shares to
its shareholders, it constituted only a small part of the consideration which
was comprised primarily by services rendered by principals of PinkMonkey to
the company. PinkMonkey.com issued a press release announcing its decision to
retain the 750,000 shares of company common stock for investment purposes.
PinkMonkey.com also indicated that although it did not intend to distribute
the shares of company common stock at this time, it may do so in the future.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The company's board of directors has developed a Year 2000 strategy and
has established a committee to determine the extent to which the company's
operations are vulnerable to Year 2000 Issues. The company believes its
operations are Year 2000 compliant. However, variability of definitions of
"compliance" with the Year 2000 and of different combinations of software,
firmware, and hardware may lead to lawsuits against the company. The
outcomes of any such lawsuits and the impact of the company are not estimable
at this time. The Year 2000 may affect the company's internal systems,
however management believes the effect will be minimal as the company
purchased its hardware systems within the last two years from name
manufacturers who have certified the equipment year 2000 compliant in their
manufacturer's warranty. Management believes out of pocket costs associated
with Year 2000 will be minimal. The company has reviewed its internal
programs and has determined there are no significant Year 2000 issues within
its systems or services. However, although the company believes its systems
are Year 2000 compliant, the equipment and software used by its licensees,
resellers or customers may not be Year 2000 compliant. Failure of such
third-party equipment or software to properly process dates for the year 2000
could result in unanticipated expenses and loss of revenues, which could have
an adverse effect on the company's business. There can be no guarantee that
the systems of other companies on which the company's operations rely will be
timely converted. Any Year 2000 compliance problems of the company could
have a material adverse effect on the company's business.
BUSINESS
THE COMPANY
The company was incorporated in the State of Texas in August 1996. The
company is a web development company that specializing in the design,
creation and marketing of cost-effective Internet products. The company
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.
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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.
BUSINESS STRATEGY
The mission of each 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
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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 clients
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.
- 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 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 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
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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. The company
has developed one thousand five hundred ninety five SiteBlazer.com web sites.
The company's licensees have developed approximately forty-five thousand
SiteBlazer.com web sites.
SITEBLAZER NETWORK
The SITEBLAZER 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 network. The company believes that the SITEBLAZER 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 network. The company is
populating the SITEBLAZER network with SiteBlazer.com web sites and expects
to launch the SITEBLAZER network as a search engine. At the time of launch,
the SITEBLAZER network will allow non-SiteBlazer.com web sites to be included
in the SITEBLAZER network search engine for a nominal fee.
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. Political Net.com's technology is derived from
the adaptability of SiteBlazer.com and the SITEBLAZER 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 one hundred ten Political Net.com web
sites.
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 30% developed. Expected launch is the fourth quarter of
1999. The company is not aware of any material conditions or uncertainties
which need to be resolved prior to commercialization.
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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
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.
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
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.
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 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 60 % 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 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. The expected launch date is summer 1999. 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 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
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<PAGE>
utilize SITEBLAZER 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
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. The
majority shareholder of ARFRA has granted the company an option to purchase
the remaining 70% of ARFRA in exchange for 10,000 shares of company common
stock.
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, 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,
- 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,
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<PAGE>
- 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 has applied for the registration of
the service mark and trademark SITEBLAZER 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 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.
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 June 1998, the company entered into a software reseller agreement
with Bauge in which the company granted Bauge a non-exclusive license
to market and distribute software products manufactured and hosted by
the company in return for royalty payments based on gross revenues of
basic web sites and various other royalty payments. In June 1999, the
agreement will automatically renew for successive one-year terms upon
Bauge achieving certain sales levels.
- In January 1999, the company entered into a software reseller
agreement Eduardo F. Azcoitia, dba 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.
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- In March 1999, the company entered into a three year joint marketing
agreement with West Marketing Services Corporation in which the
company granted West the exclusive right to direct telemarketing of
the company's Internet web site services in North America. In order
to retain the exclusivity provision of the agreement, West is required
to maintain certain minimum volume requirements. The company receives
a percentage of any sales made by West. The agreement automatically
renews for successive three year terms.
- In April 1999, the company entered into a license and service
agreement with Axis Technologies Corp. In which the company agreed to
grant Axis a non-exclusive license to utilize the company's Internet
web site generation application and market and sell the company's
products to Axis existing and future customers in the United States.
The company is entitled to receive a percentage of monthly gross
revenues generated by Axis.
The company enters into confidentiality agreements with respect to its
proprietary technology and limits access to, and distribution of its
proprietary information.
RISKS OF INFRINGEMENT IN INTERNET-RELATED INDUSTRIES
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries are
uncertain and still evolving, and accordingly, the future viability or value
of any of our proprietary rights is unknown. Any infringement or
misappropriation by third parties, should it occur, could have a material
adverse effect on our business. Furthermore, our business activities may
infringe upon the proprietary rights of others and other parties may assert
infringement claims against us. From time to time we expect to be subject to
claims in the ordinary course of our business, including claims of alleged
infringement of the trademarks and other intellectual property rights of
third parties by us or our commerce partners. Any such future litigation
could have a material adverse effect on our business. Claims of infringement
and any resultant litigation could subject us to significant liability for
damages and could result in invalidation of our proprietary rights. Even if
not meritorious, claims of infringement could be time-consuming and expensive
to defend, and could result in the diversion of management time and
attention, any of which could have a material adverse effect on our business.
POSSIBLE ADDITIONAL TAX BURDENS
We do not currently collect sales or other similar taxes in states other
than Texas. However, one or more states may seek to impose sales tax
collection obligations on out-of-state companies which engage in or
facilitate online commerce, and a number of proposals have been made at the
state and local levels that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if adopted, could
substantially impair the growth of electronic commerce and could adversely
affect our opportunity to derive financial benefit from our activities.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been proposed by Congress. Failure to enact
this legislation could allow various states to impose taxes on Internet-based
commerce and the imposition of taxes could have a material adverse effect on
our business.
