As filed with the Securities and Exchange Commission on August 17, 1999
Registration No. 333-79357
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1/A
FIRST AMENDMENT TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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WORDCRUNCHER INTERNET TECHNOLOGIES, INC.
(Name of issuer in its charter)
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Nevada 7379 84-1370590
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
405 East 12450 South, Suite B
Draper, Utah 84020
(801) 816-9904
(Address and telephone number of registrant's principal executive offices
and principal place of business)
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Kenneth W. Bell
405 East 12450 South, Suite B
Draper, Utah 84020
(801) 816-9904
(Name, Address and telephone number of agent for service)
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Copies to:
Scott R. Carpenter, Esq.
Parsons Behle & Latimer
201 South Main Street, Suite 1800
Salt Lake City, Utah 84111
(801) 532-1234
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the registration statement becomes effective.
If the securities being registered on this Form are being offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check
the following box. [ x ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following boxes 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(c) under
the Securities Act, check the following boxes 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. [ ]
We hereby amend this registration statement on such a date or dates as may be
necessary to delay its effective date until we 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.
PROSPECTUS SUBJECT TO COMPLETION, DATED AUGUST 17, 1999
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The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
WORDCRUNCHER INTERNET
TECHNOLOGIES, INC.
a Nevada corporation
2,693,137 shares of common stock
$0.001 per share
This is a public offering of 2,693,137 shares of the common stock of
WordCruncher Internet Technologies, Inc. ("WordCruncher," "we," or "us"). All of
the shares being offered, when sold, will be sold by certain selling
stockholders as identified in this prospectus. We will not receive any of the
proceeds from the sale of the shares. However, we will receive proceeds from the
exercise of warrants which can be exercised by certain of the selling
stockholders. Our common stock is currently traded over the counter under the
symbol "WCTI." The last reported sales price of the common stock on that market
on August 16, 1999 was $4.25 per share. We have submited an application to list
our common stock on the NASDAQ System under the symbol "WCTI."
_________________________
Investing in the shares involves certain risks.
See "Risk Factors" beginning on page 7.
_________________________
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.
_________________________
August 17, 1999
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. The selling stockholders are offering and
selling the shares only in jurisdictions where offers and sales are permitted.
The information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of the delivery of the prospectus or any
sale of the shares. In this prospectus, references to "WordCruncher.," "we,"
"us," and "our," refer to WordCruncher Internet Technologies, Inc.
Table of Contents
Page
Prospectus Summary.......................................................... 3
Risk Factors................................................................ 7
Transactions Effected in Connection With the Offering....................... 12
Use of Proceeds............................................................. 12
Price Range of Common Stock and Shares Eligible for Future Sale............. 13
Capitalization.............................................................. 14
Dividend Policy............................................................. 14
Selected Financial Data..................................................... 14
Management's Discussion and Analysis of
Financial Condition and Results of Operation............................ 15
Business.................................................................... 21
Management.................................................................. 28
Principal and Selling Stockholders.......................................... 31
Certain Relationships and Related Transactions.............................. 34
Changes In and Disagreements With Accountants............................... 34
Interest of Named Experts and Counsel....................................... 34
Plan of Distribution........................................................ 34
Description of Capital Stock................................................ 36
Commission's Position on Indemnification for Securities Act Liabilities..... 39
Index to Financial Statements............................................... 40
_________________________
We own or have the rights to trademarks or trade names that we use in
connection with the sale and marketing of our products and services, including
the "WordCruncher" and "Spyhop" trademarks. This prospectus may also include
references to trademarks of other companies.
SUMMARY
Because this is only a summary of the information contained in this
prospectus, it does not contain all of the information that may be important to
you in your investment decision to acquire the shares. You should read this
entire prospectus carefully, especially the section entitled "Risk Factors" and
the financial statements and notes, before deciding to invest in the shares.
Our Business
We are developing and intend to market a next-generation focused
Internet site for business professionals. Our site uses a directory structure
and search capability that allows our users to find pertinent, quality content
and information included in our database. We intend to focus our Spyhop
promotional efforts on the business researcher and professional user segments of
the Internet.
In February 1997, we purchased an exclusive, worldwide license to
market, modify and develop a portion of our core technology from a private
university. That technology had been used by researchers for more than 10 years.
Since then, we have modivied and enhanced its capabilities by combining it with
other proprietary technology in a manner that will allow it to be used on data
systems that are capable of communicating with the millions of computers
comprising the Internet. We have also refined its search and display
capabilities.
We have tested Spyhop on an Internet beta site, but we do not expect to
launch its production use until the fourth quarter of 1999. Based on our beta
test results, however, we believe Spyhop provides an effective method for
quickly sifting through large amounts of data on the Internet and private data
networks for relevant information.
Our Market
We believe Spyhop can be used for data searching, retrieval and
indexing on both private data networks and the Internet, but believe that it
will be used primarily by consumers on the Internet. Our research tells us that
37 million business professionals are currently connected to the Internet in the
United States either through their business or home computers. We intend to
market Spyhop initially to specialized segments of Internet users, including
business researchers and professionals, and then to private data network users.
The Internet is an interactive worldwide network of computers and data
systems that allows users to retrieve data, purchase products, send and receive
communications and purchase or provide services. The Internet is based on a
technology platform that allows computers in various locations and of various
makes to communicate with one another. The Internet's use has grown
substantially since it was first commercially introduced in the early 1990s.
International Data Corporation estimates that Internet users will grow from
approximately 35 million in 1996 to approximately 160 million by 2000. The
increase in the number of users has resulted in a rapid increase in the numbers
of advertisers, products and services on the Internet. For example, Jupiter
Communications estimates that advertisers spent approximately $340 million on
Internet and online advertising in 1996, and that Internet and online
advertising will grow to approximately $5 billion by the year 2000.
The use of intranets has also dramatically increased in recent years.
Corporations, universities and other large organizations have recently begun to
create large networks of interconnected computer networks to allow employees,
researchers and other parties access to private data. Many of these intranets
have adopted or use Internet Standards, which allow their users to obtain data
and information from the Internet as well as from the organization's private
data cache. A July 1996 survey of fifty Fortune 1000 companies reported that 64%
of the entities responding to the survey were currently using intranets, and
that another 32% were building them.
We believe the rapid growth of the Internet and private data networks
and, especially, the proliferation of Internet sites, has made it increasingly
challenging for consumers, content providers and advertisers to effectively
reach one another. Consumers are generally challenged to quickly find the most
relevant information, products and services related to a particular interest or
topic. Content providers are typically challenged to differentiate their
services in an increasingly crowded medium and to improve the visibility of
their sites. Advertisers are challenged to more effectively deliver their
messages to both general audiences and target groups.
Many of our competitors have developed products, including portals,
which they believe make the task of finding relevant data, information,
advertising or products on the Internet or private data networks easier and less
time consuming. These portals generally return a list of web sites (based on
search parameters) that contain limited extracts or descriptions of the web
sites. They can answer search inquires with lists of potential documents that
contain several thousand results, with little or no input as to which results
are relevant. As a result, Internet and private data networks users generally
spend substantial time searching through the list of the web sites presented to
find out which web sites are relevant to their particular inquiry. This
generally requires the user to call up the referenced page and either visually
scan it or conduct another page search to find the specific information in
question.
The Company's Solution
Spyhop is a business Internet site designed to provide fast and focused
information for business people. The centerpiece of the Spyhop business portal
is a search function that provides flexible query and retrieval capabilities,
and which draws on a proprietary database of web resources targeted to business
users. In addition to simple queries such as "internet and retail," Spyhop
supports complex queries that locate words close to each other and ranks the
match of the retrieved documents according to a complex formula. Search results
show hits in context, where keywords are highlighted in the passage of text from
the documents that most closely matches the user's query. Results may be sorted
according to criteria requested by the user, and may be e-mailed or filed for
further reference. Our business portal will also support other standard business
functions such as e-mail, fax capabilities, travel planning and financial
services.
Spyhop takes search result data and organizes it in terms that are familiar
to the average person - such as a modified table of contents or an index. Spyhop
can also sort, analyze, and manipulate search results to make it easier to find
what the user is looking for. This conceptual "bridge building" is especially
useful for new Internet users who are not generally familiar with the
limitations of existing portals.
Spyhop assists users in quickly zeroing in on sites and pages that
contain needed, relevant information by allowing users to analyze the context of
the search term in the document. This function also allows users to construct a
search request that avoids getting too many responses to a search that was
ambiguously phrased.
The Offering
Shares of common stock offered by the
selling stockholders..................................... 2,693,137
Common stock outstanding after the offering................... 13,434,449
Common stock owned by the selling
stockholders after the offering.......................... 5,210,214
Use of proceeds............................................... We will not
receive any
proceeds from
the sale of
the shares.
See "Use of
Proceeds."
Proposed NASDAQ symbol........................................ "WCTI"
The information set forth above assumes the conversion of outstanding
Series A Preferred Stock into 624,999 shares and the exercise of the warrants we
issued in connection with the Series A Preferred Stock (the "Warrants") for
307,449 shares. We are required to register for the holders of the Series A
Preferred Stock two times the number of shares of common stock they can acquire
on conversion of their Series A Preferred Stock plus the number of shares of
common stock they can acquire under the warrants they hold.
Our calculation of the number of shares of common stock issued and
outstanding is based on 11,877,002 shares of common stock outstanding as of June
30, 1999, but excludes approximately 429,000 shares of common stock subject to
outstanding options granted under employee stock options, of which 15,000 were
exercisable as of June 30, 1999, and excludes warrants to acquire up to 200,000
shares of common stock (at $5 per share) we have issued to a third party for
services. That party has earned warrants to acquire 50,000 shares of common
stock as of June 30, 1999. The information set forth above also assumes that
307,449 shares are issuable upon the exercise of the Warrants as of June 30,
1999, and the conversion by certain of the selling stockholders of outstanding
shares of Series A Preferred Stock into 624,999 common shares. The number of
shares issuable on conversion of the Series A Preferred Stock is subject to
adjustment. See 'Description of Capital Stock-Preferred Shares." We are required
to register under this prospectus for the benefit of the holders of the Series A
Preferred Stock two times the number of shares of common stock they can acquire
on conversion of their Series A Preferred stock plus the number of shares of
common stock they can acquire under the Warrants they hold. However, that number
of shares is the greatest number of shares we may be required to register for
the Series A Preferred Stock and Warrant holders, and the actual number of
shares we issue to them may be smaller. The actual number of shares of common
stock issuable to the holders of the Series A Preferred Stock (upon its
conversion) and the outstanding Warrants (upon their exercise) as of June 30,
1999 was 932,448 shares, consisting of 624,999 shares from the assumed
conversion of the Series A Preferred Stock and 307,449 shares from the exercise
of the Warrants. See "Description of Capital Stock."
<PAGE>
<TABLE>
<CAPTION>
Summary and Operating Data
Interim Period
Year Ended December 31, Ended June 30,
----------------------- ---------------------
1998 1997 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total Revenues................................... $ 82,678 $ 24,484 $ 21,286 $ 57,707
Operating costs and expenses:
Cost of sales and royalties.................... 15,864 806 25,731 586
Research and development....................... 256,291 119,862 273,091 24,342
Depreciation and amortization.................. 10,406 6,419 38,660 4,957
Sales and Marketing............................ 34,554 5,274 167,551 0
General and administrative..................... 227,590 213,293 450,625 36,817
-------------- ------------ ------------- -------------
Operating Loss................................... (462,027) (321,170) (934,372) (8,995)
Other income and (expense), net.................. (20,882) (14,048) 94,302 (13,237)
Provision for income taxes....................... - - - -
-------------- ------------ ------------- -------------
Loss before cumulative effect of
change in accounting........................ (482,909) (335,218) (840,070) (22,232)
Cumulative effect of change in accounting........ - - - -
-------------- ------------ ------------- -------------
Net income Loss $ (482,909) $ (335,218) $ (840,070) $ (22,232)
============== ============ ============ ============
Net loss per common share $ (0.079) $ (0.61) $ (0.071) $ (0.061)
============== ============ ============ ============
Basic and diluted loss per common share:
Basic loss per common share.................... $ (0.079) $ (0.61) $ (0.071) $ (0.061)
Diluted loss per common share.................. - - (0.062)(1) -
Weighted average shares outstanding.............. 6,100,679 545,535 11,877,002 367,022
</TABLE>
June 30, 1999
Actual
-------------
Balance Sheet Data:
Cash, cash equivalents, marketable debt securities
and certificate of deposit....................... $ 5,238,834
Total assets..................................... 5,628,599
Long-term obligations, including current portion. 19,270
Deficit accumulated during development stage..... (1,658,197)
Stockholders' equity............................. 5,508,965
Unless otherwise indicated, all information in this prospectus:
- assumes no exercise of outstanding and exercisable options or warrants,
- assumes no exercise of the Warrants or the conversion of the outstanding
Series A Preferred Stock,
- reflects the 3 for 1 forward stock split we effected in July 1998.
(1) Assumes conversion of outstanding perferred stock.
See Notes to Financial Statements for information concerning the computation of
per share amounts.
RISK FACTORS
An investment in the Shares is very risky. You should carefully
consider the following risks in addition to the information contained in the
remainder of this Prospectus before purchasing the Shares.
We have a limited operating history and little historical information
by which to value the shares. Although we anticipate our operating revenue will
increase in the future, we cannot guarantee that our revenues will exceed our
operating expenses. We incorporated in 1996 and purchased the license to develop
and market the basic Spyhop technology in February 1997. We only recently
completed our beta testing of Spyhop on our web site and do not anticipate
putting it into commercial use until the fourth quarter of 1999. We may
encounter financial, managerial, technological or other difficulties as a result
of our lack of operating history.
Spyhop is still being developed and is not currently available for sale
or license. We are continuing to develop our products, none of which are
immediately available for use by our customers. While we believe that Spyhop
will be marketed in the fourth quarter of 1999, we cannot be certain that we
will be able to introduce it to the marketplace by that time or that it will be
accepted by the market at any time.
We have consistently incurred losses since our formation and may never
be profitable. During 1997 and 1998, we incurred losses of $335,218 and
$482,909, respectively, and during the first six months of 1999, we incurred an
additional loss of $840,070. We have not been profitable and expect to continue
to incur losses for the foreseeable future. We have financed our operations and
business through the sale of our common stock and Series A Preferred Stock and
through the issuance of notes. We have not been able to fund our business
through the revenue we have generated and there can be no assurance that we will
be able to do so in the near future.
Our quarterly results could fluctuate and are difficult to forecast in
valuing the shares. We have consistently had losses since our formation. Our
quarterly operating results in the future may vary significantly, depending on
factors such as revenue from our advertising sales and software license fees,
the timing of our new product and service announcements and launches, market
acceptance of new and enhanced versions of Spyhop and related products (if any),
changes in our operating expenses, changes in our business strategy, and general
economic factors. We have limited or no control over many of these factors. Our
quarterly revenues will also be difficult to forecast because the markets for
our products and services are evolving and our revenues in any period could be
significantly affected by new product announcements and product launches by our
competitors, as well as by alternative technologies. We believe period-to-period
comparisons of our results of operations will not necessarily be meaningful for
the foreseeable future.
Our industry is subject to rapid technological change, and we may not
be able to keep up. Internet industries change rapidly. Our operating results
will depend to a significant extent on our ability to successfully introduce our
products and improve Spyhop. Accordingly, our ability to compete successfully in
our markets will depend on a number of factors, including our ability to
identify emerging target markets, identify emerging technological trends within
those markets, develop and maintain competitive products, enhance our products
by adding innovative features that differentiate them from our competitor's
products, bring products to market on a timely basis at competitive prices and
respond effectively to new technological changes or new product announcements by
others. We believe we will need to make continuing significant expenditures for
research and development in the future. We may not be able to successfully
develop new products or, if we do, those products may not be accepted by the
market.
We are subject to intense competition and our competitors may have
significant advantages over us. The development and marketing of search engines
and Internet portals is extremely competitive. Many of our competitors have
competitive advantages, including established positions in the market, brand
name recognition, greater financial, technical, marketing and managerial
resources, and established strategic alliances. Further, our competitors may
succeed in developing products or technologies that are more effective than
ours, or that make our products and technologies obsolete.
We are controlled by our executive officers and directors and our other
shareholders may not have great influence over our business. Our executive
officers and directors beneficially own approximately 45.2% of the common stock.
After this offering, they will continue to own over 34.1% of the common stock,
even assuming the sale of all the shares. As a result they will have substantial
influence over our operations and on the outcome of matters submitted to our
stockholders for approval. In addition, their ownership of such a large portion
of the common stock could discourage the purchase of our common stock by
potential investors, and could have an anti-takeover effect, possibly depressing
the trading price of our stock.
We depend on patents and proprietary rights which are not always secure
and the loss of which may significantly harm us. Our ability to compete
effectively in our markets will depend, in part, on our ability to protect the
proprietary nature of the Spyhop technology through a combination of patents,
licenses and trade secrets. Competition in our markets is intense and our
competitors may independently develop or obtain patents on technologies that are
substantially equivalent or superior to Spyhop. We could incur substantial costs
in defending patent infringement lawsuits brought by others and in prosecuting
patent infringement lawsuits against third parties.
A portion of our basic proprietary technology is based on an exclusive,
worldwide license to a patent that was issued to a university. Our success
depends in part on the continued validity of that patent and, if we or the
university fail to prosecute or maintain that patent, our business could be
damaged. Further, that patent (or patent applications or continuances we file in
the future) could be challenged, invalidated or circumvented by our competitors.
Patents can also fail to provide meaningful competitive advantages. For example,
another company could develop a search engine technology that provides search
results similar to Spyhop search results without infringing on the university
patent. If the university from which we license our patent rights fails to
defend the rights under its patent but we decide to take up the defense, we
would be responsible for those patent litigation costs. If we were to become
involved in a dispute regarding our intellectual property, we might have to
participate in interference proceedings declared by the United States Patent and
Trademark Office to determine who had the claimed rights first. We could be
forced to seek a judicial determination concerning the rights in question. These
types of proceedings can be costly and time consuming, and we may not prevail.
If we did not prevail, we could be forced to pay significant damages, be forced
to obtain a license to the technology in question or stop marketing a certain
product.
Intellectual property rights, by their nature, are uncertain and
involve complex legal and factual questions. We may unknowingly infringe on the
proprietary rights of others and may be liable for our infringement, which could
cost us significant amounts. We are not aware of any third party intellectual
property rights which would prevent our use of Spyhop, although rights of that
type may exist. If we infringe on the intellectual property of another party, we
could be forced to seek a license to those intellectual property rights or alter
our products or processes so they no longer infringe on the rights of the third
party. If we are required to obtain a license to another party's proprietary
rights, that license could be expensive, if we could obtain it at all.
We also rely on trade secrets and other unpatented proprietary
information in our product development activities. To the extent we rely on
confidential information to maintain our competitive position, other parties may
independently develop the same or similar information. We attempt to protect our
trade secrets and proprietary knowledge in part through confidentiality
agreements with our employees and collaborators. These agreements may not
effectively prevent disclosure of our confidential information and may not
provide us with an adequate remedy in the event of unauthorized disclosure of
that information. If employees or collaborators develop products independently
that may be applicable to our products under development, disputes may arise
about ownership of proprietary rights to those products. Those products will not
necessarily become our property, but may remain the property of those persons.
Protracted and costly litigation could be necessary to enforce and determine the
scope of our proprietary rights. Our failure to obtain or maintain patent and
trade secret protection, for any reason, could have a material adverse effect on
our business, financial position and results of operations.
We will need significant additional capital, which we may not be able
to obtain, to fund our business. Based on our current expenditure rate, we
believe we will need additional financing by the middle of 2000, and that we
will need a total of between $25 million and $30 million in new capital by 2001
to develop Spyhop and introduce it to the market. Therefore, the success of our
business strategy will be dependent on our ability to access equity capital
markets and borrow on terms that are financially advantageous to us. We have no
external source of financing and we have not received any commitment for any
funds we may need in the future. We may not be able to obtain funds on
acceptable terms. If we fail to obtain funds on acceptable terms, we may be
forced to delay or abandon some or all of our business plans, which could have a
material adverse effect. If we are unable to obtain additional capital, we also
may not have sufficient working capital to finance acquisitions, pursue business
opportunities or develop products. If we borrow money, we could be forced to use
a large portion of our cash reserves to repay it, including interest. If we
issue our securities for capital, your interest and the interests of the other
then-current shareholders could be diluted.
Our products are complex and may contain errors which may discourage
their use. Spyhop is complex and may contain errors, defects and "bugs." We have
detected those kinds of errors, defects and bugs in the past and have corrected
them as quickly as possible. Correcting any defects or bugs we discover in the
future may require us to make significant expenditures of capital and other
resources. Despite our continuing tests, users may find errors or defects in
Spyhop which could cause additional development costs or result in delays in (or
loss of) Spyhop market acceptance.
Our stock price may be volatile. In recent years the stock market in
general, and the market for shares of high technology companies in particular,
have experienced extreme price fluctuations. In many cases these fluctuations
have been unrelated to the operating performance of the affected companies. The
trading price of our common stock had been and may be subject to extreme
fluctuations in response to both business-related issues (such as quarterly
variations in operating results, or announcements of our new products or our
competitors) and stock market-related influences (such as changes in analysts'
estimates, the presence or absence of short-selling of our common stock and
events affecting other companies that the market deems to be comparable to us).
We may have problems as a result of the year 2000 issue, including a
possible shut-down of Spyhop. We rely on computer systems, applications and
devices in operating and monitoring all of the major aspects of our business,
including financial systems (such as general ledger, accounts payable and
payroll modules), customer service, networks and telecommunications equipment
and end products. Also, we provide our services and products over the Internet,
which is a computer-based industry. Even if our internal systems are not
materially affected by the year 2000 issue, we could be affected by disruptions
in the operation of the persons and entities with which we interact or year 2000
disruptions that affect our customers. Despite our efforts to address the impact
of year 2000 on our internal systems and operations, we may suffer a material
disruption of our business, which could have a material adverse effect on our
financial condition and results of our operations.
This prospectus contains forward-looking statements which may in the
future prove to be wrong. The information contained in this prospectus includes
information based on trends or other forward-looking statements that involve a
number of assumptions, risks and uncertainties. The actual results of our
operations could differ materially from our historical results of operations and
those discussed in the forward-looking statements. The forward-looking
statements are based on our management's beliefs, as well as assumptions they
have made based on currently available information. Words such as "anticipate,"
"believe," "estimate," "plan," "expect," "intend" and words or phrases of
similar import, as they relate to us or our management, are intended to identify
forward-looking statements. The forward-looking statements should be read in
light of these factors and the factors identified elsewhere in this prospectus.
The future sale of our common stock could pose investment risks,
including dilution of the shares. The market price of our common stock could
drop as a result of sales of the common stock (including the shares) in the
market after this offering, or the perception that such sales could occur. These
factors could also make it more difficult for us to raise funds through future
offerings of our common stock. There will be a total of 13,434,449 shares of
common stock outstanding immediately after this offering, assuming the sale of
all the shares (and also assuming no exercise of outstanding options or warrants
other than the Warrants). The shares registered hereunder will be freely
transferable without restriction or further registration under the Securities
Act of 1933 (the "Securities Act"), except for any shares purchased by our
"affiliates," as defined in Rule 144 under the Securities Act. We also have 4.5
million shares of common stock outstanding that are freely transferrable without
registration under the Securities Act, except for any of those shares purchased
by our "affiliates." The remaining shares of common stock outstanding are
"restricted securities," as defined in Rule 144. The restricted shares may be
sold in the future without further registration under the Securities Act to the
extent such sales are permitted by Rule 144 or any other exemption under the
federal securities laws. See "Price Range of Common Stock and Shares Eligible
for Future Sale" and "Plan of Distribution."
We have a short market history and there is little historical
information by which to value the shares. There has not been a large public
market for our equity securities, although our common stock has traded on the
over-the-counter market since July 1998. See the section entitled "Price Range
of Common Stock and Shares Eligible for Future Sales," which describes the high
and low actual sales prices of our common stock during certain periods. We have
applied for listing on the NASDAQ system, which we believe will provide our
stockholders with a more organized, efficient and broader market for our stock
than the over-the-counter market. If our application with NASDAQ is not
approved, our shareholders and potential investors will be limited to effecting
market transfers of our stock on the over-the-counter market. We do not know the
extent to which investor interest in our stock will lead to the development of a
more substantial and active trading market or how liquid that market might be.
The offering price for the shares was determined by the selling stockholders.
You may not be able to resell your shares at or above the price you pay for your
shares.
We have an unproven product and we operate in a developing market which
may not accept our products. Spyhop is based on search engine technology which
has been used for over 10 years. However, if Spyhop does not achieve significant
market acceptance and usage, our business, results of operations and financial
condition could be materially and adversely affected. We have refined the basic
Spyhop technology by adding additional functions and recently concluded a beta
test of Spyhop on our web site. We are modifying Spyhop in light of those test
results. Our success will depend largely on our ability to refine and continue
to develop Spyhop and other products. See "Business - Spyhop Markets."
The primary markets for Spyhop have only recently begun to develop and
are rapidly evolving. As is typical of new and rapidly evolving industries,
demand for (and market acceptance of) products and services that have been
released recently or that are planned for future release are subject to a high
level of uncertainty. If the markets for Spyhop fail to develop, develop more
slowly than we expect, or become saturated with products of other competitors,
or if Spyhop does not achieve market acceptance, our business, results of
operations and financial condition could suffer.
Our markets are highly dependent on the use of the Internet. A number
of critical issues concerning the commercial use of the Internet, including
security, reliability, capacity, costs, ease of use, access, quality of service
and acceptance of advertising remain unresolved and may retard the growth of the
Internet for commercial applications.
We are dependent on the continued adoption of private data networks,
the failure of which may harm our business. In addition to providing services
over the Internet, we intend to provide or license Spyhop for use on private
data networks systems. Therefore, we will be dependent on the development of
those systems. Those systems may not be adopted by large numbers of
organizations, and the organizations adopting them may not want users to
communicate over those systems. Our products may not appeal to organizations
that use private data networks.
We will need to carefully manage our growth, but may not be able to do
so effectively. We hope and expect to grow rapidly, both in the rate of our
sales and operations and the number and complexity of our products, product
distribution channels, and product development activities. Several members of
our key management team only recently joined us. See "Management." Our growth,
coupled with the rapid evolution of our markets, has placed, and is likely to
continue to place, significant strains on our administrative, operational,
technical and financial resources and increase demands on our internal
management systems, procedures and controls. If we are unable to manage future
growth effectively, our business, results of operations and financial condition
could be materially adversely affected.
We will be dependent upon value added links, but may not be able to
obtain them. We intend to establish value added links with leading Internet
content providers to allow their users to use Spyhop without leaving the content
provider's web site. We expect to derive revenue from these value added links
and to increase Spyhop brand recognition among users through such relationships.
Our success in establishing Spyhop as a recognized brand name and achieving its
acceptance in the market will depend in part on our ability to establish and
maintain value added links. See "Business."
We may be subject to capacity constraints and system failures, which
may discourage our customers' use of Spyhop. A key element of our marketing
strategy is to make Spyhop available at no cost to users of the Internet through
our own web site. Accordingly, Spyhop's performance will be critical to our
ability to establish the Spyhop brand name. Increases in the volume of searches
conducted using Spyhop could strain our system capacity, which could lead to
slower response times or complete system failures. In addition, if the number of
Internet users increases, Spyhop may not be able to be scaled appropriately. We
will likely be required to make certain performance and support commitments in
our value added link agreements and if we fail to meet the commitments, those
agreements could be terminated or we could be liable for damages. We will also
be dependent on hardware suppliers for prompt delivery, installation and service
of servers and other equipment that we use to operate our web site and for
Internet access. The servers and other hardware equipment will be vulnerable to
damages from fire, earthquake, power loss, telecommunications failures and
similar events. Our business operations may also be vulnerable to computer
viruses, break-ins and similar disruptive problems. See "Business."
We may be subject to increased regulations and we may have liability
for information retrieved from the Internet. Other than laws and regulations
applicable to businesses generally, there are currently few laws and regulations
expressly applicable to access and commerce on the Internet. Due to the
increased popularity and use of the Internet, however, it is possible that new
laws and regulations may be adopted with respect to the Internet relating to the
issues such as user privacy, pricing and characteristics, and content and
quality of products and services. For example, we may be subject to the
provisions of the Communications Decency Act, which if found to be
constitutional, could expose us to substantial liability. The adoption of any
such laws or regulations could retard the growth or the use of the Internet,
which could adversely affect the demand for our products and services. Those
laws or regulations could also result in significant additional costs and
technological challenges for us in complying with any mandatory requirements.
Further, several states have attempted to tax online retailers and service
providers even when they have no physical presence in the state. There is
currently a three-year moratorium on taxing Internet commerce which was imposed
by the federal government. We cannot predict what effect the lapse of the
moratorium period will have on our business operations. In addition, plaintiffs
have brought claims, and sometimes obtained judgments, against online services
for defamation, negligence, copyright or trademark infringement or under other
theories with respect to materials disseminated through those services. We will
maintain a web site to which users can upload materials, so we may be subject to
similar claims.
We may be subject to risks associated with global operations, which we
may not be adequately protected against. Spyhop has multi-language capability.
We have not concentrated on developing that function, but we believe we could do
so in the future. As a result, we could derive substantial portions of our
revenues from customers outside the United States. Our ability to expand
products and services internationally would be limited by the general acceptance
of the Internet and intranets in other countries. In addition, international
operations are subject to a number of risks, including costs of localizing
products and services for international markets, dependence on independent
resellers, multiple and conflicting regulations regarding communications,
restrictions on use of data and internet access, longer payment cycles,
unexpected changes in regulatory environments, import and export restrictions
and tariffs, difficulties in staffing and managing international operations,
greater difficulty or delay in accounts receivable collection, potentially
adverse tax consequences, the burden of complying with a variety of laws outside
the United States, the impact of possible recessionary environments and
economies outside the United States and political and economic instability.
Furthermore, we expect that our export sales would be denominated predominately
in United States dollars. Therefore, an increase in the value of the United
States dollar relative to other currencies could make our products and services
more expensive and potentially less competitive in international markets.
None of our common shareholders is subject to a lock-up and they may
immediately sell their stock, which may depress our stock price. Our current
common stockholders have not entered into any agreements which restrict their
ability to sell or otherwise dispose of their common stock. As a result, our
stockholders will be able to sell any and all of their shares of common stock,
subject only to applicable federal securities laws. Sales and distributions of
substantial amounts of common stock in the public market, whether by reason of
this prospectus or by the same or other shareholders, could adversely effect the
prevailing market prices for our securities. See "Price Range of Common Stock
and Shares Eligible for Future Sale."
An investment in the shares is very risky. You should carefully
consider the preceding risks in addition to the information contained in the
remainder of this prospectus before purchasing the shares. This prospectus
contains forward-looking statements that involve risks and uncertainties. Many
factors, including those described above, may cause actual results to differ
materially from anticipated results.
TRANSACTIONS EFFECTED IN CONNECTION WITH THE OFFERING
In February 1999, we entered into an agreement (the "Purchase Agreement")
with eight accredited investors relating to the purchase by those investors of
up to $15 million of our newly designated Series A Convertible Preferred Stock
(the "Series A Preferred Stock"). In March 1999, the parties completed the
purchase and sale of the Series A Preferred Stock under the Purchase Agreement,
pursuant to which those investors acquired 6,300 shares of our Series A
Preferred Stock for $6,300,000. The Series A Preferred Stock is convertible into
the number of shares of common stock equal to the dollar amount of the Series A
Preferred Stock divided by $10.08, or a total of 624,999 shares. The holders of
the Series A Preferred Stock are entitled to receive additional shares of common
stock based on the trading price of the common stock at certain preset times
and, as of July 22, 1999, were eligible to receive an additional 256,779 common
shares based on the average trading price of our common stock between July 8 and
July 21, 1999. In connection with the transaction, the investors also acquired
warrants (the "Warrants") which will permit them to purchase 307,449 additional
shares of common stock through February 2004 at weighted average exercise prices
ranging from $28.25 to $40.71 per share. See "Description of Capital Stock."
In connection with the investors' purchase of the Series A Preferred
Stock, we granted those investors certain registration rights. Under the terms
of those rights, we are required to file a registration statement (of which this
prospectus is a part) with the Securities and Exchange Commission which will
register not less than twice the number of shares of common stock which would be
required for the conversion of the Series A Preferred Stock held by those
investors if that stock were converted on the trading date immediately preceding
the filing of the registration statement. We are also required to register the
number of shares of common stock required for exercise of all the warrants. The
number of shares of common stock issuable on conversion of the outstanding
Series A Preferred Stock as of June 30, 1999 was 624,999 shares and the number
of shares of common stock issuable on the exercise of the Warrants as of that
date was 307,449 shares, so the total number of shares of common stock we are
registering for the holders of the Series A Preferred Stock and the Warrants
hereunder is 1,557,447 shares of common stock (624,999 shares times 2, plus
307,449 shares).
USE OF PROCEEDS
We are registering the shares for the benefit of the selling
stockholders and the selling stockholders will sell the shares from time to time
under this prospectus. Other than the exercise price certain of the selling
stockholders pay to exercise the Warrants, we will not receive any of the
proceeds from the sale of the shares registered hereunder. Those selling
stockholders are not obligated to exercise their Warrants, and there can be no
assurance they will exercise all or any of them. If they exercised all of the
Warrants, however, we would receive $9,591,960. We intend to use any proceeds
from any exercise of the Warrants for working capital needs and general
corporate purposes. We will pay all of the costs of this offering, with the
exception of the costs incurred by the selling stockholders for their legal
counsel and the costs they incur for brokerage commissions on the sale of their
shares.
PRICE RANGE OF COMMON STOCK AND SHARES ELIGIBLE FOR FUTURE SALE
Since July 1998, our common stock has been traded over-the-counter and
quoted on the OTC Electronic Bulletin Board under the symbol "WCTI." There were
approximately 143 holders of record of our common stock and 8 holders of record
of our Series A Preferred Stock as of June 30, 1999. Standard Registrar and
Transfer Company, Inc. currently, acts as transfer agent and registrar for the
common stock. The following table presents the range of the high and low bid
prices of our common stock as reported by the Nasdaq Trading and Market Services
for the third and fourth fiscal quarters of 1998 and the first and second
quarters of 1999. The quotations shown below represent prices between dealers,
may not include retail markups, markdowns, or commissions and may not
necessarily represent actual transactions:
Year Quarter High Low
- --------- -------------------- ---------------- --------------------
1998 Third Quarter $ 5.00 $ 0.68
Fourth Quarter $ 6.81 $ 2.00
1999 First Quarter $ 36.25 $ 4.78
Second Quarter $ 7.81 $ 3.56
Upon completion of the offering, we will have outstanding an aggregate
of 13,434,449 shares of common stock. These amounts are inclusive of the number
of shares of common stock we would be obligated to issue on the conversion of
the Series A Preferred Stock (two times the 624,999 shares currently issuable on
conversion, or 1,249,998 shares) and exercise of the Warrants, as described
below (307,449 shares). That number is exclusive, however, of any additional
common shares we will be required to issue to the holders of the Series A
Preferred Stock based on changes in the price of our common shares, as measured
on certain dates. See "Description of Capital Stock." In addition, we reserved
for issuance 429,000 shares issuable upon exercise of outstanding options (of
which 15,000 were currently exercisable as of June 30, 1999) and up to an
additional 200,000 shares of common stock under warrants we are issuing to a
third party for services (of which 50,000 have been earned as of June 30, 1999).
The shares offered hereby will be freely transferable without restriction or
further registration under the Securities Act, except for shares which may be
acquired by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. We also have 4.5 million shares of common stock that are
currently freely tradable (except for such of those shares as may be acquired by
our affiliates). The remaining shares of common stock held by existing
shareholders are "restricted securities" as that term is defined in Rule 144.
Restricted securities may be sold in the public market only if they are
registered or if they qualify for exemption from registration under Rules 144 or
701 under the Securities Act or otherwise. None of the restricted shares held by
our existing shareholders will be eligible for immediate sale in the public
market under Rule 144(k).
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of common stock or (ii) the average weekly trading volume in
the common stock during the four calendar weeks preceding such sale, subject to
the filing of a Form 144 with respect to such sale and certain other limitations
and restrictions. In addition, a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, would
be entitled to sell such shares under Rule 144(k) without regard to the volume,
manner of sale and other limitations described above.
An employee or consultant of ours who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permit non-affiliates to sell their Rule
701 shares without having to comply with the public information, holding-period,
volume-limitation or notice provisions of Rule 144 and permit affiliates to sell
their Rule 701 shares without having to comply with the Rule 144 holding period
restrictions, in each case commencing 90 days after the date of this prospectus.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999
and as adjusted to give effect to the offering and the sale of the Series A
Preferred Stock in March 1999, as more particularly described in the section
entitled "Transactions Effected In Connection with the Offering."
<TABLE>
<CAPTION>
June 30, 1999
-------------
ProForma (as adjusted for
Actual (Unaudited) conversion of Preferred)
------------------ --------------------------
<S> <C> <C>
Long-term debt, including accrued interest $3,581 $3,581
Shareholders equity: $11,877 $12,502
Common shares, par value $0.001; 11,877,002
shares issued and outstanding, actual;
11,877,002 shares issued and outstanding,
proforma (as adjusted)
Series A Convertible Preferred shares, par $63 $ --
value $0.01; 6,300 shares issued and
outstanding, actual; no shares issued and
outstanding, proforma (as adjusted)
Additional Paid-In Capital $7,155,222 $7,154,660
Accumulated deficit $(1,658,197) $(1,658,197)
Total shareholders' equity (deficit) $5,508,965 $5,508,965
Total Capitalization $5,512,546 $5,512,546
========== ==========
</TABLE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock.
We do not intend to pay any cash dividends on our common stock for the
foreseeable future.
SELECTED FINANCIAL DATA
The financial information set forth below with respect to our
statements of operations for each of the years in the three-year period ended
December 31, 1998, and with respect to our balance sheets at December 31, 1996,
1997 and 1998 are derived from the financial statements included elsewhere in
this prospectus that has been audited by our independent certified public
accountants, Crouch, Bierwolf & Chisolm, and is qualified by reference to such
financial statements and notes related thereto. The financial data for the six
month period ended June 30, 1998 and 1999 are derived from our unaudited
financial statements included elsewhere in this prospectus and, in the opinion
of our management, includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth. The results
for the six months ended June 30, 1999 are not necessarily indicative of the
results that we can expect for the full year. The following selected financial
data should be read in conjunction with our financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Result of Operations".
<TABLE>
<CAPTION>
Interim Period
Ended June 30,
----------------
1998 1997 1996 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Product Sales................................. $ 32,884 $ 16,034 -0- $ 4,448 $ 16,017
Contract research revenues, royalties and
license fees..................................... 49,794 8,450 -0- 16,838 41,690
----------- ----------- ------- ------------ -----------
Total revenues............................. $ 82,678 $ 24,484 -0- $ 21,286 $ 57,707
Operating costs and expenses:
Cost of sales and royalties................... $ 15,864 $ 806 -0- $ 25,731 $ 586
Research and development...................... 266,563 126,251 -0- 273,091 24,342
Sales and Marketing........................... 34,554 5,274 -0- 167,551 -
General and Administrative.................... 227,724 213,293 -0- 489,285 41,774
----------- ----------- ------- ------------ -----------
Total costs and expenses................... 544,705 345,654 -0- 955,658 66,702
----------- ----------- ------- ------------ -----------
Loss from operations............................. (462,027) (321,170) -0- (934,372) (8,995)
Interest income and other, net................... 7,276 3,077 -0- 97,247 4,365
Interest expense................................. 28,158 17,125 -0- 2,945 17,602
Loss before income taxes......................... (482,909) (335,218) -0- (840,070) (22,232)
=========== =========== ======= ============ ============
Provision for income taxes....................... -0- -0- -0- -0- -0-
----------- ----------- ------- ------------ -----------
Net Loss......................................... $ (482,909) $ (335,218) -0- $ (840,070) $ (22,232)
Per Common Share Amounts:
Loss from continuing operations-eps.............. $ (0.076) $ (0.59) -0- $ (0.079) (0.025)
----------- ----------- ------- ------------ -----------
Net loss-eps $ (0.079) $ (0.61) -0- $ (0.071) $ (0.061)
=========== =========== ======= ============ ============
Weighted average outstanding shares.............. 6,100,679 545,535 -0- 11,877,002 367,022
Balance Sheet Data:
Cash and cash equivalents........................ $ 425,702 $ 10,369 -0- $ 5,238,834 $ 500,000
Total Assets..................................... 623,617 139,928 -0- 5,628-599 629,167
Long-term obligations, including current portion. 147,620 342,272 -0- 19,270 348,952
Accumulated deficit.............................. (818,127) (335,218) -0- (1,658,197) (357,450)
Shareholders' equity (deficit)................... 441,084 (208,943) -0- 5,508,965 268,825
See Notes to Financial Statements for information concerning the computation of per share amounts.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of a number of
factors, including those factors set forth under the section entitled "Risk
Factors" and elsewhere in this prospectus.
Overview. We are developing and intend to market a data system search
engine and focused portal sites that can be used to provide efficient, reliable
search results in Internet and private data network environments. We will market
our portal site, coupled with our search engine, under the brand name "Spyhop."
It uses proprietary intellectual property rights that we either own or license.