GOVERNMENT REGULATION OF INTERNET ACTIVITIES
Due to concerns arising in connection with the increasing popularity and
use of the Internet, a number of laws and regulations may be adopted covering
issues such as: user privacy, pricing, characteristics, acceptable content,
taxation and quality of products and services. With the adoption of these
laws or regulations, the costs of communicating on the Internet could
increase substantially, potentially adversely affecting the growth in use of
the Internet. Further, due to the global nature of the Internet, it is
possible that, although transmissions relating to our programs originate in
the State of Texas, the governments of other states or foreign countries may
attempt to regulate our transmissions. Any of the foregoing developments
could have a material adverse effect on our business.
EMPLOYEES
As of May 3, 1999, the company employed approximately 21 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.
DESCRIPTION OF PROPERTY
The company currently leases approximately 6,643 square feet of office
space in Houston, Texas. The lease expires in October 2000 and the monthly
rental is currently $7,196. The company believes that its existing
facilities are adequate to meet its current needs and to accommodate
anticipated growth.
AVAILABLE INFORMATION
The SEC maintains a web site on the Internet that contains reports,
proxy and information statements and other information regarding companies
that file electronically with the SEC. The address of the site is
http:\\www.sec.gov. Visitors to the site may access such information by
searching the EDGAR data base on the site.
Prior to the date of this prospectus, the company was not subject to the
information and reporting requirements of the Securities Exchange Act of
1934. As a result, the company will become subject to such requirements and
begin filling periodic reports, proxy materials and other information with
the SEC. The company will provide its shareholders with annual reports
containing audited financial statements and, if determined to be feasible,
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information. The company has filed a registration
statement on Form SB-2 under the Securities Act, with respect to the
securities being registered. This prospectus does not contain all the
information set forth in the registration statement and its exhibits and
schedules, to which reference is made. Copies of the registration statement
and its exhibits are on file at the offices of the SEC and may be obtained
upon payment of the fees prescribed by the SEC or may be examined, without
charge, at the public reference facilities of the SEC, 450 Fifth Street,
N.W., Washington D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Upon request, the company will provide without charge to each person who
receives a copy of the prospectus, a copy of any of the information that is
incorporated by reference in this prospectus (not including exhibits to the
information that is incorporated by reference unless the exhibits are
themselves specifically incorporated by reference). Any request for
information should be directed to the company, attention Harry L. White, at
1770 St. James, Suite 420, Houston, Texas 77056, (713) 627-9494.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The company's directors and executive officers are:
NAME AGE POSITION
---- --- --------
Harry L. White 40 Chairman, Chief Executive Officer,
President, Treasurer and Secretary
Richard J. Finn 22 Chief Technical Officer and Director
Lee A. Magness 34 Chief Financial Officer, General Counsel
and Director
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.
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.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the chief
executive officer of the company for the fiscal year ended 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 BONUS COMPENSATION(1) OPTIONS COMPENSATION
-------- ---- ------ ----- --------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Harry L. White, 1998 $70,000
Chief Executive 1997 $30,000(2)
Officer and President
</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) This amount has not been paid to date and is currently being accrued.
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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.
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 this prospectus, options to purchase 288,000
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.
PRINCIPAL STOCKHOLDERS
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
BENEFICIALLY PERCENTAGE OF
NAME OF BENEFICIAL OWNER(1) OWNED VOTING POWER
<S> <C> <C>
Harry L. White 4,488,000 27.3%
Richard J. Finn 4,488,000 27.3%
Lee A. Magness 4,207,500 25.6%
All directors and officer as 13,183,500 80.2%
a group (3 persons)
</TABLE>
____________
(1) The business address of each individual is the same as the address of the
company's principal executive offices.
CERTAIN 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
22
<PAGE>
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 September 1998, the company issued 750,000 shares of common stock to
PinkMonkey.com in consideration for $10 and services rendered. The company
designed PinkMonkey.com's 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 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's accountants 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.
DESCRIPTION OF SECURITIES
The company is authorized to issue up to 55,000,000 shares, of which
50,000,000 shares are no par value common stock, and 5,000,000 shares are
preferred stock, par value $.01 per share.
COMMON STOCK
The holders of shares of common stock are entitled to one vote per share
on each matter submitted to a vote of stockholders. In the event of
liquidation, holders of common stock are entitled to share ratably in the
distribution of assets remaining after payment of liabilities, if any.
Holders of common stock have no cumulative voting rights, and, accordingly,
the holders of a majority of the outstanding shares have the ability to elect
all of the directors. Holders of common stock have no preemptive or other
rights to subscribe for shares. Holders of common stock are entitled to such
dividends as may be declared by the board of directors out of legally
available funds. The outstanding common stock is, and the common stock to be
outstanding upon completion of this offering will be, validly issued, fully
paid and non-assessable.
PREFERRED STOCK
The company's board of directors has the authority to issue up to
5,000,000 shares of preferred stock without any further vote or action by the
stockholders, and to determine the price, rights, preferences, privileges and
restrictions, including voting rights of those shares. Since the preferred
stock could be issued with voting, liquidation, dividend and other rights
superior to those of the common stock, the rights of the holders of common
stock will be subject to, and may be adversely affected by, the rights of the
holders of preferred stock. The issuance of preferred stock could make it
more difficult for a third party to acquire a majority of our outstanding
voting stock.
TRANSFER AGENT
The company's transfer agent is Continental Stock Transfer & Trust
Company, 2 Broadway, New York, New York 10004.
23
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
There are 16,281,633 shares of common stock currently outstanding. Upon
the effectiveness of this registration statement, 252,633 shares of common
stock will be eligible for immediate resale in the public market if and when
any market for the common stock develops. Sales of such shares held by
affiliates will, however, be subject to the restrictions of Rule 144
promulgated under the Securities Act. An affiliate of the issuer is any
person who directly or indirectly controls, is controlled by, or is under
common control with, the issuer. Affiliates of the company may include its
directors, executive officers, and persons directly or indirectly owning 10%
or more of the outstanding common stock. Under Rule 144 resales of common
stock for the account of affiliates cannot be made until it has been held for
one year from the later of its acquisition from the company or an affiliate
of the company. Thereafter, shares of common stock may be resold without
registration subject to Rule 144's volume limitation, aggregation, broker
transaction, notice filing requirements, and requirements concerning publicly
available information about the company. The volume limitations provide that
a person (or persons who must aggregate their sales) cannot, within any
three-month period, sell more than the greater of one percent of the then
outstanding shares, or the average weekly reported trading volume during the
four calendar weeks preceding each such sale.