In early 1999, we conducted beta tests of Spyhop, and are currently responding
to the recommendations and concerns that we received in the test. We anticipate
being able to launch Spyhop commercially in the fourth quarter of 1999. We
intend to initially target the business and professional segments of the
Internet market as a provider of portal search services and through licensing
arrangements with other portal or web site providers.
We have devoted most of our resources since inception in November 1996
to the research and development of Spyhop and the development of brand awareness
of "Spyhop." As of June 30, 1999, we had an accumulated earnings deficit of
approximately $1,658,000. We expect our operating losses to continue until we
develop a sufficient customer and advertising base to cover our operating
expenses.
Reverse Acquisition Treatment. Our predecessor in interest was
incorporated in the state of California on May 2, 1997, as Dunamis, Inc. Dunamis
was formed for the purpose of publishing and marketing books and audio and video
tapes. On June 25, 1998, Dunamis completed a merger with a Nevada corporation
that had been created for the sole purpose of changing Dunamis' domicile from
California to Nevada. On July 14, 1998, the surviving entity in that transaction
completed a merger with WordCruncher Publishing Technologies, Inc. (formerly
"Redstone Publishing, Inc."), a Utah corporation that was formed in November,
1996. The Nevada corporation was the surviving entity in that transaction and,
as part of the transaction, changed its name to "WordCruncher Internet
Technologies, Inc.". At the time of the merger, WordCruncher Publishing
Technologies held the rights to a significant portion of the intellectual
property we currently use. As a result of the merger, the former shareholders of
WordCruncher Publishing Technologies, Inc. also obtained a majority of the
voting power of the combined companies. Accordingly, in conformance with
generally accepted accounting principles, the merger has been accounted for as a
"reverse acquisition". Consistent with reverse acquisition accounting treatment,
our accounting statements are the financial statements of WordCruncher
Publishing Technologies, Inc. and differ from the financial statements of
Dunamis, Inc.
Stock Split and Change in Par Value. In July 1998, we authorized a 3
for 1 forward stock split. We have retroactively restated our financial
statements to reflect that stock split. In connection with the reverse merger
with Dunamis, we also changed the par value of our common stock to $.001. That
change has also been retroactively applied in our financial statements. Unless
otherwise noted in this prospectus, all share amounts reflect the forward stock
split.
Results of Operation. The following summarizes the results of our
operations for the years ended December 31, 1997 and 1998 and for the six month
interim periods ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
Interim Period Ended
Years Ended December 31, June 30, 1999
1998 1997 1999 1998
---------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 82,678 $ 24,484 $ 21,286 $ 57,707
Cost of sales and royalties 15,864 806 25,731 586
_________ _________ _________ _________
Gross profit $ 66,814 $ 23,678 $ (4,445) $ 56,121
Research and development 266,563 126,281 273,091 23,342
Sales and marketing 34,554 5,274 167,551 -0-
General and administrative 227,724 213,293 489,285 41,774
Total Operating expense 528,841 344,848 929,927 65,116
Operating Loss (462,027) (321,170) (934,372) (8,995)
Interest expense (28,158) (17,125) (2,945) (17,602)
Interest income 7,276 3,077 97,247 4,365
Net loss $(482,909) $(335,218) $(840,070) $ (22,232)
</TABLE>
Our expenses have exceeded our revenues for each fiscal period since
our inception. The revenues we have generated to date have been nominal and
almost exclusively related to product sales and licensing fees for our personal
computer based version of our software. Those revenues should continue to
decrease as we switch our development and marketing emphasis to an Internet
version of Spyhop. Accordingly, we believe a comparison of the results of our
operations on a period-by-period basis is of little benefit. We expect that, as
we implement our business plan, our revenues will grow, along with the burdens
generally associated with larger revenues, including increased burdens on our
managerial, accounting and technical personnel. Following is a comparison of our
operating results on a year-by-year basis:
Comparison of Year End Periods. Following is a comparison of our
operating results for the year ended December 31, 1998 with the year ended
December 31, 1997:
Revenue. Revenues increased $58,194 from $24,484 for the year
ended December 31,1997, to $82,678 for the year ended December 31, 1998. This
increase was due largely to a specific project we did for an unaffiliated
company using our search engine technology.
Costs of Revenues. Cost of revenues increased even more
significantly (from $806 in 1997 to $15,864 in 1998) due to more accurate
allocation of costs related to sales.
Research & Development. Research and development expense
increased during 1998 to $266,563, up from $126,287 in 1997. This was due to our
increased level of operations.
Sales and Marketing. Sales and marketing expenses also
increased from $5,274 in 1997 to $34,554 in 1998 due to the increased level of
our operations.
General and Administrative Expense. General and administrative
expense increased in 1998, as we geared up our commercial operations. During
1998 (as compared to 1997) our general and administrative expenses increased
from $213,293 to $227,724.
Total Operating Expenses. Total operating expenses increased
$183,993 from $344,848 in 1997 to $528,841 in 1998. This resulted in an
operating loss for 1998 of $462,027, an increased loss of $140,857 over the 1997
loss of $321,170.
Interest Expense. As a result of heavier borrowing, our
interest expense grew $11,033 from $17,125 in 1997 to $28,158 in 1998.
Correspondingly, interest income more than doubled from $3,077 in 1997 to $7,276
in 1998 due to larger invested balances during the last 60 days of 1998.
Net Loss. Our net loss for 1998 grew $147,691 to ($482,909),
compared to a loss of ($335,218) for 1997 as a result of our increased costs and
expenses, primarily from our year ago for commercial operations.
We had no operations for the period ended December 31, 1996, so an item
by item comparison of the results of our operations for the periods ended
December 31, 1996 and December 31, 1997 would reflect an increase in the amount
of each of those line items to the extent of those line items in 1997. The
changes in the line items are directly attributable to the fact that we
initiated our operations during 1997.
Comparison for Six Month Periods. Results for the first six months of
1999 reflect a continued reduction in revenues, with significant increases in
research and development expense to $273,091 and sales and marketing expense to
$167,551. This is consistent with the final stages of development of our new
Spyhop product, which is scheduled for delivery in the fourth quarter of 1999.
General and administrative expense also increased to $489,285 for the first six
months of 1999 (from $41,774 in the six months ended June 30, 1998) as we built
the infrastructure necessary to support our operations. The change in interest
expense was negligible due to our reduced reliance on debt in 1999, while
interest income grew significantly to $97,247 for the first six months. This
growth is due to the substantial investments we currently have in high grade,
liquid investments. Based upon the above, our net loss for the first six months
of 1999 amounted to $840,070, as compared to our net loss of $22,232 for the
first six months of 1998.
Our operating revenues for the first six months of 1998 increased
$54,675 over the same period in 1997, growing from $3,032 to $57,707. This was
due largely to a one time consulting contract for work we did relative to the
implementation of our old WordCruncher technology into a client's site. Our
total expenses increased for the six months ending June 30, 1998, by $17,432,
from $66,286 in the same period in 1997 to $83,718 in 1998. This included
increases in interest expense of $16,137, an increase in research and
development expenses of $5,286 and an $8,000 decrease in sales and marketing
expenses over the same six month period in 1997. Our net losses for the six
months ending June 30, 1998 decreased by $42,757 from the same period in 1997 to
$(22,232), down from $(64,989) for the same period in 1997. Our cash balances
and cash equivalents at June 30, 1998 were $500,000, up from $(539) at June 30,
1997. This increase contributed to an increase in our total assets of $576,320
for the first six months of 1997. Our current liabilities increased $207,004
period-to-period, with total liabilities increasing by $242,956. This resulted
in an increased net worth of $333,364, from $(64,539) on June 30, 1997 to
$268,825 on June 30, 1998.
Quarterly Trends. We do not anticipate significant "seasonal" changes
in our operations. We expect revenues to grow consistently over the next five
years, but we believe they should be reasonably even from quarter to quarter. We
believe they will come initially from advertising sales and from "shared
advertising revenues" at associated sites. We believe we will generate
additional revenues through our licensing/partnership arrangements that use
Spyhop in other commerce-related areas over the Internet. As we move into the
corporate intranet market, we believe we will generate additional revenues from
licensing agreements and maintenance agreements with those corporate clients. We
expect slightly greater variation in quarter to quarter results as we move into
the corporate intranet arena.
Liquidity and Capital Resources. Since our inception, we have funded
our cash requirements through debt and equity transactions. We have used the
funds from those transactions to fund our investments in, and acquisition of,
our technology, to provide working capital and for general corporate purposes,
including paying expenses we incurred in connection with our development of
Spyhop. As of the year ended December 31, 1997, we had total assets of $139,928,
and total liabilities of approximately $348,871, resulting in a negative net
worth of $208,943. Our operating losses totaled $335,218. These losses were
funded primarily by related party loans, which were backed by a revolving bank
line of credit. See "Certain Relationships and Related Transactions."
In connection with the merger between WordCruncher Publishing
Technologies, Inc. and Dunamis, Inc. in July 1998, we obtained a significant new
source of operating capital. At the time of the merger, Dunamis, Inc. held cash
reserves of approximately $1 million, and had no liabilities. As a result of
that transaction, our total assets for the year ended December 31, 1998 were
$623,617, including cash or cash equivalents of $425,702. Our liabilities
totaled $182,533, resulting in a net worth of $441,084, including an operating
loss of $482,909 for the year ending December 31, 1998. In February, 1999, we
received the first cash portions ($6.1 million) from our sale of our Series A
Preferred Stock to eight investors. In March, 1999, we received the last of the
proceeds from the sale of those shares (in the amount of $200,000). Our expenses
for the offering totaled $392,100, resulting in net proceeds to us of
$5,907,900. As a result, as of June 30, 1999, we had total assets of $5,628,599.
Our total liabilities as of that date were $119,634, and our stockholders'
equity was $5,508,965. Our cash or cash equivalents at June 30, 1999 totaled
$5,238,834.
A summary of our audited balance sheets for the years ended December
31, 1997 and 1998 and our interim unaudited statements for June 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, Interim Period Ended
1998 1997 June 30, 1999
--------------- ---------------- ----------------------
<S> <C> <C> <C>
Cash and Cash Equivalents $ 425,702 $ 10,369 $ 5,238,834
Current Assets $ 425,702 $ 15,369 $ 5,249,707
Total Assets $ 623,617 $ 139,928 $ 5,628,599
Current Liabilities $ 170,919 $ 321,307 $ 116,053
Total Liabilities $ 182,533 $ 348,871 $ 119,634
Total Stockholders' Equity $ 441,084 $ (208,943) $ 5,508,965
Total Liabilities & Stockholders' Equity $ 623,617 $ 139,928 $ 5,628,599
</TABLE>
With the infusion of cash from our sale of the Series A Preferred
Stock, we believe we have the resources to continue our product development
efforts and to initiate our sales, marketing and promotional activities for
Spyhop. We operate in a very competitive industry that requires continued large
amounts of capital to develop and promote its products. Many of our competitors
have significantly greater capital resources. We believe it will be essential to
continue to raise additional capital, both internally and externally to compete
in this industry.
Our need to raise external capital in the future will depend upon many
factors, including, but not limited to, the rate of sales growth and market
acceptance of our product lines, the amount and timing of our necessary research
and development expenditures, the amount and timing of our expenditures to
sufficiently market and promote our products and the amount and timing of any
accessory new product introductions. In addition to accessing the public equity
markets, we will pursue bank credit lines and equipment lease lines for certain
capital expenditures. However, there can be no assurance that we will be able to
access the capital we need.
We currently estimate that we will require between $25 and $30 million
to develop our products and launch our operations in accordance with our
business plan through 2002. The actual costs will depend on a number of factors,
including
- our ability to negotiate favorable prices for purchases of
necessary portal components,
- the number of our customers and advertisers,
- the services for which they subscribe,
- the nature and success of the services that we offer,
- regulatory changes, and
- changes in technology.
In addition, our actual costs and revenues could vary from the amounts
we expect or budget, possibly materially, and those variations are likely to
affect how much additional financing we will need for our operations.
Accordingly, there can be no assurance our actual financial needs will not
exceed the amounts available to us.
To the extent that we acquire the amounts necessary to fund our
business plan through the issuance of equity securities, our then-current
shareholders may experience dilution in the value per share of their equity
securities. The acquisition of funding through the issuance of debt could result
in a substantial portion of our cash flows from operations being dedicated to
the payment of principal and interest on that indebtedness, and could render us
more vulnerable to competitive and economic downturns.
Recent Accounting Pronouncements . In June 1998, Statement of Financing
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" was released. The Statement requires recognition of all derivatives
as either assets or liabilities on a company's balance sheet and the measurement
of those instruments at fair market value. The Statement provides for the
accounting treatment of changes in the fair value of a derivative depending on
the planned use of the derivative and the resulting designation. We are required
to implement the Statement in the first quarter of fiscal 2000. We have not used
derivative instruments, however, and we believe that the impact of the adoption
of this Statement will not have a significant effect on our financial
statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use." The Statement is effective for fiscal
years beginning after December 15, 1998. The statement provides guidance and
accounting for the cost of computer software developed or obtained for internal
use by a company. We adopted this Statement on January 1, 1999, but do not
believe that it will have a significant effect on our financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-4, "Deferral of the Effective Date of a
Provision of Statement of Position 97-2." The Statement of Position 98-4 defers
for one year the application of certain provisions of Statement of Position
97-2, "Software Revenue Recognition." Different informal and non-authoritative
interpretations of certain provisions of Statement of Position 97-2 have been
printed and, as a result, the American Institute of Certified Public Accountants
issued Statement of Position 98-9 in December 1998 which is effective for
periods beginning on or after March 15, 1999. Statement of Position 98-9 extends
the effective date of Statement of Position 98-4 and provides additional
interpretative guidance. The adoption of Statement of Position 97-2, Statement
of Position 98-4, and Statement of Position 98-9 have not have and are not
expected to have a material impact on our results of operations, financial
position or cash flows. However, due to the uncertainties related to the outcome
of these amendments, we cannot determine the impact of the Statement on our
future financial results.
Statement of Financial Accounting Standards, or SFAS, No. 130,
"Reporting Comprehensive Income," requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. We adopted the provisions of SFAS No. 130
beginning January 1, 1998, as required. Our comprehensive losses and net losses
are the same for all periods presented.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. We adopted the
provisions of SFAS No. 131 for the year ending December 31, 1998 as required.
Currently, we do not believe we have any separately reportable business segments
or other disclosure information required by the Statement.
Year 2000 Compliance. We have completed a review of our computer
systems and operations to determine the extent to which our business will be
vulnerable to potential errors and failures as a result of the "year 2000"
problem. The year 2000 problem results from the use of computer programs which
were written using only two digits (rather than four digits) to define
applicable years. On January 1, 2000, any clock or date recording mechanism,
including date-sensitive software which uses only two digits to represent the
year, could recognize a date using "00" as the year "1900," rather than the year
"2000." This could result in system failures or miscalculations, causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, provide services or engage in similar
activities. These failures, miscalculations and disruptions could have a
material adverse effect on our business, operations and financial condition.
We have concluded, based on our review of our operations and computer
systems, that our significant computer programs and operations will not be
materially affected by the Year 2000 problem, and that we can modify or replace
the programs that will be affected by the end of 1999 at a cost which will not
be significant. Under a reasonably likely worst case scenario, however, our
computer systems and/or operations could be materially affected by the Year 2000
problem.
In addition to our own properties and computer systems, we rely on
operations and computer systems of third-party customers, financial
institutions, vendors and other parties with or through which we conduct
business (such as Internet service providers and the owners of communications
backbones utilized by us).
We have prioritized our year 2000 efforts in an effort to protect, to
the extent possible, our business and operations. Our first priority will be to
protect our critical operations--such as those systems and applications that we
use to provide search engine capabilities to various Internet and intranet
customers--from incurring material service interruptions that could occur as a
result of the year 2000 transition. To this end, we have attempted to identify
any element within our business operation (including elements relating to third
party relationships) that could be materially impacted by the year 2000 date
change, and have attempted to determine the risks to our continuing business
operations as a result of an adverse effect resulting from that date change.
We generally require our key vendors and suppliers to warrant they are
year 2000 ready. We have purchased most of our mission-critical systems from
such third-party vendors. We have attempted to identify the vendors and
third-parties with which we have contractual relationships which may not be year
2000 compliant by the end of 1999, and we have adopted contingency plans which
we believe will mitigate any adverse impact to our business operations resulting
from those vendors' or third parties' inability to perform their contractual
obligations. Our contingency plans include preparing and using backup copies of
our financial records, determining the availability and reliability of alternate
network and backbone communication systems, and scheduling additional phone
center, repair and administrative personnel to be on hand on the transition
date.
New Accounting Pronouncements. We have reviewed all recently issued,
but not yet adopted, accounting standards to determine their effects, if any, on
our results of operations or financial position. Based on our review, we believe
that none of these pronouncements will have a significant effect on our current
or future earnings or operations.
BUSINESS
The following description of our business should be read in conjunction
with the information included elsewhere in this prospectus. This section
contains certain forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
discussed in the forward-looking statements as a result of certain of the risk
factors set forth below and elsewhere in this prospectus.
Introduction. We are engaged in the development and marketing of
next-generation focused Internet portal sites coupled with data gathering, text
indexing, retrieval and analysis software which we market under the brand name
"Spyhop." Spyhop allows Internet and private data network users to search single
web sites, search multiple web sites concurrently, or search substantial
portions of an entire data network.
Spyhop is based on technology originally developed at a private
university. Since 1986, that technology has been used in research projects in
over 20 countries and in more than 15 languages. In February 1997, we purchased
an exclusive, worldwide license to market, modify, develop and manufacture the
technology. Since then, we have modified and enhanced the technology by
combining it with other proprietary technology and adapting it for use on the
Internet. We have also added additional search and display functions. We intend
to market this modified and augmented technology -- the Spyhop technology -- to
help persons efficiently sift through large amounts of data for relevant
information.
We believe the Spyhop technology can be used for data searching,
retrieval and indexing on both the Internet and Internet protocol-based private
data networks. As described in more detail below, we believe Spyhop will be
employed primarily by business researchers and professionals on the Internet.
The use of the Internet has grown substantially since it was first commercially
introduced in the 1990s, resulting in concomitant increases in the number of
advertiser and product service offerings accessible by the Internet.
The rapid growth of the Internet and private data networks, and the
proliferation of Internet sites, has increasingly challenged consumers, content
providers and advertisers to effectively reach one another. Consumers are
generally challenged to quickly find the most relevant information, products and
services related to a particular interest or topic. Content providers are
typically challenged to differentiate their products and services in an
increasingly crowded medium, and to improve the visibility of their web sites.
Advertisers are challenged to more effectively deliver their advertising
messages to both large interested audiences and target groups.
Many competitors have developed products, including portals, which they
believe make the task of finding relevant data, information, advertising or
products on the Internet and other data systems easier and less time consuming.
These portals generally return a list of web sites without showing which web
sites may be relevant to the actual search query. In some cases, they return
lists of hundred or thousands of potential documents for further review. As a
result, Internet and private data networks users may spend substantial time
searching through the list of returned documents to find out which documents are
relevant. This generally requires the user to call up the reference page and
either visually scan the page or conduct another page search to find the
specific reference in question.
In contrast, Spyhop provides advanced search capabilities that create a
search result metaphor we refer to as "what you see is what you get." In a
Spyhop search result a portion of the computer screen is devoted to an
information summary that is the equivalent of a modified table of contents or
index. Each entry in the table of contents represents an Internet site or page,
and the entry shows the user how many references match the search criteria on
each web site or page. By clicking on an entry in the table of contents or
index, users can see the search results in the actual surrounding context of the
document and determine more quickly and efficiently if the web site provides the
information they want.
Spyhop is based on a computer program that takes search result data and
organizes it in terms which we believe are familiar to the average person, such
as modified tables of contents or indices. Spyhop can also sort, analyze, and
manipulate search results to make it easier to find what the researcher is
looking for. Spyhop uses a language analysis technique that assists users in
quickly determining which web sites and pages contain needed, relevant
information. Spyhop also assists users in properly constructing a search
request, thereby avoiding the common problem of getting too many responses to a
search that was ambiguously phrased.
Spyhop Markets. We believe Spyhop will be used primarily by business
researchers and professionals on the Internet. The Internet is an interactive
worldwide network of computers and data systems that allows its users to
retrieve data, purchase products, send and receive communications and purchase
or provide services. The Internet is based on a technology platform that
incorporates a series of standards that allow computers in various locations and
of various makes and models to communicate effectively with one another. The use
of the Internet has grown substantially since it was first commercially
introduced in the 1990s. International Data Corporation estimates that the
Internet user population will grow from approximately 35 million in 1996 to
approximately 160 million by 2000. The significant increase in the number of
Internet users has resulted in a rapid increase in the number of advertisers,
products and services on the Internet. For example, Jupiter Communications has
estimated that approximately $340 million was spent on Internet and online
advertising in 1996, and that Internet and online advertising will grow to be
approximately $5 billion by the year 2000.
As the Internet developed, corporations, universities and other large
organizations began developing private data networks to serve the needs of their
organizations. Generally, these networks are custom-built, and use proprietary
protocols to connect specific communities or groups of users through local area
networks and wide area networks. Private networks are generally expensive to
build and maintain, and the proprietary nature of the networks and their
applications sometimes makes it difficult to manage and exchange information
between them. In addition, these networks typically use leased telephone lines,
modem banks and other proprietary systems to connect geographically distinct
parts of the same private network (such as connecting a field office in Boise,
Idaho with a home office in New York City), to link separate private networks
and to permit access by remote individual users. Many organizations have begun
to create private data networks that adopt the same communication standards used
on the Internet. Because the Internet and private data networks are increasingly
using the same standards, private data networks can provide users with
substantially increased access to information and other users, both inside an
organization and, via the Internet, throughout the world. As a result, a July
1996 Forrester Research survey of fifty Fortune 1000 companies reported that 64%
of the respondents were currently using private data networks, and another 32%
were building private data networks. According to International Data
Corporation, the market for intranet software products and services in the year
2000 will exceed $3 billion, up from approximately $276 million in 1995, and the
estimated expenditures for private data networks software products and services
will exceed $6 billion in the year 2000, up from approximately $260 million in
1995.
The adoption of standardized communications standards on private
networks and the increasing use of the Internet to link private networks have
created a need for location and platform independent software products and
services that integrate all levels of the workplace and allow users to quickly
and efficiently obtain relevant and useful information. Currently, solutions for
searching and retrieving information from data networks generally involves the
use of catalogs, search services or other specially designed applications. We
believe these tools generally lack sufficient speed, accuracy and
comprehensiveness, and can be difficult to use. In many cases, currently-used
portals and information retrieval devices produce search results that do not
allow the user to easily determine if any particular search result is relevant
to the search query.
Our Solution. The basic Spyhop technology, originally called
"WordCruncher," was developed in the 1980s at a private university. Those
efforts produced a software program that generates a detailed index of documents
of almost any size. This index included the exact location of each word found in
the search document and its relationship to other words and phrases. The
software also allowed users to retrieve full texts and determine logical
connectors, frequency distribution and collocation. Because they worked with
scholars from around the world, the development team also designed the software
to provide multiple language support capabilities. The resulting technology has
been used in research projects in over twenty countries and in over 15
languages. In 1997, we purchased the exclusive, worldwide rights to this search
technology, which we augmented by adding technology from other search engines
and adapted for use on the Internet under the brand name "Spyhop."
Spyhop currently incorporates the following features:
Fast, In-Context Display of Search Results. When an Internet
user initiates a search on other portals, results are returned in the form of a
list of web sites that may or may not contain relevant information. Before the
user knows for certain which web sites are relevant, he must call up the
referenced page and either visually scan the page or do a "page search" to find
the specific reference to the search term. During a Spyhop search, however, one
portion of the screen is devoted to the equivalent of a table of contents. Each
entry in the table of contents represents an Internet site, page, category or
subcategory and the entry shows the user how many references match the search
criteria on each web site or page. By clicking on an entry in the table of
contents, the user can see the search results with the actual surrounding
context; in other words, "hit-in-context." With this type of display, the user
can preliminarily determine if a web site provides the information he wants
without having to link to the web site first.
New Information Presentation Model. As part of our efforts to
make Spyhop search results more familiar, Spyhop takes search results data and
organizes it in terms which we believe are familiar to the average person (for
example, in the form of a modified table of contents or index). Spyhop also
provides tools that sort, analyze and manipulate search results to make it
easier to find what the user is looking for. This conceptual "bridge-building"
is useful not only for experienced Internet users, but for the increased number
of new Internet users.
Context Analysis. Many people who search the Internet do not
receive the search results they want, in part because they use an ambiguous
search. One of the most common results of ambiguously constructed searches is
the tendency to get far too many possible search references, or "hits." Spyhop
uses a language analysis technique to help users quickly zero in on web sites or
pages which contain relevant information.
Relevance. Some portals rank search results based on factors
that may have little or no relevance to the data the user is seeking. For
example, at least one widely-used portal displays search results based, in part,
on the fees paid to the provider of the portal. In contrast, Spyhop uses
pre-computed document ranking, in conjunction with term location, frequency and
distribution features, to determine the most relevant hits for a given search
and sort these to the top of the list the user sees.
Speed of Engine / Scalability. We believe that two of the
primary requirements for a successful portal are speed and scalability. "Speed"
refers to speed of indexing, and the speed of returning search results to users.
"Scalability" refers to the ability of the portal to cope with the vast amount
of data on the data base being searched. Spyhop uses detailed indexing to handle
rapid searching of very large data bases and is designed for scalable clustered
systems to achieve near linear performance increases as we add additional
hardware.
Our Business Objectives and Strategy. We intend to be the leader in the
development and marketing of specialized portal sites for the Internet and
private data networks. Initially, we intend to focus our business efforts on the
continued development and marketing of Spyhop for the Internet, with an emphasis
on the business and professional segments of that market. We believe Internet
users in those market segments typically spend more money on Internet services,
software and hardware and that, therefore, they are a significant target for
advertisers. According to Zona Research, focused portals and directories will
have an increased impact on the revenues and advertising expenditures on the
Internet, and during the next five years online directory spending for focused
portals and directories should increase from 10% of the overall Internet
advertising budget to 80% of the overall Internet advertising budget. By
focusing our target market on the business and professional users segment of the
Internet market initially, we believe we will be able to more quickly generate
revenues on our own site and associated sites through better advertising and
applications of other e-commerce applications that use Spyhop. Based on the
results of our marketing effort in the business and professional Internet market
segments, we intend either to focus our long-term business efforts on other
specialized segments of the Internet or more aggressively pursue the development
of products and services for the private data network segments of the data
services industry.
We intend to achieve our business objectives using the following
strategies:
We Will Launch and Maintain Our Own Web Site. We currently
maintain a web site at http://www.WORDCRUNCHER.com, where users can preview
descriptions of our company and Spyhop. In February, 1999, we opened our web
site as a "beta" for evaluating Spyhop's capabilities and consumer reaction. We
discontinued the beta site in March 1999. While it was in operation, we received
up to 25,000 hits per day. We intend to use the data we obtained from our beta
test to further refine Spyhop's capabilities. We also intend to use our web site
as the primary site for third parties to use Spyhop. We will provide the use of
Spyhop to the visitors to our web site for free.
We Intend to Increase Spyhop Brand Recognition. We believe
brand recognition on the Internet will be crucial to effectively marketing
Spyhop. We are offering Spyhop without charge to web users as a showcase and to
establish ourselves as a premier provider of services on the Internet. We also
plan to make available additional free services on the Internet to showcase our
technology and to extend awareness of the Spyhop brand.
We Will Use Value Added Links. We intend to develop increased
Spyhop brand recognition in the marketplace by entering into licensing
agreements with major Internet content providers to deliver Spyhop branded
Internet search service results to users through "value added links" on those
other providers' web sites.
We Intend to Maximize Advertising Revenue. Although we expect
to earn revenue from licensing through value added link agreements, we expect
that the primary source of our revenues will be from advertising generated on
our portal site. We also expect to conduct a significant portion of our business
over the Internet, including marketing, communications, partner registration,
sales, software distribution and partner and customer support. We intend our web
page to be a "front door" to a menu of business and professional oriented
activities, and to offer users an interactive multi-media environment where they
can access information about our products, download software products, receive
support and conduct commercial transactions with us.
Sales and Marketing. Our sales strategy is to achieve broad market
penetration by employing multiple distribution channels, including direct sales
over the Internet and sales through our own sales organization, value added
resellers, Internet service providers, telecommunications companies, original
equipment manufacturers and independent software vendors. We anticipate that, by
the end of 1999, we will have an 8 person sales and marketing team that will
market Spyhop directly to advertisers and content providers. Our primary sales
tool will be our web site, which will demonstrate, promote and sell software
products that can be downloaded directly to the user's computer.
We are focusing our search engine development activities towards
insuring that our search engine meets the specific needs of a business-focused
portal. We currently do not intend to make our search engine available to third
parties (whether through licensing or other business arrangements), although we
could do so at some time in the future.
Customer Support and Services. We believe a high level of customer
support and service for products will be critical to our success. Our principal
customer support focus will be to provide training, documentation and technical
support at our web site to persons using Spyhop.
Competition. Our markets are new, very competitive and subject to rapid
technological change. We face competition in the overall Internet/intranet
software market, as well as in each of the market segments where Spyhop will
compete. We expect competition to persist, increase, and intensify in the future
as the markets for our products and services continue to develop and as
additional companies enter our markets.
A number of companies provide or have announced intentions to provide
software products based on Internet standards and which are designed as portals
in either the Internet or private data network markets. In particular, Spyhop
will face competition from AltaVista, Excite, Hotbot, Infoseek, Lycos, Yahoo!,
Ask Jeeves and Open Text. A number of the companies offering these portals have
been offering services on the Internet for a number of years (although, not to
focused Internet segments), so the increased use and visibility of Spyhop will
depend, in large part, on our ability to build and host a large web index as the
web grows in size while maintaining operational performance levels. We also
believe it will be essential for us to develop long-term business alliances with
parties with which we can enter into value added link contracts. We believe we
will need to make significant investments in research and development in order
to keep up with the technological and operational demands imposed by the
anticipated changes in the Internet and intranet markets.
We are aware of several other large and small software developers that
are focusing significant resources on developing and marketing software products
and services that will compete with Spyhop. Some of our current and potential
competitors may bundle their products with other software or hardware, including
operating systems and browsers, in a manner that may discourage users from
purchasing or using our products and services. We may not be able to compete
effectively with current and future competitors.
Product Development. Our current product development efforts are
focused on post-beta test adjustments to Spyhop. These adjustments include
revisions related to the functionality, speed and interface of our portal site.
Based on our current estimates, we believe that we will be able to launch Spyhop
on a production basis in the fourth quarter of 1999. [Add in Ken's update]
During the course of our development process, we learned that certain
components of the WordCruncher engine did not readily lend themselves to
conversion to an Internet-based application. Although we did not believe
conversion would be impossible, we believed that the time and costs necessary to
satisfactorily complete the conversion process in time for our anticipated
product rollout in fourth quarter of 1999 could have been prohibitive.
Therefore, we licensed third party technologies that we believe will enable us
to accelerate the completion of our development process, while still maintaining
the key WordCruncher features and functionality we believe are important. This
licensed technology also enables us to add other features and functionality
(both from WordCruncher and elsewhere) that we believe Internet users expect in
state-of-the-art search technologies.
We intend to actively support industry standards and, if they are
commercially feasible, incorporate new standards-compliant features into Spyhop
as they become available. Some of the technology we use was developed by third
parties and then licensed to us. We have, however, developed significant
additions to this technology internally and, to date, have spent over $1.25
million in research and engineering activities and expenses in support of our
research and engineering activities.
Our ability to successfully develop and release new products and
enhancements to Spyhop in a timely manner will be subject to a variety of
factors, including our ability to solve technical problems and test products,
the availability of financial, sales and management resources, and other
factors, some of which we may not be able to control. We may experience
difficulties that could delay or prevent our successful development,
introduction or marketing of new products and enhancements.
Material Contracts. We are a party to the following material contracts
and arrangements:
Brigham Young University License. On February 14, 1997 we signed a
master license agreement (the "License") with BYU, under which we obtained the
exclusive worldwide rights to use, develop, manufacture, market, and modify the
WordCruncher technology. BYU retained the ownership rights to any improvements
to the WordCruncher technology that we develop. We issued BYU (and certain
individuals who developed the licensed technology while they were employed by
BYU) 544,761 shares of common stock for the License. The WordCruncher technology
constitutes the core search technology we use in our "Spyhop" product.
The term of the License is for as long as allowed by law, but it may be
terminated if we materially breach the License. We are required to pay BYU a
royalty of 3% of our adjusted gross sales. Annual minimum royalties began in
January 1999, and $20,000 will be due for 1999. The minimum royalty payments
increase annually and, in 2002, will be capped at $150,000. In addition, when we
acquired the License, BYU had already sublicensed the technology to several
other parties for royalty payments ranging from 3% to 8% of the sublicensee's
gross sales. Under the term of the License, we are required to pass through to
BYU 50% of the royalty payments we receive from these sublicenses.
Dataware License. In July 1999 we signed a source code software license
agreement with Dataware Technologies, Inc. granting us access to code for
Dataware's proprietary search engine technology. We intend to blend this
technology with our search technologies as we continue to develop our overall
product line. The license has a term of three years (with a two year renewal
option) and cost us $350,000. In connection with this agreement, we also signed
a Consulting Agreement with Acsiom Inc., an affiliate of Dataware, to provide
consulting services relating to the integration of the Dataware search engine
into our existing technology, including our business professional portal site.
This agreement requires us to pay hourly developer consulting fees ranging from
$100 - $150 per hour.
Pittard Sullivan Contract. In July 1999 we retained Pittard Sullivan, a
marketing communications company in the media and entertainment industries, to
provide us with brand strategy, brand identity and site design consulting
services. Brand strategy and identity efforts include the development of the
brand vision, brand mission, brand positioning policies, and an articulation of
our core branding values. Site development consulting efforts include creative
conceptualization and strategic analysis, design creation, production and
implementation, and testing. This contract runs through year end 1999 and will
cost $365,000.
Digital Boardwalk Agreement. In July, 1999 we signed a strategic
agreement with Digital Boardwalk, a commercial website developer and e-commerce
specialist, to integrate business information resources and services offered
within our portal site for business professionals. Components of this effort
include specifications and development of user services and features, web
application flow, site security, third-party data sources, and methods for
connecting the application to our existing data infrastructure. Our existing
contract is for $50,000 and runs through July, 1999. We are currently
negotiating an additional contract with Boardwalk that will be for approximately
$500,000 and will run through year end 1999.
Petersen Intellectual Property Purchase. We purchased certain
intellectual property from Jeffrey B. Petersen in December 1998. The
intellectual property consists of software and source codes that we use to build
databases, a boolean search engine for searching databases, a dynamically
updatable search engine, and certain utility/sample programs. We paid $50,000
for the intellectual property by delivering $15,000 in cash and 13,000 shares of
common stock to Mr. Petersen.
Purchase Agreement. In February and March 1999, we sold 6,300
shares of our newly designated Series A Preferred Stock to eight investors under
the terms of the Purchase Agreement. We received a total of $6.3 million in the
transaction. After we paid the expenses of the placement agent ($378,000) and
our other expenses for the transaction ($15,000), we netted $5,907,000 from the
sale. In connection with the transaction, we also issued both the purchasers and
the placement agent the Warrants and granted those parties certain registration
rights for the shares of common stock they can acquire by converting the Series
A Preferred Stock and exercising the Warrants. See "Transactions Effected in
Connection With the Offering," "Description of Capital Stock" and "Principal and
Selling Stockholders."
Columbia Financial Group Services Agreement. In January 1999,
we entered into a services agreement with Columbia Financial Group ("Columbia").
Columbia provides investor relations services for a number of public companies,
particularly those companies that are involved in the Internet business. Under
the agreement, we agreed to grant Columbia warrants to purchase for five years
up to 200,000 shares of our common stock for $5 per share. As of June 30, 1999,
Columbia had earned warrants to purchase 50,000 shares.
Corporate Development. Our predecessor in interest was incorporated in
the State of California on May 2, 1997, as Dunamis, Inc. ("Dunamis"). Dunamis
was formed for the purpose of publishing and marketing books and audio and video
tapes. On June 25, 1998, Dunamis completed a merger with a Nevada corporation
that had been created for the sole purpose for changing Dunamis' domicile from
California to Nevada. On July 14, 1998, the surviving entity in that transaction
completed a merger with WordCruncher Publishing Technologies, Inc. (formerly
"Redstone Publishing, Inc."), a Utah corporation. The Nevada corporation was the
surviving entity in that transaction and, as part of the transaction, changed
its name to "WordCruncher Internet Technologies, Inc." At the time of the
merger, WordCruncher Publishing Technologies, Inc. held the rights to a
significant portion of the intellectual property we currently use.
Patents, Licenses and Intellectual Property. Our success will depend,
in part, on our ability to obtain and protect patents, maintain trade secrets
and operate without infringing on the proprietary rights of others in the Untied
States and other countries. Spyhop is based, in part, on a United States patent
issued to BYU. We have an exclusive world-wide license to that patent. If either
we or BYU fail to file, prosecute or maintain the patent, we could be severally
damaged. We intend to file additional patent applications relating to our
technology, products and processes as the need arises. We will also direct BYU
to file any additional patent applications relating to the technology we have
licensed from it. However, any of these patents or patent applications could be
challenged, invalidated or circumvented by our competitors.
If we were to become involved in a dispute regarding our intellectual
property, we may have to participate in interference proceedings before the
United States Patent and Trademark Office to determine who has the first claim
to the rights involved. We could also be forced to seek a judicial determination
concerning the rights in question. These types of proceedings can be costly and
time consuming, even if we eventually prevail. If we did not prevail, we could
be forced to pay significant damages, obtain a license to the technology in
question, or stop commercializing a certain product.
We also rely on trade secrets, proprietary know-how and confidentiality
provisions in agreements with employees and consultants to protect our
intellectual property rights. These other parties may not comply with the terms
of their agreements with us, and we may not be able to adequately enforce our
rights against those parties.
We have adopted a policy of requiring our employees and collaborators
to execute confidentiality agreements when they commence employment or
consulting relationships with us. These agreements generally provide that all
confidential information developed or made known to the individual during the
course of his or her relationship with us is to be kept confidential and not
disclosed to third parties, except under certain specific circumstances. In the
case of employees, the agreements also provide that all inventions conceived by
the individual in the course of his or her employment will be our exclusive
property.
Employees. We have twenty-five (25) employees. Approximately 14 of our
employees are engaged in development activities, 6 are engaged in administrative
and finance functions, and 5 are engaged in sales or marketing. Our employees
are not presently covered by any collective bargaining agreemeRnt. We believe
our relations with our employees are good, and we have not experienced any work
stoppages.
Properties. We lease 3,600 square feet of administrative, office and
developmental space at the Town Square Professional Plaza in Draper, Utah 84020.
The term of the lease is from March 15, 1999 until March 31, 2002. The current
annual rental for the space is $44,932 ($3,744 per month), which we believe is
typical for similar premises in the area.
Legal Proceedings. We are not a party to any proceeding or threatened
proceeding as of the date of this prospectus.
MANAGEMENT
Our directors, executive officers and key employees, as of the date
hereof, and their respective ages and positions with us are set forth below.
Biographical information for each of those persons is also presented below. Our
executive officers are chosen by our Board of Directors and serve at its
discretion. There are no existing family relationships between or among any of
our directors or executive officers.
Name Age Position Held
- ------------------------- ------- -------------------------------------------
M. Daniel Lunt 45 President, Chief Executive Officer,
Director
James W. Johnston 46 Chairman of the Board, Executive Vice
President, Director
Kenneth W. Bell 49 Senior Vice President, Chief Financial
Officer, Treasurer, Secretary,
Director
Peter T. Stoop 38 Vice President of Marketing
Martin E. Cryer 39 Vice President of Product Development
M. Daniel Lunt: Mr. Lunt was a co-founder of WordCruncher Publishing
and has served as our President, Chief Executive Officer and Director since
November 1996. Mr. Lunt has over 20 years experience in the computer software
industry. Between 1983 and 1993, he was employed by WordPerfect Corporation,
most recently as Vice President of Worldwide Marketing. In that capacity, he was
responsible for the development and implementation of WordPerfect's marketing,
sales and support divisions. After leaving WordPerfect in 1993, Mr. Lunt became
the president of a residential real estate development company. Mr. Lunt
attended Brigham Young University.
James W. Johnston: Mr. Johnston was a co-founder WordCruncher
Publishing and has served as our Director, Chairman of the Board and Executive
Vice President since November 1996. From December 1990 to November 1996, he was
president of Johnston & Company, which published virtual works using Spyhop
technology, including the Constitution Papers (CD ROM). Mr. Johnston has 15
years of expertise in developing and marketing products involving content
presentation, analysis software and virtual publishing.
Kenneth W. Bell: Mr. Bell joined us as our Senior Vice President, Chief
Financial Officer, Secretary and Treasurer and Director in February 1997.
Between April 1990 and December 1996, he served as President and Chief Financial
Officer of Kelmarc Corporation, a financial and management advisory company. He
has twenty-five years experience in a variety of finance and management
positions, including employment in the commercial banking area for fifteen years
in Utah and California. Mr. Bell received his B.S. from BYU in 1972.