PLAN OF DISTRIBUTION
The 252,633 shares offered by the selling stockholders may be sold by
one or more of the following methods, without limitation: (i) ordinary
brokerage transactions and transactions in which the broker-dealer solicits
purchases; and (ii) face-to-face transactions between sellers and purchasers
without a broker-dealer. In effecting sales, brokers or dealers engaged by
the selling stockholders may arrange for other brokers or dealers to
participate. The brokers or dealers may receive commissions or discounts
from the selling stockholders in amounts to be negotiated. The brokers and
dealers and any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the Securities Act, in connection with
such sales. The selling stockholder or dealer effecting a transaction in the
registered securities is required to deliver a prospectus. As a result of
the shares being registered under the Securities Act, holders who
subsequently resell such shares to the public may be deemed to be
underwriters with respect to such shares of common stock for purposes of the
Securities Act, with the result that they may be subject to certain statutory
liabilities if the registration statement to which this prospectus relates
contains a material misstatement or omits a statement of material fact. The
company has not agreed to indemnify any of the selling stockholders regarding
this liability. The company will not receive any proceeds from the resale of
common stock by the selling stockholders.
SELLING STOCKHOLDERS
This prospectus relates to the resale of 252,633 shares of common stock
by the selling stockholders. The table below sets forth information with
respect to the resale of shares of common stock by the selling stockholders.
The company will not receive any proceeds from the resale of common stock by
the selling stockholders for shares currently outstanding.
RESALE OF COMMON STOCK BY SELLING STOCKHOLDERS
SHARES CURRENTLY OUTSTANDING
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY AMOUNT OFFERED SHARES BENEFICIALLY
OWNED BEFORE (ASSUMING ALL SHARES OWNED AFTER
STOCKHOLDER RESALE IMMEDIATELY SOLD) RESALE PERCENTAGE
<S> <C> <C> <C> <C>
Ashraf K. Abadir 10,000 10,000 0% 0%
Jeffrey A. Ballenger 7,000 7,000 0% 0%
Stephen Bollman 4,000 4,000 0% 0%
24
<PAGE>
Andrew B. Doerr(1) 8,366 8,366 0% 0%
Leo Detassis 6,667 6,667 0% 0%
Allen G. Dusek 3,000 3,000 0% 0%
Debbie Esparza(2) 10,000 10,000 0% 0%
Richard A. Finn 5,000 5,000 0% 0%
W.B. Finn 1,000 1,000 0% 0%
Henry Hailes 10,000 10,000 0% 0%
Paul Hailes(3) 10,000 10,000 0% 0%
Arthur Hebron 10,000 10,000 0% 0%
Lucy Hebron 10,000 10,000 0% 0%
Tom Hillman 2,000 2,000 0% 0%
Hannah M. Loev 12,500 12,500 0% 0%
David L. Magness(4) 15,000 15,000 0% 0%
Price Lloyd Magness(4) 5,000 5,000 0% 0%
Walter L. Magness(4) 22,000 22,000 0% 0%
Hungson Van Nguyen 3,000 3,000 0% 0%
True Lam V. Nguyen 1,000 1,000 0% 0%
Dan Nelson 40,000 40,000 0% 0%
Chris Truax 20,000 20,000 0% 0%
Anthony Rahati 5,000 5,000 0% 0%
Steve Reynolds 1,750 1,750 0% 0%
Lora W. Rhein 10,000 10,000 0% 0%
Frank Rhodes 1,800 1,800 0% 0%
Larry Shoemaker 5,000 5,000 0% 0%
Don C. Smith 2,000 2,000 0% 0%
Jukka Tolonen 5,800 5,800 0% 0%
Keith Ward 750 750 0% 0%
Kevin Work(5) 5,000 5,000 0% 0%
</TABLE>
________________
(1) Andrew B. Doerr, an employee of the company, was awarded 5,000 shares of
company common stock for services rendered. The remaining shares held be
Mr. Doerr were purchased by him.
(2) Debbie Esparza, an employee of the company, was awarded 10,000 shares of
company common stock for services rendered.
(3) Mr. Hailes, an employee of the company purchased the shares held by him.
(4) These individuals are relatives of Lee Magness an officer and director of
the company
(5) Kevin Work, an employee of the company, was awarded 5,000 shares of company
common stock for services rendered.
25
<PAGE>
LEGAL PROCEEDINGS
The company was a plaintiff in HOUSTON INTERWEB DESIGN, INC. V. LANDRY'S
SEAFOOD RESTAURANTS, INC. filed in the District Court of Harris County,
Texas; 133rd Judicial District. The complaint alleged breach of contract and
the company sought damages of $300,000. Landry's filed a counter-claim
against the company asserting infringement of Landry's federally registered
trademark LANDRY'S SEAFOOD HOUSE. The matter was resolved in the company's
favor and the counter-claim was dropped.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business
issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the small business issuer will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
FINANCIAL STATEMENTS
The financial statements of the company appearing in this Form SB-2
Registration Statement for the period from inception (August 9, 1996) to July
31, 1997, and the year ended July 31, 1998, have been audited by Mann,
Frankfort, Stein and Lipp, P.C. The financial statements have been prepared
assuming that the Rescission Offerees elect not to rescind the purchase of
the shares.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for the company by Brewer & Pritchard, P. C., Houston, Texas.
26
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
C O N T E N T S
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report ........................................F-2
Balance Sheets ......................................................F-3
Statements of Operations ............................................F-4
Statements of Changes in Stockholders' Deficit ......................F-5
Statements of Cash Flows ............................................F-6
Notes to Financial Statements .......................................F-7
</TABLE>
F-1
<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, 1998 and 1997, and the related statements of operations,
changes in stockholders' deficit, and cash flows for the year ended July 31,
1998 and for the period from inception (August 9, 1996) to July 31, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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, 1998 and 1997, and the results of its operations and its
cash flows for the year ended July 31, 1998 and for the period from inception
(August 9, 1996) to July 31, 1997 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
$781,595 for 1998 and has incurred substantial net losses since inception. At
July 31, 1998, current liabilities exceed current assets by $106,092 and
total liabilities exceed total assets by $92,427. 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, P.C.