Peter T. Stoop: In September 1998, Mr. Stoop joined us as our Vice
President of Sales and Marketing. He was employed by Novell, Inc. from February
1994 through June 1997, most recently as senior director of product management
for Novell's $70 million product division. Mr. Stoop has eight years of
experience in the computer industry. Mr. Stoop received his MBA in marketing
from the William E. Simon School of Business at the University of Rochester in
1989.
Martin Cryer: Mr. Cryer joined us as our Vice President of Product
Development in March 1999. Mr. Cryer has nearly 20 years experience in the
computer industry. He has designed and developed several generations of computer
systems, covering both symmetrical multi-processing and parallel architectures.
Between 1996 and 1999, Mr. Cryer oversaw the Salt Lake City based Siemens
Research and Development Centre. Mr. Cryer also served 12 years in the Unisys
UNIX Systems Group, contributing significantly to many of its innovative server
system designs. He graduated from Queen Mary College, University of London and
has been residing in the United States for the past 10 years.
Board of Directors. Our Articles of Incorporation provide for a Board
of Directors consisting of 3 persons. The number of directors can be increased
as provided in our by-laws, which allow either our board of directors or our
stockholders to approve the change. Our directors serve for terms of one-year.
Board of Directors Committees. Our Board of Directors intends to
establish two committees, the audit committee and the compensation committee.
Each of these committees will be responsible to the full Board of Directors,
and, in general, its activities will be subject to the approval of the full
Board of Directors.
The audit committee will be primarily charged with the review of
professional services provided by our independent auditors, the determination of
the independence of those auditors, our annual financial statements, and our
system of internal accounting controls. The audit committee will also review
such other matters with respect to our accounting, auditing and financial
reporting practices and procedures as it finds appropriate or as is brought to
its attention, including our selection and retention of independent accountants.
We are is currently seeking one or more persons to add as outside directors to
the Board of Directors, and we anticipate that one or more of the new members
will be appointed as a member of the audit committee.
The compensation committee will be charged with the responsibility of
reviewing executive salaries, administering bonuses, incentive compensation and
our stock option plans and approving our other executive officer benefits. The
compensation committee will also consult with our management regarding pension
and other benefit plans, and our compensation policies and practices in general.
We are currently seeking one or more persons to add as outside directors to the
Board of Directors. We anticipate that one or more of the new outside directors
will be appointed as a member of the compensation committee.
Compensation of Directors. We do not have any standard arrangement for
compensating our directors for the services they provide to us in their capacity
as directors, including services for committee participation or for special
assignments.
Employment Agreements. We have adopted a policy of entering into
employment agreements with our senior management, and have entered into such
agreements with Messrs. Lunt, Bell, Johnston and Stoop. The terms of the
employment agreements for Messrs. Lunt, Bell and Johnston begun on September 1,
1998 and have initial terms of three years. Under the agreements, each is
entitled to receive a base annual salary of $102,000 during the first year of
the agreements. The salary will be increased annually, effective in September of
each year, by an amount equal to the greater of 8% or an amount determined by
the Board of Directors. In addition to the base salary amounts, each of Messrs.
Lunt, Bell and Johnston will receive incentive bonuses (as determined by our
Board of Directors), standard benefits such as health and life insurance,
disability payments and reimbursement of reasonable business expenses.
We have also entered into an employment agreement with Mr. Stoop. The
initial term of the agreement is two years and it provides for a base salary of
$66,000 (increased to $84,000 effective April 1, 1999). The agreement also
provides for standard health and medical insurance, incentive bonuses,
disability coverage and reimbursement for reasonable business expenses. In
addition, Mr. Stoop received options to acquire 300,000 shares of common stock
vesting over a three year period.
We may terminate the employment contracts for cause (which is defined
in the agreements), or without cause. If the contract is terminated without
cause or as a result of a "change of control", as defined in the agreements, the
employee is generally entitled to receive severance pay. In the event of a
change of control, Messrs. Lundt, Bell and Johnston will each receive a payment
equal to five times the sum of his average annual salary, bonus and profit
sharing (based on a per year average over the five preceding years). The term
"change of control" is defined in their agreements as
- any tender offer, stock exchange offer or other take-over device
in which any person becomes the beneficial owner of 30% or more of
the total voting power of our outstanding securities;
- any realignment of the Board of Directors or change in officers
due to shareholder action;
- our sale by 30% or more of our assets; or
- any merger or reorganization where we are not the surviving entity
or our shareholders fail to retain substantially the same direct
or indirect ownership in us immediately after the merger or
reorganization.
If Mr. Stoop is terminated for cause under his agreement, he will not
be entitled to receive any severance compensation. If the termination is without
cause, we are obligated to pay him a severance payment equal to 90 days' of base
salary, payable in three equal monthly installments, and if the termination is
because of a change of control, he is entitled to receive a severance payment
equal to his annual salary, payable in three installments. A change of control
is defined in his agreement as any sale or other disposition by the us of all or
substantially all of our assets, any merger or consolidation with another
corporation in which our shareholders as a group do not hold at least 50% of the
voting power of the surviving corporation, or any person becomes the beneficial
owner of 50% or more of our voting power.
Limitations of Liability and Indemnification. Our Articles of
Incorporation limit the personal liability of our directors and officers for
monetary damages to the maximum extent permitted by Nevada law. Under Nevada
law, these limitations include limitations on monetary damages for any action
taken or failed to be taken as a director or officer except for (i) an act or
omission that involves intentional misconduct or a knowing violation of a law,
or (ii) payment of improper distributions. Nevada law also permits a corporation
to indemnify any current or former director, officer, employee or agent if the
person acted in good faith and in a manner in which he reasonably believed to be
in (or not opposed to) the best interest of the corporation. In the case of a
criminal proceeding, the indemnified person must also have had no reasonable
cause to believe his conduct was unlawful.
Our by-laws provide that, to the fullest extent permitted by our
Articles of Incorporation and the Nevada Business Corporation Act, we will
indemnify (and advance expenses to) our officers, directors and employees in
connection with any action, suit or proceeding (whether civil or criminal) to
which those persons are made party by reason of their being our director,
officer or employee. Any such indemnification would be in addition to the
advancement of expenses.
At present, there is no pending litigation or proceeding involving any
of our directors, officers, employees or agents where indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding which would result in a claim for such indemnification.
Executive Compensation. The following table summarizes the compensation
paid to or earned by our chief executive officer and our four most
highly-compensated executive officers whose total salary and bonus exceed
$100,000 (collectively, the "named executive officers") during each of the past
two fiscal years. During the fiscal year ended December 31, 1996, none of our
officers received any cash compensation, bonuses, stock appreciation rights,
long-term compensation, stock awards or long-term incentive rights:
Summary Compensation Table
--------------------------
All Other
Annual Compensation Compensation
--------------------------- ----------------
Name and Principal Position Fiscal Year Salary($)
- --------------------------- ----------- ------------
M. Daniel Lunt 1998 $102,000 (1) -
President, CEO, Director 1997 - -
James W. Johnston 1998 $102,000 (1) -
Chairman of the Board, 1997 - -
Executive Vice President
Kenneth W. Bell 1998 $102,000 (1) -
Senior Vice President, CFO 1997 - -
Director
_______________________________
(1) The figures shown under the "Salary" column represent annual salary. Each of
Messrs. Lunt, Johnston and Bell joined us effective July, 1998.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of June 30, 1999, the beneficial
ownership of our outstanding common stock by
- each person known by us to own beneficially 5% or more of our
outstanding common stock,
- each of our executive officers,
- each of our directors,
- all executive officers and directors as a group, and
- the selling stockholders.
Beneficial ownership after this offering will depend on the number of shares
actually sold by the selling stockholders. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. For
purposes of calculating the percentages shown in the chart, each person listed
is also deemed to beneficially own any shares issuable on (a) the exercise of
vested options or warrants held by that person and that are exercisable within
60 days after June 30, 1999 or (b) the conversion of any Series A Preferred
Stock held by that person. Except as indicated by footnote, the persons named in
the table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them. The inclusion of any shares as
beneficially owned does not constitute an admission of beneficial ownership of
those shares.
<TABLE>
<CAPTION>
Common Stock Beneficially Common Stock Beneficially Owned
Owned Prior to Offering(1) Number of After Offering(2)
Name of Beneficial Owner and -------------------------- Shares Being -------------------------------
Relationship to Us Shares Percent Registered Shares Percent
- ------------------------------- ------------ ------------ -------------- ------------- ---------------
Officers and Directors
- ------------------------------
<S> <C> <C> <C> <C> <C>
M. Daniel Lunt(3) 1,798,383 15.1% 250,000 1,548,383 11.5%
President, CEO, Director
James W. Johnston(4) 2,021,223 17.0% 250,000 1,771,223 13.2%
Chairman of the Board,
Executive V.P.
Kenneth W. Bell(5) 1,510,608 12.7% 250,000 1,260,608 9.4%
Senior V.P., CFO, Treasurer,
Secretary, Director
Peter T. Stoop 5,000 * 5,000 - -
V.P. Marketing
Martin Cryer 10,000 * 10,000 - -
V.P. Product Development
All Executive Officers and 5,374,214 45.2% 794,000 4,580,214 34.1%
Directors as a Group (5
persons)(6)
Selling Stockholders -
Jeffrey Peterson 13,000 * 13,000 - -
Consultant
Timothy J. Riker(7) 29,000 * 29,000 - -
Former Officer
Mike Schouten 5,000 * 5,000 - -
Marketing
Robert Stevens 5,000 * 5,000 - -
Programmer
Universal Insurance 25,000 * 5,000 20,000 *
Consultant
Shane Smit 4,000 * 4,000 - -
Development
Brett Bell 2,000 * 2,000 - -
Marketing
Alexis Lee 2,000 * 2,000 - -
Support
Shane Jackson 2,000 * 2,000 - -
Accounting
Andrew Blum 3,690 * 3,690 - -
Consultant
Mutual Ventures 450,000 3.8% 100,000 350,000 2.6%
Consultant
Capital Communications 360,000 3.0% 100,000 260,000 1.9%
Consultant
Columbia Financial Group 100,000 * 100,000 - -
Consultant
Tajunnisah Owesh(8) 541,281 4.5% 541,281 - -
Series A Preferred Stockholder
Ohoud F. Sharbatly(8) 216,512 1.8% 216,512 - -
Series A Preferred Stockholder
Mohammad A. Al-Quaiz8 216,512 1.8% 216,512 - -
Series A Preferred Stockholder
Urban Development Est.(8) 108,256 * 108,256 - -
Series A Preferred Stockholder
Yasser M. Zaidan8 108,256 * 108,256 - -
Series A Preferred Stockholder
Khaled A. Almubarak(8) 45,512 * 45,512 - -
Series A Preferred Stockholder
Gibraltor Worldwide, Inc.(8) 108,256 * 108,256 - -
Series A Preferred Stockholder
Abdulwahhab A. Abdulwasea(8) 23,862 * 23,862 - -
Series A Preferred Stockholder
Cardinal Capital Managemen(8) 189,000 1.6% 189,000 - -
Warrantholder
- -------------------------------
</TABLE>
* Less than 1% of the outstanding common stock.
(1) Percentage of beneficial ownership prior to offering is based on
11,877,002 shares of common stock outstanding as of June 30, 1999. See "Summary"
for a description of the calculation of the number of shares of common stock
outstanding.
(2) Percentage of beneficial ownership after offering is based on
13,434,449 shares of common stock. See "Summary". That figure assumes the sale
of all the shares. The actual number of shares sold may be less than the total
registered hereunder. See footnote number 7 below. See "Summary" for a
description of the calculation of the number of shares of common stock to be
outstanding.
(3) Mr. Lunt shares voting power and investment power with his wife,
Lori Lunt.
(4) Mr. Johnston shares voting power and investment power of 1,953,339
shares held jointly with his wife, Catherine F. Johnston, 66,408 of such shares
are held in the name of his wife, Catherine F. Johnston. He also influences the
investment power and voting power of 1,476 shares held by his son, LeGrand
Johnston. Mr. Johnston does not disclaim beneficial ownership of his wife's and
son's shares.
(5) Mr. Bell has sole voting power and investment power of 330,000
shares and shares voting power and investment power of 1,180,608 shares with his
wife, Roberta L. Bell.
(6) Assumes the matters set forth in footnotes 1 through 5.
(7) Mr. Riker, formerly our vice president and chief scientist, left us
effective May 1, 1999.
(8) Under the terms of the Purchase Agreement, we are required to
register for the benefit of the holders of the Series A Preferred Stock and the
Warrants the number of shares equal to twice the number of shares of common
stock those persons could acquire on the conversion of their Series A Preferred
Stock, plus the number of shares of common stock those persons could acquire on
exercise of the Warrants. The number of shares set forth with respect to such
Series A Preferred Stock holders and Warrant holders reflects twice the number
of shares that could be currently acquired upon the conversion of the Series A
Preferred Stock plus the number of shares they could acquire on the exercise of
the Warrants. We may issue the holders of the Series A Preferred Stock and
Warrants fewer than the number of shares reflected for them in the chart,
depending on the market value of our common stock on certain dates. See
"Transactions Effected in Connection With the Offering" and "Description of
Capital Stock."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information summarizes certain transactions either we
engaged in during the past two years or we propose to engage in involving our
executive officers, directors, 5% stockholders or immediate family members of
those persons:
Management Loans to Us. James Johnston, Kenneth Bell and Daniel Lunt a
secured line of credit in the amount of $250,000 (which they agreed to use to
loan us up to that amount on a revolving basis) and loaned us an additional
$50,000 (for a total of $300,000) in 1997. We subsequently drew down the entire
$250,000 loan commitment. As of December 31, 1998, we owed $120,000 of the
$300,000. In October 1998, we repaid the $50,000 loan and the line of credit was
paid down to zero in January 1999, but it still remains available to be drawn
on, if we need it, through December 31, 1999. In May 1998, Mr. Lunt loaned us
$13,000, which we repaid in July 1998 though our issuance of additional common
stock to Mr. Lunt.
Indebtedness of Management. We advanced a total of $66,700 to James
Johnston during 1997 and 1998. The amounts outstanding on these loans as of
December 31, 1998 was $66,700. The interest rate is 8%, with interest and
principle due on January 1, 2000, but was paid in full by Mr. Johnston in March
1999. We also advanced a total of $29,500 to Kenneth Bell in 1997 and 1998. Mr.
Bell repaid those amounts to us in March 1999. We also loaned an entity owned by
M. Daniel Lunt $10,000 in 1997 and loaned him $4,000 personally in 1998. A
portion of the $10,000 loan ($5,000) was repaid by offsetting amounts we
otherwise owed Mr. Lunt, another portion ($5,000) was repaid in cash, and the
$4,000 loan was paid to us in March 1999.
Intellectual Property Development Rights. We purchased certain
intellectual property from Jeffery Petersen in December 1998. In connection with
that transaction, Timothy Riker disclaimed any interest he had in the property.
Mr. Riker was involved in the early stages of the development of the
intellectual property, which was further developed by Mr. Petersen before we
purchased it.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have had no change in, or disagreements with, our principal
independent accountant during our last two fiscal years.
INTEREST OF NAMED EXPERTS AND COUNSEL
We are not aware of any expert or legal counsel named in this
registration statement who will receive a direct or indirect substantial
interest in the offering. Our counsel, Parsons Behle & Latimer, will pass on the
legality of the shares to be issued pursuant to the conversion of the Series A
Preferred Stock and the exercise of the Warrants. Our financial statements at
December 31, 1998 and 1997, and for the periods ending then, have been audited
by Crouch, Bierwolf & Chisholm, as set forth in this report at the end of this
prospectus, and are included in reliance on that report given on the authority
of that firm as experts in accounting and auditing.
PLAN OF DISTRIBUTION
We will not use the services of underwriters or dealers in connection
with the sale of the shares registered hereunder. The shares will be freely
transferable, except for the shares issued to certain of the selling
stockholders who are affiliates. We will hold 1,557,447 of the shares in reserve
for the conversion of the shares of Series A Preferred Stock and the exercise of
the Warrants, as defined below, pursuant to the terms of the Purchase Agreement.
The selling stockholders will offer and sell the shares registered
hereunder from time to time. They will act as principals for their own accounts
in selling the shares and may sell the shares through public or private
transactions, on or off established markets, at prevailing market prices or at
privately negotiated prices. The selling stockholders will receive all of the
net proceeds from the sale of the shares and will pay all commissions and
underwriting discounts in connection with their sale. Other than the exercise
price the selling stockholders may pay with respect to the exercise of the
Warrants, we will not receive any proceeds from the sale of the shares.
The distribution of the shares by the selling stockholders is not
subject to any underwriting agreement. We expect that the selling stockholders
will sell the shares through customary brokerage channels, including
broker/dealers acting as principals (who then may resell the shares), in private
sales, in transactions under Rule 144 under the Securities Act, or in block
trades in which the broker/dealer engaged will attempt to sell the shares as
agent but position and resell a portion of the block as principal to facilitate
the transaction. We expect the selling stockholders to sell the shares at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or negotiated prices. The selling stockholders may also pledge all
or a portion of the shares as collateral in loan transactions. Upon any default
by the selling stockholders, the pledgee in the loan transaction would then have
the same rights of sale as the selling stockholders under this prospectus. The
selling stockholders may also transfer the shares in other ways not involving
market makers or established trading markets, including directly by gift,
distribution or other transfer without consideration, and upon any such
transfer, the transferee would have the same rights of sale as the selling
stockholders under this prospectus. Finally, the selling stockholders and the
brokers and dealers through whom sales of the shares are made may be deemed to
be "underwriters" within the meaning of the Securities Act, and the commissions
or discounts and other compensation paid to those persons could be regarded as
underwriters compensation.
From time to time, the selling stockholders may engage in short sales,
short sales against the box, puts and calls and other transactions in our
securities or derivatives of our securities, and will be able to sell and
deliver the shares in connection with those transactions or in settlement of
securities loans. In effecting sales, brokers and dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate in those
sales. Brokers or dealers may receive commissions or discounts from the selling
stockholders (or, if any such broker dealer acts as agent for the purchaser of
those shares, from the purchaser) in amounts to be negotiated (which are not
expected to exceed those customary in the types of transactions involved.)
Brokers and dealers may agree with the Selling Stockholder to sell a specified
number of shares at a stipulated price per share and, to the extent those
brokers and dealers are unable do so acting as agent for the Selling
Stockholder, to purchase as principal any unsold shares at the price required to
fulfill the broker dealer commitment to the Selling Stockholder. Broker dealers
who acquire shares as principals may thereafter resell those shares from time to
time in transactions in the over-the-counter market or otherwise and at prices
and on terms then prevailing at the time of sale, at prices then related to the
then-current market price or negotiated transactions and, in connection with
those resells, may pay to or receive from the purchasers of those shares
commissions as described above.
We will pay all expenses of registration incurred in connection with
this offering, but the selling stockholders will pay all brokerage commission
and other similar expenses incurred by them.
At the time a particular offer of the shares is made, to the extent it
is required, we will distribute a supplement to this prospectus which will
identify and set forth the aggregate amount of shares being offered and the
terms of the offering. The Selling Stockholder may sell the shares at any price.
Sales of the shares at less than market price may depress the market price of
our common stock. Subject to applicable securities laws (and the provisions of
the Purchase Agreement, which limit the number of shares of Series A Preferred
Stock that their holders can convert to shares of common stock at any one time),
the selling stockholders will generally not be restricted as to the number of
shares which they may sell at any one time, and it is possible that a
significant number of shares could be resold at the same time. The Selling
Stockholder and any other person participating in the distribution of the shares
will also be subject to applicable provisions of the Securities Exchange Act of
1934 and the rules and regulations promulgated under it, including, without
limitation, Regulation M, which may limit the timing of purchases and sales of
the shares by the selling stockholders and any other person. Furthermore,
Regulation M of the Securities Exchange Act of 1934 may restrict the ability of
any person engaged in the distribution of the shares to engage in market- making
activities with respect to the particular shares being distributed for a period
of up to 5 business days prior to the commencement of the distribution. All of
the foregoing may affect the marketability of the shares and the ability of any
person or entity to engage in market-making activities with respect to the
shares.
To comply with certain states securities laws, if applicable, the
shares may be sold in those jurisdictions only through registered or licensed
brokers or dealers. In certain states the shares may not be sold unless the
Selling Stockholder meets the applicable state notice and filing requirements.
Available Information. This prospectus does not contain all of the
information set forth in the registration statement relating to the shares. For
further information, reference is made to the registration statement and such
exhibits and schedules. Statements contained in the prospectus concerning any
documents are not necessarily complete and, in each instance, reference is made
to the copies of the documents filed as exhibits to the registration statement.
Each such statement is qualified in its entirety by that reference. Copies of
these documents may be inspected, without charge, at the Commission's Public
Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549 and at the
Denver Regional offices of the Commission located at 1801 California Street,
Suite 4800, Denver, Colorado 80202. The public may obtain information on the
operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. Copies of this material also should be available through the
Internet by using the Commission's EDGAR Archive, the address of which is
http://www.sec.gov.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital consists of 60,000,000 shares of common stock,
$0.001 par value, and 50,000 preferred shares, $0.01 par value, of which 15,000
shares have been designated as the Series A Preferred Stock. As of June 30,
1999, there were 11,877,002 shares of common stock and 6,300 shares of Series A
Preferred Stock outstanding. As of that date, an additional 429,000 shares of
common stock may be issued upon the exercise of outstanding share options (of
which 15,000 are presently exercisable), up to an additional 200,000 shares may
be issued to a third party upon the exercise of warrants being acquired by that
party in exchange fore services (of which, it has earned warrants for 50,000
shares to date), an additional 307,449 shares may be issued upon the exercise of
the outstanding Warrants as described below, and an additional 624,999 shares of
common stock may currently be issued upon the conversion of the Series A
Preferred Stock into common stock. As of June 30, 1999, there were approximately
143 holders of record of the common stock and eight record holders of the Series
A Preferred shares.
Common Stock. Subject to preferences that may be applicable to any then
outstanding preferred shares, holders of the common stock are entitled to
receive, pro rata, such dividends as may be declared by our Board of Directors
out of funds legally available for such purposes. In the event of our
liquidation, dissolution or winding-up, the holders of the common stock are
entitled to participate in all assets remaining after the payment of liabilities
and the liquidation preferences of any then-outstanding preferred shares. The
holders of the common stock have no preemptive rights and no right to convert
the common stock into any other securities. There are no redemption or sinking
fund provisions applicable to the common stock, and all outstanding common stock
are fully paid and non-assessable. The holders of the common stock are entitled
to one vote for each share they hold of record on all matters submitted to a
vote of our stockholders. We have not paid, and do not intend to pay, cash
dividends on the common stock for the foreseeable future.
Preferred Shares. Our Articles of Incorporation grant our Board of
Directors the authority to issue up to 50,000 shares of preferred stock, and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights of those shares without any further vote or action by the
stockholders.
In February 1999, our Board of Directors created 15,000 shares of the
Series A Convertible Preferred Stock, and sold 6,300 of these shares to certain
of the selling stockholders for $1,000 per share. The Series A Convertible
Preferred Stock gives its holders the right to receive $1,000, plus 6% each
year, for each share before any of our other stockholders receive anything if we
are liquidated, but does not give their holders the right to vote in most
matters our stockholders are asked to consider and vote on. These shares of
preferred stock also give their holders a right to receive an annual 6% dividend
at the time the preferred shares are converted into common stock. We have the
option of paying the dividend in cash or in shares of common stock. The Series A
Preferred Stock will first be convertible into shares of common stock on the day
this registration statement becomes effective. Up to 20% of the Series A
Preferred Stock can be converted into common stock during each month following
the effective date with this prospectus. In addition to the right to convert the
Series A Preferred Stock into common stock, we also gave the holders of the
Series A Preferred Stock a limited right to receive additional shares of common
stock at certain times if the market price for the common stock is less than
$12.096 per share. On the 10th trading day after each of July 8, 1999, October
6, 1999 and February 13, 2000, the holders of the Series A Preferred Stock are
entitled to receive the number of shares of common stock equal to one-third of
the purchase price for their Series A Preferred Stock times the difference
between the 10 day average closing price of the common stock and $12.096,
divided by the ten day trading average. For example, if for the ten day trading
period beginning July 8, 1999 our common stock trades at $10 per share, the
holders of the Series A Preferred Stock would receive 43,667 additional shares
of common stock ([$12.096-$10.00] x [$6,300,000 / 3] / 10). Based on the trading
price of our common stock during the 10 business day period following July 8,
1999, the holders of the Series A Preferred Stock are entitled to receive
256,779 additional shares of common stock. The Series A Preferred Stockholders
also receive additional shares of common stock under certain other limited
conditions, including if the Securities and Exchange Commission places a stop
order on this registration statement.
We believe our Board of Directors' authority to set the terms of, and
our ability to issue, additional shares of preferred stock will provide
flexibility in connection with possible financing transactions in the future.
The issuance of additional preferred stock, however, could adversely affect the
voting power of holders of common stock, and the likelihood that the holders
will receive dividend payments and payments upon liquidation and could have the
effect of delaying, deferring or preventing a change in our control. However, we
do not presently have any plan to issue any additional shares of preferred
stock.
Warrants. When we sold the Series A Preferred Stock to investors in
February and March, we also issued warrants (the "Warrants") to acquire shares
of our common stock. The Warrants were issued in three series - Series A and
Series B, which the investors in the Series A Preferred Stock acquired, and
Series C, which we issued to a third party as a finder's fee for the
transaction. The Series A Warrants allow their holders to purchase up to an
aggregate of 71,069 shares of common stock at an approximate weighted average
exercise price of $33.93 per share (125% of the closing bid price for our common
stock on the day prior to the closing of the Purchase agreement (the "Closing
Price")) at any time through the fifth anniversary of the closing of the
Purchase Agreement (the "Warrant Expiration Date"). The Series B Warrants allow
their holders to purchase up to an aggregate of 47,380 shares of common stock at
an approximate weighted average exercise price of $40.71 (equal to 150% of the
Closing Price) at any time through the Warrant Expiration Date. The Series C
Warrants allow its holder to purchase up to 189,000 shares of common stock at an
approximate weighted average exercise price equal to $28.25 per share (105% of
the Closing Price) at any time through the Warrant Expiration Date. If the
holders exercise all of the Warrants, we would receive a total of $9,591,960.
We have also entered into an agreement with a third party that is
providing investor relations services to us. Under the agreement, we will grant
that party warrants to acquire up to 200,000 shares of our common stock at $5
per share. As of June 30, 1999, that party has earned warrants to purchase
50,000 shares.
Registrations Rights. We have granted contractual registration rights
to the holders of the Series A Preferred Stock. Those persons are part of the
selling stockholders. The registration rights we granted those selling
stockholders are as follows:
(i) the "registerable securities" covered by the rights include any of
our shares of capital stock which are acquired on exercise of the Warrants or
the conversion of the Series A Preferred Stock. A particular security is no
longer a "registerable security" if it has been registered under a registration
statement filed under the Securities Act and disposed of pursuant to the
registration statement, the registration statement under the Securities Act is
no longer required for the immediate public distribution of that security as a
result of the application of the provisions of Rule 144 under that act, or the
security in question ceases to be outstanding. "Registerable Securities" also
includes all securities acquired as a result of stock splits, stock dividends,
reclassifications, recapitalizations or similar events relating to those
securities.
(ii) Subject to certain limitations, we were obligated to prepare and
file with the Securities and Exchange Commission, on or before April 30, 1999, a
registration statement (under the Securities Act) in order to permit a public
offering sale of the registerable securities under the Securities Act. The
holders of the Series A Preferred Stock waived the deadline for the filing of
the registration statement from April 30, 1999 through the date hereof. We are
also obligated to use our best efforts to cause a registration statement to
become effective on or before June 30, 1999. This prospectus is a part of the
registration statement contemplated by the registration rights.
(iii) We are required to maintain the registration statement, or a
post-effective amendment, until the earlier the date of all the registerable
securities have been sold pursuant to the registration statement, the date the
holders of those share receive an opinion of counsel that the registerable
securities may be sold under the provisions of Rule 144 without limitation, or
five years after the date the holders of the Series A Preferred Stock first
subscribed for their shares.
(iv) We are obligated to pay all fees, disbursements and out-of-pocket
expenses and costs connected with the preparation and filing of the registration
statement and complying with applicable securities and Blue Sky Laws (including,
without limitation, attorneys fees). The holder of the shares subject to the
registration statement are obligated to bear the costs, pro rata, of any
underwriting discounts and commissions, if any, applicable to the registered
securities being registerable, as well as the fees of their own counsel.
(v) If this registration statement was not filed with the Securities
Exchange Commission on or before April 30, 1999, or is not declared effective by
the Securities and Exchange Commission on or before June 30, 1999 we are
obligated to pay the holders of the Series A Preferred Stock, as liquidated
damages for that failure (and not as a penalty), 2% of the purchase price of the
then outstanding shares of Series A Preferred Stock for each thirty calendar day
period until the registration statement is filed and/or declared effective. We
would be required to pay the liquidate damages in cash.
We have also granted registration rights to Messrs. Lunt, Johnston and
Bell under the terms of their employment contracts. Those rights include both
demand and "piggyback" rights.
Anti-Takeover Effective Nevada Law In Certain Provisions. Nevada law
provides that any agreement providing for the merger, consolidation or sale of
all or substantially all of the assets of a corporation be approved by the
owners of at least the majority of the outstanding shares of that corporation,
unless a different vote is provided for in our Article of Incorporation. Our
Articles of Incorporation do not provide for a super-majority voting requirement
in order to approve any such transactions. Nevada law also gives appraisal
rights for certain types of mergers, plans of reorganization, or exchanges or
sales of all or substantially all of the assets of a corporation. Under Nevada
law, a stockholder does not have the right to dissent with respect to (a) a sale
of assets or reorganization, or (b) any plan of merger or any plan of exchange,
if (i) the shares held by the stockholder are part of a class of shares which
are listed on a national securities exchange or the NASDAQ National Market
Systems, or are held of record by not less than 2,000 shareholders and (ii) the
stockholder is not required to accept for his shares any consideration other
than shares of a corporation that, immediately after the effective time of the
merger or exchange, will be part of a class of shares which are listed on a
national securities exchange or the NASDAQ National Market System, or are held
of record by not less than 2,000 holders.
The Nevada Private Corporation Law also has three provisions designed
to deter take-over attempts:
Control Share Acquisition Provision. Under Nevada law, when a
person has acquired or offers to acquire one-fifth, one-third or a majority of
the stock of a corporation, stockholders meeting must be held after delivery of
an "offerors" statement, at the offerors expense, so that the stockholders of
the corporation can vote on whether the shares proposed to be acquired (the
"control shares") can exercise voting rights. Except as otherwise provided in a
corporation's Articles of Incorporation, the approval of the majority of the
outstanding stock not held by the offerors is required so that the stock held by
the offerors will have voting rights. The control share acquisition provisions
are applicable to any acquisition of a controlling interest, unless the Articles
of Incorporation or by-laws of a corporation in effect on the tenth day
following the acquisition of a controlling interest by an acquiring person
provides that the control share acquisition provisions do not apply. We have has
not elected out of the control share acquisition provisions of Nevada law.
Combination Moratorium Provision. Nevada law provides that a
corporation may not engage in any "combinations," which is broadly defined to
include mergers, sales and leases of assets, issuances of securities and similar
transactions with an "interested stockholder" (which is defined as the
beneficial owner of 10% or more of the voting power of the corporation) and
certain affiliates of their associates for three years after an interested
stockholder's date of acquiring the shares, unless the combination or the
purchase of the shares by the interested stockholder is first approved by the
Board of Directors. After the initial three-year period, any combination must
still be approved by majority of the voting power not beneficially owned by the
interested stockholder or the interested stockholders affiliates or associates,
unless the aggregate amount of cash and the market value of the consideration
other than cash that could be received by stockholders as a result of the
combination is at least equal to the highest of: (a) the highest bid per share
of each class or series of shares, including the common shares, on the date of
the announcement of the combination or on the date the interested stockholder
acquired the shares; or (b) for holders of preferred stock, the highest
liquidation value of the preferred sock.
Other Provisions. Under Nevada law, the selection of a period
for achieving corporate goals is the responsibility of the directors. In
addition, the directors and officers, in exercising their respective powers with
a view to the interest of the corporation, may consider (i) the interest of the
corporations employees, suppliers, creditors and customers, (ii) the economy of
the state and the nation, (iii) the interest of the economy and of society and
(iv) the long-term, as well as short-term, interests of the corporation and its
stockholders, including the possibility that those interests may be best served
by the continued independence of the corporation. The directors may also resist
any change or potential change of control of the corporation if the directors,
by majority vote of a quorum, determine that a change or potential change is
opposed to or not in the best interest of the corporation "upon consideration of
the interest of the corporations stockholders," or for one of the other reasons
described above. The directors may also take action to protect the interests of
the corporation' stockholders by adopting or executing plans that deny rights,
privileges, powers or authority to a holder of a specific number of shares or
percentage of share ownership or voting power.
COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Pursuant to Nevada Revised Statutes Section 78.7502 and 78.751, our
Articles of Incorporation and bylaws provide for the indemnification of our
officers and directors. Mandatory indemnification is required for present and
former directors. However, the director must have conducted himself in good
faith and reasonably believed that his conduct was in, or not opposed to, our
best interests. In a criminal action he must not have had a reasonable cause to
believe his conduct was unlawful. Advances for expenses may be made if the
director affirms in writing that he believes he has met the standards and that
he will personally repay the expense if it is determined he did not meet the
standards. We provide permissive indemnification for officers, employees or
agents. Our Board must approve such indemnification and the standards and
limitations are the same as for a director.
We will not indemnify a director or officer adjudged liable due to his
negligence or willful misconduct toward us, adjudged liable to us, or if he
improperly received personal benefit. Indemnification in a derivative action is
limited to reasonable expenses incurred in connection with the proceeding. Also,
we are is authorized to purchase insurance on behalf of an individual for
liabilities incurred whether or not we would have the power or obligation to
indemnify him pursuant to our bylaws.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, or officers or persons controlling us
pursuant to the foregoing provisions, the registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
INDEX TO FINANCIAL STATEMENTS
WORDCRUNCHER INTERNET TECHNOLOGIES, INC
Audited Financial Statements: Page
Auditor's Report....................................................F-1
Consolidated Balance Sheets at December 31, 1998 and 1997...........F-2
Consolidated Statements of Operations for Years Ended
December 31, 1998 and 1997 ................................F-4
Consolidated Statements of Stockholders' Equity from
inception on November 5, 1996 through
December 31, 1998 and 1997 ...............................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996...........................F-8
Notes to Consolidated Financial Statements..........................F-9
Interim Financial Statements (Unaudited):
Balance Sheets at June 30, 1999 and 1998...........................F-16
Statement of Operations for the Six Months Ended
June 30, 1999 and 1998 ...................................F-18
Statement of Stockholders' Equity (Deficit) for the
Six Months Ended June 30, 1999 and 1998...................F-19
Statement of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 ...................................F-20
Notes to the Interim Financial
Statements...............................................F-21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of WordCruncher Internet Technologies, Inc.
We have audited the accompanying consolidated balance sheets of WordCruncher
Internet Technologies, Inc. as of December 31, 1998 and 1997 and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WordCruncher
Internet Technologies, Inc. as of December 31, 1998 and 1997 and the results of
its consolidated operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
Crouch, Bierwolf & Chisholm
Salt Lake City, Utah
January 21, 1999
<PAGE>
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
Consolidated Balance Sheets
ASSETS
December 31,
1998 1997
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash & Cash Equivalents (Note 1) $ 425,702 $ 10,369
Notes receivable-current portion (Note 3) - 5,000
----------- -----------
Total Current Assets 425,702 15,369
----------- -----------
PROPERTY & EQUIPMENT (Note 2) 81,419 44,682
----------- -----------
OTHER ASSETS
Organization Costs (Note 1) 1,202 -
Notes receivable-related party (Note 3) long-term portion 100,200 77,000
Interest receivable-long term 10,018 2,877
Deposits 5,076 -
----------- -----------
Total Other Assets 116,496 79,877
----------- -----------
TOTAL ASSETS $ 623,617 $ 139,928
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
Consolidated Balance Sheets continued
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
CURRENT LIABILITIES 1998 1997
------------- ------------
<S> <C> <C>
Accounts payable $ 10,421 $ 1,170
Accrued expenses 23,752 2,960
Accrued Interest 740 2,469
Current portion of long-term liabilities (Note 4) 136,006 314,708
------------- ------------
Total Current Liabilities 170,919 321,307
------------- ------------
LONG TERM LIABILITIES (Note 4)
Notes payable-related party 120,000 300,000
Capital lease obligations 27,620 42,272
Less current portion (136,006) (314,708)
------------- ------------
Total long term Liabilities 11,617 27,564
------------- ------------
TOTAL LIABILITIES 182,533 348,871
------------- ------------
STOCKHOLDERS' EQUITY
Common stock, authorized 60,000,000 shares
of $.001 par value, issued and outstanding
11,877,002 and 363,689 shares, respectively 11,877 1,091
Additional Paid-in capital 1,247,334 125,184
Retained earnings (818,127) (335,218)
------------- ------------
Total Stockholders' Equity 441,084 (208,943)
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 623,617 $ 139,928
============= ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
Consolidated Statements of Operations
For the Year ended
December 31,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES $ 82,678 $ 24,484 $ -
COST OF SALES 15,864 806 -
------------- ------------- -------------
GROSS PROFIT 66,814 23,678 -
------------- ------------- -------------
SELLING EXPENSES 34,554 5,274 -
RESEARCH & DEVELOPMENT 266,563 126,281 -
GENERAL & ADMINISTRATIVE EXPENSES 227,724 213,293 -
------------- ------------- -------------
TOTAL OPERATING EXPENSES 528,841 344,848 -
------------- ------------- -------------
OPERATING LOSS (462,027) (321,170) -
------------- ------------- -------------
OTHER INCOME AND (EXPENSES)
Interest income 7,276 2,877 -
Miscellaneous income - 200 -
Interest expense (28,158) (17,125) -
------------- ------------- -------------
Total Other Income and (Expenses) (20,882) (14,048) -
------------- ------------- -------------
LOSS BEFORE INCOME TAXES (482,909) (335,218) -
PROVISION FOR INCOME TAXES (Note 1) - - -
------------- ------------- -------------
NET LOSS $ (482,909) $ (335,218) -
============= ============= =============
LOSS PER COMMON SHARE
LOSS FROM OPERATIONS - EPS $ (.076) $ (.59) -
============= ============= =============
NET LOSS- EPS $ (.079) $ (.61) -
============= ============= =============
WEIGHTED AVERAGE
OUTSTANDING SHARES 6,100,679 545,535 -
============= ============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
Consolidated Statements of Stockholders' Equity
From Inception on November 5, 1996 through December 31, 1998
Additional Retained
Common Stock Paid-in
Earnings
Shares Amount Capital (Deficit)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at inception-November 5, 1996 - $ - $ - $ -
Net loss for the period ended
December 31, 1996 - - - -
----------- ----------- ----------- -----------
Balance December 31, 1996 - - - -
January 97 - Issuance of stock for cash
to organizers at $.001 per share 622,500 623 52 -
February 97 - Issuance of stock for
cash at $.001 per share 67,500 67 8 -
February 97 - Issuance of stock for
license agreement 110,742 111 (111) -
September 1997 - Issuance of stock
to employees for services at
$.33 per share 252,450 252 83,898 -
August 1997 - Issuance of stock for
services performed at $1.09 per share 37,875 38 41,337 -
Net loss for the year
ended December 31, 1997 - - - (335,218)
----------- ----------- ----------- -----------
Balance on December 31, 1997 1,091,067 1,091 125,184 (335,218)
July 1998 - Issuance of stock for cash
at $4.17 per share 120,000 120 499,880 -
July 98 - Reverse acquisition and
reorganization adjustment 9,885,435 9,886 (8,550) -
July 98 - Stock issued for cash at
$.725 per share 690,000 690 499,310 -
July 98 - Stock issued for debt conversion
at $.96 per share 13,500 13 12,987 -
October 98 - Shares issued for services
at $1.80 per share 39,000 39 70,161 -
October 98 - Shares issued for software
technology at $1.80 per share 13,000 13 23,387 -
November 98 - Shares issued for
insurance coverage at $1.0 per share 25,000 25 24,975 -
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
Consolidated Statements of Stockholders' Equity
From Inception on November 5, 1996 through December 31, 1998
Common Stock Additional Retained
-------------------------- Paid-in Earnings
Shares Amount Capital (Deficit)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Loss for the year
ended December 31, 1998 - - - (482,909)
----------- ----------- ----------- -----------
Balance on December 31, 1998 11,877,002 $ 11,877 $ 1,247,334 $ (818,127)
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
Consolidated Statements of Cash Flows
For the Year ended
December 31,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (482,909) $ (335,218) $ -
Non-cash items:
Depreciation & amortization 10,406 6,419 -
Stock issued for services 95,200 125,525 -
(Increase)/decrease in current assets:
Interest receivable (7,141) (2,877) -
Increase/(decrease) in current liabilities:
Accounts payable 4,251 1,170 -
Accrued expenses 19,063 5,429 -
------------- ------------- -------------
Net Cash Provided (Used) by Operating Activities (361,130) (199,552) -
------------- ------------- -------------
Cash Flows from Investing Activities
Cash paid for property, equipment
and software technology (18,627) - -
Cash received on notes receivables 5,000 - -
Cash advanced on notes receivable (23,200) (82,000) -
Cash paid for deposits (5,076) - -
------------- ------------- -------------
Net Cash Provided (Used) by Investing Activities (41,903) (82,000) -
------------- ------------- -------------
Cash Flows from Financing Activities
Cash received from stock issuance 1,000,000 750 -
Cash received from debt financing 13,000 300,000 -
Principal payments on long-term debt (194,634) (8,829) -
------------- ------------- -------------
Net Cash Provided (Used) by Financing Activities 818,366 291,921 -
------------- ------------- -------------
Increase/(decrease) in Cash 415,333 10,369 -
Cash and Cash Equivalents at Beginning of Period 10,369 - -
------------- ------------- -------------
Cash and Cash Equivalents at End of Period $ 425,702 $ 10,369 $ -
============= ============= =============
Supplemental Cash Flow Information:
Cash paid for interest $ 29,888 $ 14,656 $ -
Cash paid for income taxes $ - $ - $ -
Non-cash financing transaction:
Purchase of equipment with lease obligations $ - $ 51,190 $ -
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
The accompanying notes are an integral part of these financial statements.