Houston, Texas
September 8, 1998
F-2
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
July 31,
------------------------ January 31,
1998 1997 1999
--------- -------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 18,988 $ 10,204 $ 43,640
Accounts receivable - trade - related parties 55,259 14,611 23,043
Accounts receivable - trade - nonaffiliates 61,012 42,070 28,203
Deferred income tax asset - 4,998 -
Other current assets 10,445 3,226 -
--------- -------- -----------
TOTAL CURRENT ASSETS 145,704 75,109 94,886
PROPERTY AND EQUIPMENT
Office equipment 4,056 2,306 10,010
Furniture and fixtures 13,072 12,490 13,072
--------- -------- -----------
17,128 14,796 23,082
Less: accumulated depreciation 3,463 1,567 4,733
--------- -------- -----------
TOTAL PROPERTY AND EQUIPMENT 13,665 13,229 18,349
INVESTMENT UNDER THE EQUITY METHOD - - -
--------- -------- -----------
TOTAL ASSETS $ 159,369 $ 88,338 $ 113,235
--------- -------- -----------
--------- -------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 220,086 $127,895 $ 307,910
Advances payable - affiliate - - 30,000
Deposits - - 24,976
Deferred income tax liability 2,498 - -
Note payable - line of credit 29,212 - 29,219
Notes payable to stockholders - 21,275 -
--------- -------- -----------
TOTAL CURRENT LIABILITIES 251,796 149,170 392,105
STOCKHOLDERS' DEFICIT
Common stock, no par value, 50,000,000 shares
authorized, 16,029,000 and 15,279,000 shares
issued and outstanding at July 31, 1998 and 1997,
respectively, and 16,281,633 shares issued at
January 31, 1999 754,000 4,000 1,090,950
Stock subscriptions receivable - - (14,609)
Accumulated deficit (846,427) (64,832) (1,355,211)
--------- -------- -----------
TOTAL STOCKHOLDERS' DEFICIT (92,427) (60,832) (278,870)
--------- -------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 159,369 $ 88,338 $ 113,235
--------- -------- -----------
--------- -------- -----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
STATEMENTS OF OPERATIONS
<TABLE>
Period From
Inception
(August 9, Six Months Ended
Year Ended 1996) January 31,
July 31, to July 31, -----------------------------
1998 1997 1999 1998
-------------- ------------- ------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES
Affiliates $ 110,951 $ 22,830 $ 41,486 $ 80,000
Nonaffiliates 517,119 163,164 217,261 182,437
-------------- ------------- ------------- --------------
TOTAL REVENUES 628,070 185,994 258,747 262,437
EXPENSES
Advertising 32,620 28,215 33,173 12,173
Computer equipment 25,051 38,248 21,528 16,998
Consulting costs 749,990 - - -
Contract labor 68,198 44,755 11,247 21,982
Depreciation 1,896 1,567 1,270 949
General and administrative 20,096 3,605 47,803 3,152
Interest 6,080 2,690 3,082 3,736
Internet service 29,019 8,073 17,932 11,063
Professional fees 15,288 1,228 201,706 -
Rent 21,105 10,450 37,449 8,873
Repairs and maintenance 3,474 3,391 2,773 4,205
Salaries and benefits 384,082 93,188 372,222 174,406
Supplies 26,036 11,461 5,228 11,314
Telephone 11,797 4,806 5,891 5,814
Travel 7,437 4,147 8,725 2,404
-------------- ------------- ------------- --------------
TOTAL EXPENSES 1,402,169 255,824 770,029 277,069
-------------- ------------- ------------- --------------
INCOME (LOSS) BEFORE FEDERAL
INCOME TAXES (774,099) (69,830) (511,282) (14,632)
FEDERAL INCOME TAX EXPENSE
(BENEFIT)
Deferred 7,496 (4,998) (2,498) (1,045)
-------------- ------------- ------------- --------------
NET LOSS $ (781,595) $ (64,832) $ (508,784) $ (13,587)
============== ============= ============= ==============
NET LOSS PER SHARE, BASIC AND
DILUTED $ (0.05) $ - $ (0.03) $ -
============= ============= ============ ==============
AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 15,341,535 15,279,000 16,128,268 15,279,000
============== ============= ============= ==============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEAR ENDED JULY 31, 1998 AND PERIOD FROM INCEPTION (AUGUST 9, 1996) TO
JULY 31, 1997
<TABLE>
Common Stock Stock
----------------------------- Accumulated Subscription
Shares Amount Deficit Receivable Total
------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Contributions 15,279,000 $ 4,000 $ - $ - $ 4,000
Net loss, period from inception
(August 9, 1996) to July 31, 1997 - - (64,832) - (64,832)
------------- -------------- ------------- ------------- --------------
Balance, July 31, 1997 15,279,000 4,000 (64,832) - (60,832)
Issuance of common stock, issued
as compensation 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)
Net loss, six months ended
January 31, 1999 (unaudited) - - (508,784) - (508,784)
Issuance of common stock
(unaudited) 160,133 198,200 - - 198,200
Issuance of common stock as
compensation (unaudited) 20,000 30,000 - - 30,000
Issuance of common stock for
services rendered (unaudited) 72,500 108,750 - - 108,750
Stock subscription receivable - - - (14,609) (14,609)
------------- -------------- ------------- ------------- --------------
Balance, January 31, 1999
(unaudited) 16,281,633 $ 1,090,950 $ (1,355,211) $ (14,609) $ (278,870)
============= ============== ============= ============= ==============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
Inception
(August 9, Six Months Ended
Year Ended 1996) January 31,
July 31, to July 31, -------------------------
1998 1997 1999 1998
---------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(781,595) $(64,832) $(508,784) $(13,587)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 1,896 1,567 1,270 949
Deferred income tax expense (benefit) 7,496 (4,998) (2,498) (1,045)
Common stock issued as compensation 749,990 - 138,750 -
Changes in assets and liabilities:
Accounts receivable (59,590) (56,681) 65,025 (25,451)
Deposits - - 24,976 -
Other current assets (7,219) (3,226) 10,445 2,287
Accounts payable and accrued expenses 92,191 127,895 87,824 76,075
---------- ----------- ----------- -----------
784,764 64,557 325,792 52,815
---------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 3,169 (275) (182,992) 39,228
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,332) (14,796) (5,954) (2,332)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from affiliate - - 30,000 -
Net proceeds (repayments) from notes payable (21,275) 21,275 - (21,275)
Net proceeds from line of credit 29,212 - 7 26,689
Proceeds from issuance of common stock 10 4,000 198,200 -
Increase in stock subscriptions receivable - - (14,609) -