WordCruncher Internet Technologies, Inc.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1 - Summary of Significant Accounting Policies
a. Organization
WordCruncher Internet Technologies, Inc. (the Company) was
incorporated on November 5, 1996 in the state of Utah under the
name of Redstone Publishing, Inc. On March 10, 1997 the Company
changed its name to WordCruncher Publishing Technologies, Inc.
During July 1998, the Company merged with Dunamis, Inc. a public
company organized in the State of California. Dunamis has
essentially no assets and liabilities, and management of Dunamis
has resigned and management of the Company now manages the
consolidated entity. The merger was recorded as a reverse
acquisition, therefore WordCruncher is the accounting survivor.
In connection with the merger, the Company changed it's
name to WordCruncher Internet Technologies, Inc. and changed its
domicile to the State of Nevada. The Company's headquarters are in
Draper, Utah, where the Company is engaged in the marketing of a
search engine software product. The Company has acquired a license
agreement from a University wherein the Company has an exclusive,
worldwide right to sell, develop and manufacture the "wordcruncher"
technology.
b. Recognition of Revenue
The Company recognizes income and expense on the accrual
basis of accounting. The Company receives revenues from services
provided for indexing printed materials to online format. Revenue
is recorded when the services are completed. The Company also
generates revenues from the sale of their publishers proprietary
version of the search engine technology. Revenues are recorded upon
the sale of the products. Licensing fees are also generated from
the sublicensing of the technology and is recorded as revenue when
received.
c. Earnings (Loss) Per Share
The computation of earnings per share of common stock is
based on the weighted average number of shares outstanding at the
date of the financial statements. Preferred shares issued
subsequent to December 31, 1998, that were convertible into common
shares, were not included in computing diluted EPS because their
effects were antidilutive.
d. Provision for Income Taxes
In 1997, WordCruncher Publishing Technologies, Inc. elected
to file federal and state income taxes under the provisions of
Subchapter S of the Internal Revenue Code. Under those provisions,
the Company does not pay corporate income taxes on its taxable
income during that period of time. Instead, the stockholders are
liable for individual income taxes on their respective shares of
the Company's net operating income in their individual income tax
returns. Effective July 1, 1998, the Company will file a
consolidated return with it's parent and will lose it's S-Corp
status.
No provision for income taxes has been recorded due to net
operating loss carry forwards totaling approximately $460,000 that
will be offset against future taxable income. These NOL carry
forwards begin to expire in 2013. No tax benefit has been reported
in the financial statements because the Company has not yet proven
it can generate taxable income.
Deferred tax assets and the valuation account is as follows
at December 31, 1998 and 1997:
1998 1997
------------ ------------
Deferred tax asset:
NOL carry forward $ 156,400 $ -
Valuation allowance (156,400) -
------------ ------------
Total $ - $ -
============ ============
e. Cash and Cash Equivalents
The company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents.
f. Property and Equipment
Expenditures for property and equipment and for renewals
and betterments, which extend the originally estimated economic
life of assets or convert the assets to a new use, are capitalized
at cost. Expenditures for maintenance, repairs and other renewals
of items are charged to expense. When items are disposed of, the
cost and accumulated depreciation are eliminated from the accounts,
and any gain or loss is included in the results of operations.
The provision for depreciation is calculated using the
straight-line method over the estimated useful lives of the assets.
The useful lives of equipment, furniture and software are 5 years,
7 years and 3 years, respectively. Depreciation expense for the
period ended December 31, 1998 and 1997 is $10,272 and $6,419,
respectively.
g. Stock Split & Change in Par Value
In July 1998, the Company authorized a 3 for 1 forward
stock split. These financial statements have been retroactively
restated to reflect the stock split. Pursuant to the reverse merger
with Dunamis the Company's par value changed to $.001. This change
has also been retroactively applied.
h. Cost of Sales
The costs associated with product sales including shipping
expenses are recorded as cost of sales.
i. Software Development Costs
The Company expenses all costs associated with software
development as research and development expense until technological
feasibility has been achieved. Subsequent to technological
feasibility, costs to produce product masters are capitalized and
amortized over a three year period. Amortization will start when
the product is available for general release, which is yet to come.
NOTE 2 - Property & Equipment
Property and equipment consists of the following at
December 31, 1998 and 1997:
1998 1997
----------- -----------
Computer equipment $ 8,609 $ -
Leased computer equipment 45,743 45,743
Leased furniture equipment 5,358 5,358
Software technology 38,400 -
----------- -----------
98,110 51,101
Less:
Accumulated depreciation - equipment 358 -
Accumulated depreciation - leased equipment (16,333) (6,419)
----------- -----------
Total Property & Equipment $ 81,419 $ 44,682
=========== ===========
NOTE 3 - Notes Receivable - Related Party
The Company loaned money to several officers/shareholders
of the Company. Notes receivable at December 31, 1998 and 1997
consist of the following:
December 31,
1998 1997
-------- --------
Note receivable from James Johnston, an
officer, interest rate of 8%, interest and
principle due January 1, 2000. 66,700 56,250
Note receivable from Kenneth Bell, an
officer, bears interest at 8%, principle and
interest due January 1, 2000. 29,500 20,750
Note receivable from a corporation owned by
Dan Lunt, an officer, bears interest at 8%
principal and interest due January 1, 2000 4,000 5,000
-------- --------
Total 100,200 82,000
Less current portion - 5,000
--------- --------
Notes receivable - long term $ 100,200 $ 77,000
========= ========
NOTE 4 - Long-Term Liabilities
Long Term Liabilities are detailed in the following
schedules as of December 31, 1998 and 1997:
Notes payable related party is detailed as follows: December 31
1998 1997
--------- --------
Note payable to three officers of the Company,
bears interest of prime +1 1/2%,
with principal due December 1999,
unsecured note $ 120,000 $ 300,000
--------- ---------
Total notes payable - related party $ 120,000 $ 300,000
--------- ---------
Capital lease obligations are detailed in the following schedule as
of and December 31, 1998 and 1997:
Capital lease obligation to a corporation
for computer equipment, lease payments due
monthly of $234 through December 2001,
bears interest at 14%, secured by computer
equipment. $ 6,818 $ 8,386
Capital lease obligation to a corporation
for computer equipment and furniture,
lease payments due monthly of $436
through April 2000, bears interest at 11%,
secured by equipment. 6,946 11,467
Capital lease obligation to a corporation
for equipment, lease payments due
monthly of $499 through April 2000,
bears interest at 11.5%, secured by
equipment. 7,786 12,569
Capital lease obligation to a corporation
for computer equipment, lease payments due
monthly of $369 through June 2000, bears
interest at 11.5%, secured by computer
equipment. 6,070 9,850
--------- ---------
Total Lease Obligations 27,620 42,272
--------- ---------
Total long term liabilities 147,620 342,272
--------- ---------
Less current portion of:
Notes payable - related party 120,000 300,000
Capital lease obligations 16,006 14,708
--------- ---------
Total current portion 136,006 314,708
--------- ---------
Net Long Term Liabilities $ 11,614 $ 27,564
========= =========
Future minimum principal payments on notes payable related party
are as follows:
1999 $ 120,000
----------
Total notes payable-related party $ 120,000
==========
Future minimum lease payments are as follows at December 31, 1998:
1999 $ 18,456
2000 $ 9,758
2001 $ 2,806
----------
$ 31,020
Less portion representing interest $ (3,400)
----------
Total $ 27,620
==========
NOTE 5 - Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
NOTE 6 - Commitments and Contingencies
The Company is committed for their office facilities.
Monthly lease payments are due of $3,744 for a 38 month period.
Future minimum lease payments are as follows at December 31, 1998:
1999 $ 44,928
2000 $ 44,928
2001 $ 44,928
2002 $ 7,488
---------
$ 142,272
As part of the license agreement described in Note 7, the
Company is committed to minimum royalty payments as follows:
1999 $ 20,000
2000 $ 50,000
2001 $ 100,000
2002 and thereafter $ 150,000
These minimum royalties are due as long as the license
agreement is in effect.
The Company has committed to Employment agreements to three
officers of the Company. The agreements commenced in September 1998
and end in August 2001. Monthly installments on the agreements
total $25,500.
NOTE 7 - Licenses
On February 14, 1998, the Company signed an exclusive
license agreement with Brigham Young University, a Utah non-profit
corporation and educational institution, wherein the Company has
the worldwide rights to market, modify, develop and manufacture the
"wordcruncher" technology, which is a software program used to
search data for specific items (search engine). The term of the
lease is as long as allowed by law. The agreement calls for license
fees and royalties of 3% of adjusted gross sales, and 50% of
royalty payments from sublicenses. Annual minimum royalties begin
for the calendar year 1999 and are due the quarter following the
year end, as specified in Note 6. Minimum royalty payments will be
capped at $150,000 from 2002 on. The Company acquired the license
through stock issuance, and is required to maintain BYU's equity
interest of 10%.
NOTE 8 - Related Party Transactions
James Johnston, Kenneth Bell and Dan Lunt, officers and
shareholders of the Company, borrowed $300,000 from a bank and
loaned the funds to the Company. At December 31, 1998 and 1997,
$120,000 and $300,000 was outstanding, respectively. Also in May
1998, Dan Lunt loaned the Company $13,000, which was paid by
December 31, 1998.
The Company has advanced funds to James Johnston in the
amount of $66,700 and $56,250 at December 31, 1998 and 1997,
respectively. Advances have also been made to Kenneth Bell of
$29,500 and $20,750 at December 31, 1998 and 1997, respectively.
During 1997, the Company loaned $10,000 to a company owned
by Dan Lunt. $5,000 was repaid in 1997 and $5,000 was offset
against advertising costs incurred by Mr. Lunt in 1998. During
1998, the Company advanced an additional $4,000 on a note
receivable due in 2000, all of which is outstanding at December 31,
1998.
NOTE 9 - Subsequent Events
On January 19, 1999 the Board of Directors organized a
Series A Convertible Preferred Stock with 15,000 shares authorized.
The preferred stock has a stated value of $1,000, and a cumulative
dividend of 6%. The Company issued 6300 Series of the Series A
Convertible Preferred Stock in February and March 1999. Under the
terms of the document for those sales, the shares are convertible
into 624,999 shares of common stock at a conversion rate of $10.08
per share, upon registration of the common stock. The preferred
shares hold no voting rights, and up to 20% of the preferred stock
can be converted into common during each month following the
effective date of the Company's prospectus. Preferred shareholders
have a limited right to receive additional shares of common stock
at certain times if the market price of the common stock is less
than $12.096 per share. On the 10th trading day after each of July
8, 1999, October 6, 1999, and February 13, 2000, preferred
shareholders are entitled to receive the number of shares of common
stock equal to one-third of the purchase price for their Series A
Preferred Stock times the difference between the 10 day average
closing price of the common stock and $12.096, divided by the ten
day trading average.
The investors of the Series A Preferred Stock were also
issued Series A and B warrants to purchase common stock. A Series C
warrant was also issued to a third party as a finder's fee. Series
A warrants allow their holders to purchase up to an aggregate of
71,069 shares of common stock at a weighted average price of $34.53
per share (125% of the closing bid price of Series A Preferred
Stock purchase agreement) at any time through the fifth anniversary
of the closing. Series B warrants allow their holders to purchase
up to an aggregate of 47,380 shares of common stock at a weighted
average of $41.44, through the expiration date. Series C warrants
allow their holders to purchase up to 189,000 shares of common
stock at a weighted average price of $29.01 per share through the
fifth anniversary of the warrant issue.
<PAGE>
<TABLE>
<CAPTION>
Interim Financial Statements
WordCruncher Internet Technologies, Inc.
Balance Sheet
ASSETS
------
June 30,
1999 1998
-------------- ----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 5,238,834 $ -
Stock subscription receivable - 500,000
Interest receivable 7,816 1,233
Accounts receivable 427 -
Notes receivable - current portion 2,630 -
-------------- ----------------
Total Current Assets 5,249,707 501,233
-------------- ----------------
PROPERTY & EQUIPMENT 372,747 39,725
-------------- ----------------
OTHER ASSETS
Organization costs 1,069 -
Notes receivable-related party long-term portion - 82,200
Interest receivable-long term - 6,009
Deposits 5,076 -
-------------- ----------------
Total Other Assets 6,145 88,209
============== ================
TOTAL ASSETS $ 5,628,599 $ 629,167
============== ================
The accompanying note is an integral part of these interim financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Interim Financial Statements
WordCruncher Internet Technologies, Inc.
Balance Sheet (cont'd)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
1999 1998
-------------- ----------------
<S> <C> <C>
CURRENT LIABILITIES
Bank overdrafts $ - $ 311
Accounts payable 55,485 7,037
Accrued expenses 44,879 1,643
Accrued interest - 2,399
Current portion of long-term liabilities 15,689 329,129
-------------- ----------------
Total Current Liabilities 116,053 340,519
-------------- ----------------
LONG TERM LIABILITIES
Notes payable-related party - 313,000
Capital lease obligations 19,270 35,952
Less current portion (15,689) (329,129)
-------------- ----------------
Total Long Term Liabilities 3,581 19,823
-------------- ----------------
TOTAL LIABILITIES 119,634 360,342
-------------- ----------------
STOCKHOLDERS' EQUITY
Common stock 11,877 4,037
Preferred stock 63 -
Additional Paid-in capital 7,155,222 622,238
Retained earnings (1,658,197) (357,450)
-------------- ----------------
Total Stockholders' Equity 5,508,965 268,825
============== ================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,628,599 $ 629,167
============== ================
The accompanying note is an integral part of these interim financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Interim Financial Statements
WordCruncher Internet Technologies, Inc.
Statement of Operations
Interim Period Ended June 30,
1999 1998
------------- ------------
<S> <C> <C>
REVENUES $ 21,286 $ 57,707
COST OF SALES & ROYALTIES 25,731 586
------------- ------------
GROSS PROFIT (4,445) 57,121
------------- ------------
RESEARCH & DEVELOPMENT EXPENSES 273,091 24,342
SALES & MARKETING EXPENSES 167,551 -
GENERAL & ADMINISTRATIVE EXPENSES 489,285 41,774
------------- ------------
TOTAL OPERATING EXPENSE 929,927 66,116
------------- ------------
OPERATING LOSS (934,372) (8,995)
------------- ------------
OTHER INCOME AND (EXPENSES)
Interest income 97,247 4,365
Interest expense (2,945) (17,602)
------------- ------------
Total Other Income and (Expenses), net 94,302 (13,237)
------------- ------------
LOSS BEFORE INCOME TAXES (840,070) (22,232)
PROVISION FOR INCOME TAXES - -
-------------
------------
NET LOSS $ (840,070) $ (22,232)
============
NET LOSS PER COMMON SHARE $ (0.071) $ (0.061)
============= ============
BASIC AND DILUTED LOSS PER COMMON SHARE
Basic loss per common share $ (0.071) $ (0.061)
Diluted loss per common share (0.062) -
WEIGHTED AVERAGE OUTSTANDING SHARES 11,877,002 367,022
============= ============
The accompanying note is an integral part of these interim financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Interim Financial Statements
WordCruncher Internet Technologies, Inc.
Statement of Stockolders' Equity|
From January 1, 1999 through June 30, 1999
Additional Retained
Paid-in Earnings
Common Stock Preferred Stock Capital (Deficit)
------------- ------------- ------------- ------------- ------------- -------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance on January 1, 1999 11,877,002 $ 11,877 - $ - $ 1,247,334 $ (818,127)
February 1999 - Issuance - - 6,100 61 5,719,839 -
of preferred stock for
cash at $1,000 per share,
$.01 par value
March 1999 - Issuance of - - 200 2 187,998 -
preferred stock for cash
at $1,000 per share, $.01
par value
March 1999 - Adjusting - - - - 51 -
journal entry to account
for petty cash account
Net Loss for the interim - - - - - (840,070)
period ended June 30, 1999
============= ============= ============= ============= ============= =============
Balance on June 30, 1999 11,877,002 $ 11,877 6,300 $ 63 $ 7,155,222 $ (1,658,197)
============= ============= ============= ============= ============= =============
The accompanying note is an integral part of these interim financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Interim Financial Statements
WordCruncher Internet Technologies, Inc.
Statement of Cash Flows
For the Six Months Ended For the Year Ended
June 30 December 31
1999 1998
-------------------- -------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (840,070) $ (482,909)
Non-cash items:
Depreciation & amortization 38,660 10,406
Stock issued for services - 95,200
(Increase)/decrease in current assets:
Interest receivable (7,831) (7,141)
Increase/(decrease) in current liabilities:
Accounts payable 45,064 4,251
Accrued expenses 20,387 19,063
-------------------- --------------------
Net Cash Provided (Used) by
Operating Activities (743,790) (361,130)
-------------------- --------------------
Cash Flows from Investing Activities
Cash paid for property, equipment and software (328,563) (18,627)
technology
Cash received on notes receivables 110,085 5,000
Cash advanced on notes receivable (12,500) (23,200)
Cash paid for deposits - (5,076)
-------------------- --------------------
Net Cash Provided (Used) by (230,978) (41,903)
Investing Activities
-------------------- --------------------
Cash Flows from Financing Activities
Cash received from preferred stock issuance 6,300,000 1,000,000
Cash received from debt financing 10,000 13,000
Cash paid for fees associated with preferred stock (392,100)
issuance
Principal payments on long-term debt (130,000) (194,634)
-------------------- --------------------
Net Cash Provided (Used) by
Financing Activities 5,787,900 818,366
-------------------- --------------------
Increase/(decrease) in Cash 4,813,132 415,333
Cash and Cash Equivalents at Beginning of Period 425,702 10,369
-------------------- --------------------
Cash and Cash Equivalents at End of Period $ 5,238,834 $ 425,702
==================== ====================
Supplemental Cash Flow Information:
Cash paid for interest $ 2,945 $ 29,888
Cash paid for income taxes $ - $ -
Non-cash financing transactions:
Purchase of equipment with lease obligations $ - $ -
The accompanying note is an integral part of these interim financial statements.
</TABLE>
<PAGE>
Note To Interim Financial Statements
WordCruncher Internet Technologies, Inc.
Note 1. Preferred Stock Issuance
On January 19, 1999 the Board of Directors organized a Series A
Convertible Preferred Stock with 15,000 shares authorized. The
preferred stock has a stated value of $1,000, and a cumulative dividend
of 6%. The company issued 6300 Series of the Series A Convertible
Preferred Stock in February and March 1999. Under the terms of the
document for those sales, the shares are convertible into 624,999
shares of common stock at a conversion rate of $10.08 per share, upon
registration of the common stock. The preferred shares hold no voting
rights, and up to 20% of the preferred stock can be converted into
common during each month following the effective date of the Company's
prospectus. Preferred shareholders have a limited right to receive
additional shares of common stock at certain times if the market price
of the common stock is less than $12.096 per share. On the 10th trading
day after each of July 8, 1999, October 6, 1999, and February 13, 2000,
preferred shareholders are entitled to receive the number of shares of
common stock equal to one-third of the purchase price for their Series
A Preferred Stock times the difference between the 10 day average
closing price of the common stock and $12.096, divided by the ten day
trading average.
The investors of the Series A Preferred Stock were also issued
Series A and B warrants to purchase common stock. A Series C warrant
was also issued to a third party as a finders fee. Series A warrants
allow their holders to purchase up to an aggregate of 71,069 shares of
common stock at a weighted average price of $34.53 per share (125% of
the closing bid price of Series A Preferred Stock purchase agreement)
at any time through the fifth anniversary of the closing. Series B
warrants allow their holders to purchase up to an aggregate of 47,380
shares of common stock at a weighted average of $41.44, through the
expiration date. Series C warrants allow their holders to purchase up
to 189,000 shares of common stock at a weighted average price of $29.01
per share through the fifth anniversary of the warrant issue.