---------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 7,947 25,275 213,598 5,414
---------- ----------- ----------- -----------
NET INCREASE IN CASH 8,784 10,204 24,652 42,310
CASH AT BEGINNING OF PERIOD 10,204 - 18,988 10,204
---------- ----------- ----------- -----------
CASH AT END OF YEAR $ 18,988 $ 10,204 $ 43,640 $ 52,514
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid $ 6,080 $ 2,690 $ 3,082 $ 3,736
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
SUPPLEMENTAL NONCASH FINANCING
ACTIVITIES
July 31, 1998 issuance of 750,000 common
shares in exchange for consulting services $ 749,990 $ - $ - $ -
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
January 31, 1999 issuance of 92,500
common shares as compensation and for
services rendered $ - $ - $ 138,750 $ -
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
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
has a working capital deficit of $106,092 and a stockholders' deficit of $92,427
at July 31, 1998, and experienced significant losses in fiscal 1998 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.
- - As described in Note J, the Company recently entered into a contract with a
corporation (reseller) to market and distribute software products
manufactured and hosted by the Company. The amount of revenue, if any, as a
result of the above contract cannot presently be determined.
- - Obtaining equity capital or debt financing.
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. For the year ended July 31, 1998, revenues
from significant customers totaled $368,572. Included in this amount is $80,000
earned from a nonrecurring customer. 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 minimum amount is recognized upon completion of the design and
development of the InterWeb web site and placing the web site into the
siteblazer network at which time the Company has completed all obligations under
the licensing agreement. The Company uses the direct write-off method in
accounting for bad debts, the results of which are not materially different from
the allowance method.
F-7
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
UNAUDITED INTERIM INFORMATION: The accompanying financial information as of
January 31, 1999 and for the six months ended January 31, 1999 and 1998 has been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. The financial statements reflect all
adjustments, consisting of normal recurring accruals which are, in the opinion
of management, necessary to fairly present such information in accordance with
generally accepted accounting principles.
NOTE C - INVESTMENTS UNDER THE EQUITY METHOD
At July 31, 1998, 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, 1998 and January 31, 1999, the activities of the investee had not
commenced.
NOTE D - NOTE PAYABLE
Note payable consist of the following:
<TABLE>
<CAPTION>
July 31,
-------------------------
1998 1997
---------- ----------
<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 at the
bank's option. $ 29,212 $ -
========== ==========
</TABLE>
F-8
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
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, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
July 31,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 290,373 $ 5,177
Cash-to-accrual differences - 4,998
------------- -------------
Total gross deferred tax assets 290,373 10,175
Less: valuation allowance 290,373 5,177
------------- -------------
- 4,998
Deferred tax liabilities:
Tax over book depreciation (371) -
Cash-to-accrual differences (2,127) -
------------- -------------
Total gross deferred tax liabilities (2,498) -
------------- -------------
Net current deferred tax assets (liability) $ (2,498) $ 4,998
============= =============
</TABLE>
The Company has net operating loss carryforwards of approximately $854,000 as
of July 31, 1998, which expire through the year 2013. Valuation allowances
have been provided for all net operating losses due to lack of evidence of
future recoverability at July 31, 1998.
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,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Current tax benefit computed at federal
statutory tax rate $ (263,194) $ (23,742)
Effect of marginal tax brackets - 11,284
Change in valuation allowance 285,196 5,177
Other (14,506) 2,283
------------- -------------
Total income tax expense (benefit) $ 7,496 $ (4,998)
============= =============
</TABLE>
F-9
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE F - RELATED PARTY TRANSACTIONS
The Company has notes payable to its stockholders, unsecured, with interest
payable at 6%, maturing July 31, 1998. Interest expense on these notes totaled
approximately $293 in 1998 and $1,660 in 1997. The following is a summary of
notes payable to stockholders:
<TABLE>
<CAPTION>
July 31,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Lee Magness $ - $ 15,897
Harry White - 5,378
------------- -------------
$ - $ 21,275
============= =============
</TABLE>
In July 1998, the Company issued 4,545.4545 shares of its common stock to a
publicly traded related party (certain officers and stockholders of the
Company are directors and own stock in the related party) 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 related party 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 as consulting costs to
account for the fair value of the consulting services received from this
related party.
As of July 31, 1998, the Company has recognized revenue of approximately
$30,951 in connection with a web site marketing program between the Company
and the related party described above. The Company had a receivable from the
related party of $17,894 as of July 31, 1998 which has been recorded in
accounts receivable related parties in the balance sheet.
Additionally, the Company recognized revenue of $80,000 for the year ended
July 31, 1998 for services performed for a related party (an officer of the
Company is a director of the related party) of which $37,365 remains
uncollected at July 31, 1998 and has been included as accounts receivable -
affiliates.
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>
1999 $ 86,360
2000 86,360
2001 21,590
-------------
$ 194,310
=============
</TABLE>
F-10
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rental expense for the year ended July 31, 1998 was $21,105 and for the
initial period ended July 31, 1997 was $10,450.
The Company has instituted legal proceedings against a party for breach of
contract seeking damages of $300,000. The party has made a counter claim
against the Company, but has not plead any amount of damages. Management is
of the opinion that the counter claim filed by the party is without basis and
that the Company will prevail. Accordingly, no gain or loss has been accrued
in these financial statements pertaining to these proceedings. In January
1999, in accordance with a confidential and mutual release and settlement
agreement, the Company received nominal consideration in exchange for the
mutual releases of all parties.
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
incurred by the Company related to these employment agreements were $210,000
and $90,000 for the fiscal year ended July 31, 1998, and the initial period
ended July 31, 1997, respectively, and $180,000 and $105,000 for the six
months ended January 31, 1999 and 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,
1998, or during the initial period ended July 31, 1997, basic average shares
outstanding and earnings per share are equal to diluted average shares
outstanding and earnings per share, respectively, for the year ended July 31,
1998, and for the initial period ended July 31, 1997 and for the six month
periods ended January 31, 1999 and 1998.
NOTE I - STOCKHOLDERS' EQUITY
Subsequent to July 31, 1998, in contemplation of the stock split and employee
incentive stock option plan discussed below, 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.
F-11
<PAGE>
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE I - STOCKHOLDERS' EQUITY (Continued)
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. Subsequent to this
stock split, and prior to October 31, 1998, the Company sold an additional
117,500 shares of its common stock to various individuals at prices ranging
from $1 per share to $1.50 per share. As a result of the stock split and the
subsequent sales of common stock, the total common stock of the Company
issued and outstanding increased to 16,146,500 shares. 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 February
1999, 288,000 shares were issued to employees under this plan although no
options have been exercised to date.
NOTE J - SUBSEQUENT EVENTS
Subsequent to January 31, 1999, the Company has continued to issue shares of
common stock to individuals for cash at prices ranging from $1.00 per share
to $1.50 per share, including 166,667 shares issued to two individuals for
$250,000 cash in February 1999. In April 1999, the Company initiated a
recision offer to the individuals.
At the end of January 1999, the Company entered into a contract with a
corporation (reseller) to market and distribute software products
manufactured and hosted by the Company. The amount of revenue, if any, as a
result of the above contract cannot presently be determined.
F-12
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Texas law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The amended and
restated articles of incorporation of the company limit the liability of
directors of the company (in their capacity as directors but not in their
capacity as officers) to the company or its stockholders to the fullest
extent permitted by Texas law. Specifically, directors of the company will
not be personally liable for monetary damages for breach of a director's
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the company or its stockholders, (ii) for acts
or omissions not in good faith that constitute a breach of duty of the
director to the company or an act or omission which involves intentional
misconduct or a knowing violation of law, (iii) for an act or omission for
which the liability of a director is expressly provided by an applicable
statute, or (iv) for any transaction from which the director received an
improper personal benefit, whether the benefit resulted from an action taken
within the scope of the director's office. Section 2.41 of the Texas Business
Corporation Act relates to directors' liability for unlawful dividends and
stock issuances.
The inclusion of this provision in the amended and restated articles of
incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefitted the company and its stockholders.
The company's amended and restated articles of incorporation provide for
the indemnification of its executive officers and directors, and the
advancement to them of expenses in connection with any proceedings and
claims, to the fullest extent permitted by the Texas Business Corporation
Act. The amended and restated articles of incorporation include related
provisions meant to facilitate the indemnities' receipt of such benefits.
These provisions cover, among other things: (i) specification of the method
of determining entitlement to indemnification and the selection of
independent counsel that will in some cases make such determination, (ii)
specification of certain time periods by which certain payments or
determinations must be made and actions must be taken, and (iii) the
establishment of certain presumptions in favor of an indemnitee. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the company pursuant
to the foregoing provisions, the company has been informed that, in the
opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant.
<TABLE>
<S> <C>
SEC Registration Fee . . . . . . . . . . . . $ 100.00
Printing and Engraving Expenses. . . . . . . 2,000.00
Legal Fees and Expenses. . . . . . . . . . . 40,000.00
Accounting Fees and Expenses . . . . . . . . 35,000.00
Miscellaneous. . . . . . . . . . . . . . . . 5,000.00
----------
TOTAL. . . . . . . . . . . . . . . . . . . . $82,100.00
----------
----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
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 insiders as they assisted
with the formation of the company and 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.
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.
II-1
<PAGE>
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. These investors were insiders as they assisted
with the formation of the company and 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.
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.
In November 1998, the company issued an aggregate of 20,000 shares 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.
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.
ITEM 27. EXHIBITS
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
- -----------
<S> <C>
3.1(1) Amended and Restated Articles of Incorporation
3.2(1) Articles of Amendment to the Articles of Incorporation
3.3(1) By-Laws of the company
3.4(1) Articles of Correction to the Amended and Restated Articles
of Incorporation
3.5(1) Articles of Correction to the Articles of Amendment to the
Articles of Incorporation
4.1(1) Form of Specimen of common stock
5.1(3) Legal Opinion
10.1(1) Letter Agreement between the company and PinkMonkey.com,
Inc.
10.2(1) Software License and Marketing Agreement between the company
and Websource Media, L.L.C.
10.3(1) Software Reseller Agreement between the company and Harry
Bauge
10.4(1) Letter Agreement between the company and Harry Bauge
10.5(1) Agreement between the company and NetTrade Online, L.L.C.
II-2
<PAGE>
10.6(1) Employment Agreement between the company and Harry White
10.7(1) Employment Agreement between the company and Richard Finn
10.8(1) Employment Agreement between the company and Lee Magness
10.9(1) Lease Agreement
10.10(3) Software Reseller Agreement with Eduardo F. Azcoitia, dba
Proses
10.11(3) Joint Marketing Agreement with West Marketing Services
Corporation
10.12(3) License and Service Agreement with Axis Technologies Corp.
10.13(4) Promissory Note with Lee Magness
23.1(4) Consent of Mann, Frankfort, Stein and Lipp, P.C.
23.2(4) Consent of Brewer & Pritchard, P.C.
27.1(1) Financial Data Schedule
99.1(3) Notice of Recission
</TABLE>
(1) Filed as an Exhibit to the company's registration statement on Form SB-2
(File No. 67871) and herein incorporated by reference.
(2) Contained in Exhibit 5.1.
(3) Filed as an Exhibit to the company's registration statement on Form
SB-2/A Filed May 6, 1999 and incorporated herein by reference.
(4) Filed herewith.
ITEM 28. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of
the Securities Act;
ii. Reflect in the prospectus any facts or events arising after
the effective date of which, individually or together,
represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
iii. Include any additional or changed material on the plan of
distribution.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) i. That, for the purpose of determining liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4), or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of
the time it was declared effective.
II-3
<PAGE>
ii. For determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
BONA FIDE offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on the 11th day of June,
1999.
HOUSTON INTERWEB DESIGN, INC.
By: /s/ Harry White
-------------------------------------
HARRY L. WHITE, President and
Chief Executive Officer
_________________________
This registration statement has been signed by the following persons in
the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Harry L. White President, Treasurer, June 11, 1999
- ------------------------------- Secretary and Chairman
HARRY L. WHITE
/s/ Richard J. Finn Chief Technical Officer and June 11, 1999
- ------------------------------- Director
RICHARD J. FINN
/s/ Lee A. Magness Chief Financial Officer, General June 11, 1999
- ------------------------------- Counsel and Director
LEE A. MAGNESS
II-5
<PAGE>
June 11, 1999
Board of Directors
Houston InterWeb Design, Inc.
1770 St. James Place
Suite 515
Houston, Texas 77056
Gentlemen:
As counsel for Houston InterWeb Design, Inc., a Texas corporation
("Company"), you have requested our firm to render this opinion in connection
with the Registration Statement of the Company on Form SB-2 filed under the
Securities Act of 1933, as amended ("Act"), with the Securities and Exchange
Commission relating to the registration of the resale of 252,633 shares of
Company common stock and the issuance 166,667 shares of Company common stock
("Shares").
We are familiar with the registration statement and the registration
contemplated thereby. In giving this opinion, we have reviewed the
registration statement and such other documents and certificates of public
officials and of officers of the Company with respect to the accuracy of the
factual matters contained therein as we have felt necessary or appropriate in
order to render the opinions expressed herein. In making our examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents presented to us as originals, the conformity to original documents
of all documents presented to us as copies thereof, and the authenticity of
the original documents from which any such copies were made, which
assumptions we have not independently verified.
Based upon all the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Texas.
2. The Shares are duly authorized common shares in the capital of the
Company.
3. The Shares are issued and, when sold in the manner described as in the
Registration Statement, will be validly issued, fully paid and
nonassessable
<PAGE>
Board of Directors
June 11, 1999
Page 2
We consent to the filing of this opinion as an exhibit to the
Registration Statement and the use in the registration statement of the
reference to Brewer & Pritchard, P.C. under the heading "Legal Matters."
Very truly yours,
BREWER & PRITCHARD, P.C.
<PAGE>
EXHIBIT 10.13
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND IS TRANSFERABLE ONLY UPON THE CONDITIONS SPECIFIED IN THE NOTE AGREEMENT
REFERRED TO HEREIN.
PROMISSORY NOTE
$250,000 Houston, Texas June 10, 1999
FOR VALUE RECEIVED, the undersigned, HOUSTON INTERWEB DESIGN, INC., a Texas
corporation ("MAKER"), hereby promises to pay to the order of Lee Magness
("PAYEE"), at Houston, Texas, the principal sum of Two Hundred Fifty Thousand
and no/100 Dollars ($250,000), in lawful money in United States of America,
which shall be legal tender, in payment of all debts and dues, public and
private, at the time of payment, bearing interest and payable as provided
herein.
Interest on the unpaid balance of this Note shall accrue at a rate per
annum equal to 10%; provided, however, that such interest shall not exceed the
Maximum Rate as hereinafter defined. All past-due principal and interest shall
bear interest at the maximum rate permitted by applicable law. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
The principal amount and accrued interest of this Note shall be due and
payable on June 10, 2000.
This Note may be prepaid in whole or in part, at any time and from time to
time, without premium or penalty.
If any payment of principal or interest on this Note shall become due on a
Saturday, Sunday or any other day on which national banks are not open for
business, such payment shall be made on the next succeeding business day.
If an Event of Default shall occur and be continuing, the principal amount
of this Note may be declared immediately due and payable.
Notwithstanding anything to the contrary in this Note or any other
agreement entered into in connection herewith, whether now existing or hereafter
arising and whether written or oral, it is agreed that the aggregate of all
interest and any other charges constituting interest, or adjudicated as
constituting interest, and contracted for, chargeable or receivable under this
Note or otherwise in
<PAGE>
connection with this loan transaction, shall under no circumstances exceed
the Maximum Rate. In the event the maturity of this Note is accelerated by
reason of an Event of Default under this Note, other agreement entered into
in connection herewith or therewith, by voluntary prepayment by Maker or
otherwise, then earned interest may never include more than the Maximum Rate,
computed from the dates of each advance of the loan proceeds outstanding
until payment. If from any circumstance any holder of this Note shall ever
receive interest or any other charges constituting interest, or adjudicated
as constituting interest, the amount, if any, which would exceed the Maximum
Rate shall be applied to the reduction of the principal amount owing on this
Note, and not to the payment of interest; or if such excessive interest
exceeds the unpaid balance of principal hereof, the amount of such excessive
interest that exceeds the unpaid balance of principal hereof shall be
refunded to Maker. In determining whether or not the interest paid or
payable exceeds the Maximum Rate, to the extent permitted by applicable law
(i) any nonprincipal payment shall be characterized as an expense, fee or
premium rather than as interest; and (ii) all interest at any time contracted
for, charged, received or preserved in connection herewith shall be
amortized, prorated, allocated and spread in equal parts during the period of
the full stated term of this Note. The term "Maximum Rate" shall mean the
maximum rate of interest allowed by applicable federal or state law.
Except as provided herein, Maker and any sureties, guarantors and endorsers
of this Note jointly and severally waive demand, presentment, notice of
nonpayment or dishonor, notice of intent to accelerate, notice of acceleration,
diligence in collecting, grace, notice and protest, and consent to all
extensions without notice for any period or periods of time and partial
payments, before or after maturity, without prejudice to the holder. The holder
shall similarly have the right to deal in any way, at any time, with one or more
of the foregoing parties without notice to any other party, and to grant any
such party any extensions of time for payment of any of said indebtedness, or to
grant any other indulgences or forbearance whatsoever, without notice to any
other party and without in any way affecting the personal liability of any party
hereunder. If any efforts are made to collect or enforce this Note or any
installment due hereunder, the undersigned agrees to pay all collection costs
and fees, including reasonable attorney's fees.
This Note shall be construed and enforced under and in accordance with the
laws of the State of Texas.
IN WITNESS WHEREOF, Maker has duly executed this Note as of the day and
year first above written.
Houston Interweb Design, Inc.
/s/ Harry White
------------------------------------
By: Harry White
Chief Executive Officer
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 2 to the registration
statement on Form SB-2 (File No. 333-67871) of our report dated September 8,
1998, on our audits of the financial statements of Houston InterWeb Design, Inc.
MANN FRANKFORT STEIN & LIPP, P.C.
Houston, Texas
June 11, 1999
<PAGE>
June 11, 1999
Mr. Richard Wulff
Chief
Office of Small Business
Securities and Exchange Commission
Mail Stop 3-4
Washington, D.C. 20549
Re: Houston Interweb Design, Inc.
Amendment No. 3 to Form SB-2
Filed: June 11, 1999
File No.: 333-67871
Dear Mr. Wulff:
Please be advised the company filed Amendment No. 3 to its Registration
Statement on Form SB-2/A today. A courtesy copy of the filing and the original
auditor's consent are enclosed herewith. The following are our responses to
your comment letter dated June 9, 1999. Our responses are numbered to
correspond with the numbered paragraphs included in your comment letter, a copy
of which is attached hereto.
CALCULATION OF REGISTRATION FEE
1. The rescission offering shares have been added to this table.
COVER PAGE
2. Detailed disclosure regarding the rescission offer has been removed. The
paragraph beginning "We have not authorized...." has been relocated to the
table of contents page.
RISK FACTORS
3. The risk factors have been revised to comply with plain English
requirements.
4. The following risk factors have been deleted:
"As an advertising medium the Internet is still an evolving market"
"Our ability to adapt to rapidly changing technology"
"Various factors relating to competition in the Internet industry"
"Our business is dependent on the maintenance of the Internet
infrastructure"
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The following risk factors have been relocated to the business section:
"Risks of Infringement in Internet-related industries"
"Possible additional tax burdens"
"Government regulation of Internet activities"
5. Various factors relating to competition in the Internet industry has been
deleted as the disclosure is adequately covered under "Competition" in the
business section.
6. We have added the following risk factors regarding the rescission offer on
page 3 of the SB-2/A.
WE MAY HAVE VIOLATED SECURITIES LAWS
The company sold 166,667 shares of common stock in February 1999. The
securities sold in February did not have a registration statement on file with
the SEC. The federal securities laws require registration of securities unless
an appropriate exemption from the registration requirements of those laws is
available. If an exemption did not exist for the sale of these securities, the
company may have violated the registration requirements. If so, purchasers
could seek rescission of their purchase and recover money paid for the
securities. The company makes no admission of any violation of federal
securities laws and no investor has sought rescission of any purchase.
ACCEPTANCE OF THE RESCISSION OFFER COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
FINANCIAL CONDITION
The company intends to make a rescission offer to the February investors by
means of this prospectus. Should those purchasers accept the rescission offer,
the company would need to pay those investors up to approximately $250,000 (plus
interest and other costs), which could have a material adverse effect on our
financial condition.
WE MAY BE UNABLE TO INSULATE OURSELVES FROM LIABILITY UNDER FEDERAL LAW
To the extent that claims for federal securities violations are not time barred,
we may not be able to insulate ourselves from liability under federal law
because the SEC has taken the position that liability under federal law is not
avoided because the potentially liable person makes a registered rescission
offer.
MD&A
7. In June 1999, Mr. Magness loaned the company $250,000 pursuant to a one
year promissory note which bears interest at 10% per annum in order to
finance potential payment to the Rescission Offerees. In the event the
Rescission offer is accepted, payment to the Rescission Offerees could have
a material adverse effect on the
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company's financial condition. If the company is unable to repay the note
when due, it may need to obtain additional financing.
8. The following paragraph has been added to page 12 of the SB-2/A:
The SEC and state securities boards detailed a substantial number of
requirements in order to effectuate the distribution of 750,000 shares of
company common stock held by PinkMonkey.com. The company determined that
the time and costs to comply with these requirements outweighed the
benefits of the distribution. Management believes the main benefit of the
distribution was that the company would become a reporting company under
the Exchange Act. By registering the resale of the 252,633 shares of
company common stock held by the selling stockholders, the company becomes
a reporting company upon effectiveness of this registration statement.
Although a portion of the consideration paid by PinkMonkey.com was the
distribution of the shares to its shareholders, it constituted only a small
part of the consideration which was comprised primarily by services
rendered by principals of PinkMonkey.com to the company. PinkMonkey.com
issued a press release announcing its decision to retain the 750,000 shares
of company common stock for investment purposes. PinkMonkey.com also
indicated that although it did not intend to distribute the shares of
company common stock at this time, it may do so in the future.
Supplementally, the company believes that the PinkMonkey.com shareholders
do not have a contractual or other right to receive company shares.
PinkMonkey.com evaluated the issue prior to publication of the press
release abandoning the distribution.
ITEM 26
9. The disclosure has been revised to delete references to the company's
belief that the investors were insiders or accredited investors. Certain
of the investors were involved in the development of the company and
certain of the investors were employees or consultants of the company. The
disclosure has been revised accordingly.
ACCOUNTING COMMENTS
10. The repurchase price has not been reclassified as it was a subsequent
event. The company is aware of the reclassification issue, and if
additional interim financial statements are required, the reclassification
will be made as appropriate.
Very truly yours,
BREWER & PRITCHARD, P.C.