<PAGE>
TABLE OF CONTENTS
We have not authorized any dealer,
salesperson or other person to give
any information or represent
anything not contained in this
prospectus. You must not rely on
any unauthorized information. This
prospectus does not offer to sell or 2,693,137 SHARES
buy any shares in any jurisdiction
where it is unlawful. The
information in this prospectus is
current only as of its date.
WORDCRUNCHER INTERNET
TECHNOLOGIES, INC.
--------------------------------------
PROSPECTUS
--------------------------------------
TABLE OF CONTENTS
ON PAGE 2 August 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses Of Issuance And Distribution
The following table sets forth the expenses payable by us in connection
with the sale of the shares. All the amounts shown are estimates except for the
registration fee:
Securities and Exchange Commission Registration Fee . . . . $ 3,837
NASDAQ Fees . . . . . . . . . . . . . . . . . . . . . . . . $ 6,000
Printing and Engraving Expenses . . . . . . . . . . . . . . $10,000
Legal and Accounting Fees and Expenses . . . . . . . . . . $50,000
Blue Sky Qualification Fees and Expenses . . . . . . . . . . $15,000
Transfer Agent and Registrar Fees and Expenses . . . . . . . $ 3,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . $ 1,500
-------
Total: $89,337
Item 14. Indemnification of Directors and Officers
Pursuant to Nevada Revised Statutes Section 78.7502 and 78.751, our
Articles of Incorporation and bylaws provide for the indemnification of our
officers and directors. Mandatory indemnification is required for present and
former directors. However, the director must have conducted himself in good
faith and reasonably believed that his conduct was in, or not opposed to, our
best interests. In a criminal action he must not have had a reasonable cause to
believe his conduct was unlawful. Advances for expenses may be made if the
director affirms in writing that he believes he has met the standards and that
he will personally repay the expense if it is determined he did not meet the
standards. We provide permissive indemnification for officers, employees or
agents. Our Board must approve such indemnification and the standards and
limitations are the same as for a director.
We will not indemnify a director or officer adjudged liable due to his
negligence or willful misconduct toward us, adjudged liable to us, or if he
improperly received personal benefit. Indemnification in a derivative action is
limited to reasonable expenses incurred in connection with the proceeding. Also,
we are authorized to purchase insurance on behalf of an individual for
liabilities incurred whether or not we would have the power or obligation to
indemnify him pursuant to our bylaws.
Item 15. Recent Sales of Unregistered Securities
The following discussion describes all securities we have sold within
the past three years without registration:
On May 16, 1997 we issued 1,500,000 shares of common stock for $1,500
in cash to Carol N. Purcell and Wilford Purcell, the founders of Dumanis, Inc.
Beginning on May 15 and ending on June 11, 1997 we sold 1,500,000 shares of
common stock at $.05 per share, for an aggregate offering amount of $75,000
pursuant to Rule 504 of Regulation D of the Securities Act. On July 14, 1998,
the Company issued an aggregate of 2,433,334 shares of common stock to the
stockholders of WordCruncher Publishing in a merger of that company into ours.
On July 1, 1998, we issued 13,500 shares of common stock, valued at $12,960, to
M. Daniel Lunt, one of our officers and directors, in satisfaction of a note we
issued to Mr. Lunt. On October 30, 1998 we issued an aggregate of 39,000 shares
of common stock, for $70,200, to four individuals in consideration for services
they provided to us. Specifically, 29,000 restricted shares were issued to
Timothy J. Riker, 5,000 shares to Peter T. Stoop, and 5,000 shares to Robert J.
Stevens. On December 29, 1998, we issued 13,000 shares of common stock to
Jeffrey B. Peterson to acquire certain intellectual property rights held by Mr.
Peterson. We valued those shares at $35,000. In November 1998, we issued 25,000
shares of common stock to Universal Business Insurance in satisfaction of
insurance premiums we owed to it. We valued those shares at $25,000. On February
8 and March 15, 1999, we issued an aggregate of 6,300 shares of Series A
Preferred Stock to eight persons pursuant to the Purchase Agreement. The Series
A Preferred Stock was issued for an aggregate of $6.3 million.
In connection with each of these isolated issuances of our securities,
we believe that each purchaser (i) was aware that the securities had not been
registered under federal securities laws, (ii) acquired the securities for its
own account for investment purposes and not with a view to or for resale in
connection with any distribution for purposes of the federal securities laws,
(iii) understood that the securities would need to be indefinitely held unless
registered or an exemption from registration applied to a proposed disposition
and (iv) was aware that the certificate representing the securities would bear a
legend restricting their transfer. We believe that, in light of the foregoing,
the sale of our securities to the respective acquirers did not constitute the
sale of an unregistered security in violation of the federal securities laws and
regulations by reason of the exemptions provided under Sections 3(b) and 4(2) of
the Securities Act, and the rules and regulations promulgated thereunder.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit Number Description
2.1** Agreement and Plan of Reorganization between the
Company and WordCruncher Publishing
Technologies, Inc., dated July 14 1998
3.1** Articles of Incorporation of the Company
3.2** Articles of Merger, filed June 20, 1998
3.3** Articles of Merger, filed July 15, 1998
3.4** Articles of Merger
3.5** Certificate of Amendment, filed February 1, 1999
3.6** Bylaws of the Company
4.1** Reference is made to Exhibit 3.4
4.2*** Specimen of Common Stock Certificate
5.1*** Opinion of Parsons Behle & Latimer
10.1** Lease between the Company and SLT III, LLC,
dated December 24, 1998
10.2** License Agreement between the Company and
Brigham Young University, dated February 14,
1997
10.3** Purchase Agreement between the Company and
Jeffrey B. Petersen, dated December 28, 1998
10.4** Employment Agreement between the Company and
Kenneth W. Bell, dated September 1, 1998
10.5** Employment Agreement between the Company and
James W. Johnston, dated September 1, 1998
10.6** Employment Agreement between the Company and M.
Daniel Lunt, dated September 1, 1998
10.7** Employment Agreement between the Company and
Peter T. Stoop
10.8** Preferred Stock Purchase Agreement between the
Company and certain Series A Preferred
investors, dated February 8, 1999
10.9** Letter Amendment Regarding Preferred Stock
Purchase Agreement, dated April 21, 1999
10.10** Escrow Agreement among the Company, the
Goldstein Law Group and certain Series A
Preferred Investors, dated February 8, 1999
10.11** Registration Rights Agreement among the Company
and certain Series A Preferred Investors, dated
February 8, 1999
10.12** Form of Warrant issued to certain Series A
Preferred Investors on February 8, 1999
10.13** Warrant issued to Placement Agent, dated
February 8, 1999
10.14* Dataware License Agreement, dated July 1999
10.15* Pittard Sullivan Contract, dated July 1999
10.16* Digital Boardwalk Agreement, dated July 1999
10.17* Acsiom, Inc. Consulting Agreement, dated July
1999
11.11** Statement re computation of earnings per share
23.1* Consent of Parsons Behle & Latimer
23.2* Consent of Crouch, Bierwolf & Chisholm
24.1** Power of Attorney (see signature page)
27.1* Financial Data Schedule
_________________________
* Filed herewith
** Previously filed
*** To be filed by amendment
Item 17. Undertakings
Pursuant to Rule 415, 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 of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth 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 Commission pursuant to Rule 242(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement:
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining 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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused the amended registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Salt
Lake, State of Utah, on August 17, 1999.
WORDCRUNCHER INTERNET TECHNOLOGIES, INC.
a Nevada Corporation
By: /s/ M. Daniel Lunt
M. Daniel Lunt
President, Chief Executive Officer, Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints M. Daniel Lunt and Kenneth W. Bell, and
each of them, his attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him in any and all capacities, to sign any
and all amendments (including posteffective amendments) to this registration
statement, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully as to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, the amended
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
By: Date: /s/ James W. Johnston April 29, 1999
James W. Johnston
Chairman of the Board, Executive Vice President
By: Date: /s/ Kenneth W. Bell April 29, 1999
Kenneth W. Bell
Senior Vice President, Chief Financial Officer,
Treasurer, Secretary, Director
By: Date: /s/ M. Daniel Lunt April 29, 1999
M. Daniel Lunt
President, Chief Executive Officer, Director
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit Number Description
-------------- -----------
10.14* Dataware License Agreement, dated July 1999
10.15* Pittard Sullivan Contract, dated July 1999
10.16* Digital Boardwalk Agreement, dated July 1999
10.17* Acsiom, Inc. Consulting Agreement, dated July
1999
23.1* Consent of Parsons Behle & Latimer
23.2* Consent of Crouch, Bierwolf & Chisholm
27.1* Financial Data Schedule
Limited Use Embedded Solutions Partner
SOURCE CODE SOFTWARE LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "Agreement") is made and entered into this
7/22/99 ("Effective Date"), by and between Dataware Technologies, Inc. whose
principal office is at One Canal Place, Cambridge MA 01741, ("Dataware") and
Word Cruncher Internet Technologies Inc. whose principal office is at 405 East
12450 South, Draper, UT 84092 ("LICENSEE").
Whereas, Dataware is sole proprietor of the Search Engine, as defined
below, and desires to license such Search Engine to LICENSEE under the terms of
this Agreement; and
Whereas, LICENSEE desires to license such Search Engine from Dataware,
and to incorporate such Search Engine with the LICENSEE'S Web Site, as defined
below.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties agree as follows:
1. DEFINITIONS.
1.1 For purposes of this Agreement:
(a) Code. "Code" shall mean computer programming code for the
Search Engine in both object Code and Source Code.
(b) Documentation. "Documentation" shall mean Dataware's
standard user manuals, on-line help, and other written and graphic materials
related to the Search Engine.
(c) End User. "End User" shall mean an Internet user who
accesses LICENSEE's Web Site.
(d) Object Code. "Object Code" shall mean the machine-readable
form of the Code.
(e) Search Engine. "Search Engine" shall mean Dataware's
proprietary search and filtering engines Code, as described in Exhibit B, but
excluding the following components:
(i) Inso Filters; and
(ii) inXight.
(f) Source Code. "Source Code" shall mean the human-readable
form of the Code.
(g) Web Host. "Web Host" shall mean an entity identified in
Exhibit A that stores any Web Site on its Web Server, receives or stores
commands or data transmitted by End-Users and transmits Web Page data to
End-Users' Internet addresses.
(h) Web Page. "Web Page" means each individual screen display
contained in Web Site.
(i) Web Server. "Web Server" shall mean each computer that
delivers any Web Page, which is located in the territory described in Exhibit A.
(j) Web Site. "Web Site" shall mean all Web Pages associated
with LICENSEE and its products or services, which incorporates the Object Code,
are stored by Web Host on Web Server, and have the URL, target market and other
features described in Exhibit A.
2. RIGHTS AND RESTRICTIONS.
2.1 License. Subject to the terms of this Agreement, Dataware hereby
grants to LICENSEE, and LICENSEE accepts, the no-exclusive, non-transferable,
limited use license under Dataware's copyrights, and patents, if any, to the
Search Engine to incorporate the Object Code with the Web Site, and to use the
Source Code solely in support of the authorized use of Search Engine during the
term of this Agreement.
2.2 Ownership. LICENSEE shall retain all rights, title and interest in
and to the Web Site, except that Dataware shall retain all rights, title and
interest in and to the Search Engine including all enhancements, modifications,
derivative works and improvements to the Search Engine developed by or for
Dataware. LICENSEE SHALL HAVE NO RIGHT TO AMEND, MODIFY, ALTER OR PREPARE
DERIVATIVE WORKS OF THE SEARCH ENGINE SAVE AS EXPRESSLY PROVIDED IN THIS
AGREEMENT OR AS OTHERWISE EXPRESSLY AUTHORIZED BY DATAWARE IN WRITING.
2.3 Restrictions. LICENSEE acknowledges and agrees that the Search
Engine is proprietary to Dataware and contains Dataware's proprietary
information and, in order to protect such proprietary rights and information,
LICENSEE agrees not to sell, license, sublicense, disclose, rent or otherwise
transfer the Search Engine to any third party except as expressly provided in
this Agreement. Neither party shall during the term of this Agreement (including
any renewal thereof), nor for a period of 12 months following termination of
this Agreement, directly or indirectly solicit the employment of any employee of
the other.
2.4 Reproduction. Dataware will provide LICENSEE with one master copy
of the Object Code, and one master copy of the Source Code to the Search Engine.
LICENSEE may only amend, modify and alter the Source Code to the Search Engine
to customize the Search Engine for use with the Web Site and not for any other
purpose without Dataware's prior written agreement. All modifications,
adaptations and derivative works of the Source Code to the Search Engine
licensed under this Agreement made by LICENSEE shall be owned by LICENSEE,
provided that LICENSEE grants to Dataware a non-exclusive and fully paid up
license in and to such modifications, adaptations, and derivative works of the
Search Engine for internal purposes; negotiates in good faith, upon Dataware's
request, the terms of a license in and to such modifications, adaptations, and
derivative works of the Search Engine for commercial purposes; and otherwise
observes the restrictions of t his Agreement.
3. CODE.
3.1 Object Code. The Object code shall not be sold, licensed,
sublicensed, disclosed, rented or otherwise transferred to third parties, except
that LICENSEE may permit Web Host to store the Object Code with Web site on Web
Server and to transmit data from Search Engine to End Users' Internet addresses.
3.2 Source Code. The Source Code to the Search Engine shall not be
sold, licensed, sublicensed, disclosed, rented or otherwise transferred to third
parties except that the Search Engine may be made accessible only to those
subcontractors of LICENSEE, if any, approved in writing by Dataware, and those
employees of LICENSEE requiring access to Source Code to develop and maintain
the Web Site, who shall have FIRST executed a confidentiality agreement with
terms at least as protective of the Source Code to the Search Engine as those
contained in this Agreement.
4. FEES AND STATEMENTS.
4.1 Fees. LICENSEE shall pay to Dataware or its designee those fees
specified in Exhibit C, at the time and in the manner specified therein. Failure
of LICENSEE to pay any amounts when due shall result in the accrual of interest
on the remaining unpaid balance at a rate equal to the lesser of one and one
half percent (1 1/2%) per annum or the maximum rate allowed by law.
4.2 Inspection Rights. LICENSEE will keep and maintain, for a period of
five (5) years complete and accurate records of LICENSEE's use of the Search
Engine and Documentation and such other matters as may affect the determination
of any amount payable to Dataware hereunder in sufficient detail to enable
Dataware or Dataware's professional advisors to determine any amounts payable to
Dataware under this Agreement. Dataware may inspect such records to verify
LICENSEE's statements. Any such inspection will be conducted only by Dataware's
professional advisers during regular business hours at LICENSEE's offices in a
manner that doe snot unreasonably interfere with LICENSEE's business activities.
Such inspection shall be at Dataware's cost and expense; provided, however, that
such inspection shall be at Licensee's cost and expense if such inspection
reveals that Licensee underpaid its fees due to Dataware hereunder by more than
5%. Such inspections may be conducted no ore than once in any twelve (12) month
period. In the event that Dataware wishes to inspect such records, LICENSEE will
make the relevant records available to such professional advisers. Such advisers
may use LICENSEE records solely for the purpose of verifying royalty payments
and may not use information obtained from LICENSEE records for any other purpose
or disclose confidential information made available to the independent
accountants by the LICENSEE in the course of such inspection. In no event may
Dataware commence an inspection of any statement later than five (5) years from
the date of such statement.
4.3 Taxes. LICENSEE's payments required under this Section 4 are
exclusive of taxes except as provided herein, and LICENSEE agrees to bear and be
solely responsible for the payment of all such taxes, other than taxes payable
on Dataware's net income, including but not limited to all sales, use, rental
receipt, personal property or other taxes and their equivalents which may be
levied or assessed in connection with the use, manufacture or sale of the Search
Engine or the Web Site.
5. MARKETING.
LICENSEE shall provide to Dataware, at no cost, a link from each Web
Site on the Internet to Dataware's home page on the Internet and shall permit
Dataware to establish, at no cost, a link from Dataware's Web Site to LICENSEE's
home page on each Web Site.
6. PRODUCT WARRANTY.
6.1 Warranty. Dataware warrants to LICENSEE (and not to any other
party) that, for a period of thirty (30) days from the date of delivery to
LICENSEE of the master copy of the Object Code, the Search Engine will
substantially perform the functions described in the Documentation for such
Search Engine. Dataware warrants that it has the right and authority to enter
into this Agreement and to license the Search Engine to LICENSEE in accordance
with the terms hereof, and as of the Effective Date, is not aware of any claim
that the Search Engine infringes any copyright, patent or trade secret rights of
any third party. Dataware EXCLUDES ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF TITLE, MERCHANTABILITY,
AND FITNESS FOR A PARTICULAR PURPOSE, TO THE MAXIMUM EXTENT PERMITTED BY LAW.
LICENSEE's sole remedy for failure of the Search Engine to meet this warranty
shall be limited to having Dataware use commercially reasonable efforts to
correct documented nonconformances within a reasonable period of time, provided
that LICENSEE shall return to Dataware all copies of the nonconforming Search
Engine.
6.2 Year 2000 Warranty. Dataware warrants that the occurrence in or use
by the Search Engine of dates before, on or after January 1, 2000 ("Millennial
Dates") will not adversely affect its performance with respect to date-dependent
data, computations, output, or other functions (including, without limitation,
calculating, comparing and sequencing) and that the Search Engine will create,
store, process and output information related to or including Millennial Dates
without error or omissions and at no additional cost to Licensee. The Search
Engine includes calendar year 2000 date conversion and compatibility
capabilities, including, but not limited to, date data century recognition, same
century and multiple century formula and date value calculations, and user
interface date data, values that reflect the century, and that the Search Engine
will (i) manage and manipulate data involving dates, including single century
and multiple century dates, and will not cause an abnormal abend or abort or
result in the generation of incorrect values or invalid output involving such
dates; and (ii) include the indication of the correct century in all
date-related user interface functionalities; (iii) include the indication of the
correct century in all date-related system-to-system or
application-to-application data interface functionalities; and (iv) respond to
two-digit year-date input in a way that resolves the ambiguity as to century in
a disclosed, defined, and predetermined manner; provided however that this
Section shall not apply to the extent that the Search Engine is not used in
accordance with the Documentation provided by Dataware, and to the extent that
any other products (e.g., hardware, software, firmware) used in combination with
the Search Engine do not properly exchange date data with the Search Engine.
6.3 No Pass Through. LICENSEE will not pass through to End Users the
warranties in Sections 6.1 or 6.2 or the benefit thereof and shall make no other
representations to End Users on behalf of Dataware. LICENSEE shall be solely
responsible for providing support and warranty service to End Users for the
Search Engine and Web Site. LICENSEE shall indicate to End Users that they must
look solely to LICENSEE in connection with any problems, warranty claims, or
other matters regarding the Search Engine or Web Site. LICENSEE shall make no
warranties to End users on behalf of Dataware. LICENSEE agrees to indemnify and
hold Dataware harmless from any third party claims based on warranties given in
violation of this Agreement.
6.4 Exclusions. This limited warranty does not cover loss or damage
which: (i) occurs in shipment to or from LICENSEE; (ii) is due to improper
installation or maintenance, misuse, neglect, or any cause other than ordinary
commercial or industrial application; (iii) is due to adjustment, repair or
modification by any person other than as expressly authorized in writing by
Dataware; (iv) is due to storage or use in an improper environment, excessive or
inadequate heating or air conditioning and electrical power failures, surges or
other irregularities; or (v) is due to any statement about the Search Engine
other than as provided for in this Agreement, unless confirmed in writing by an
authorized corporate officer of Dataware.
Dataware is not responsible for problems caused by computer hardware or
computer operating systems (including those making up Web Server or Web Site)
which are not compatible with the system specifications required to run the
Search Engine as set forth in the Search Engine's user manual, or for problems
in the interaction of the Search Engine with non-Dataware software.
7. LIMITATION OF LIABILITY
7.1 DATAWARE SHALL NOT BE LIABLE TO LICENSEE OR END USERS OR ANY OTHER
PARTY CLAIMING THROUGH OR UNDER LICENSEE FOR ANY LOSS OF PROFITS OR INCOME, LOSS
OF DATA, OR OTHER TANGIBLE BUSINESS LOSS OR OTHER CONSEQUENTIAL, INDIRECT,
INCIDENTAL, OR SPECIAL LOSS OR DAMAGES, OR FOR ANY CLAIM BY ANY OTHER PARTY,
WHETHER IN AN ACTION IN CONTRACT OR TORT OR BASED ON A WARRANTY, EVEN IF
DATAWARE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ARISING OUT OF OR
IN CONNECTION WITH THE USE OF THE LICENSES GRANTED HEREUNDER. LICENSEE'S, END
USERS' OR ANY OTHER ENTITY'S SOLE AND EXCLUSIVE REMEDIES SHALL BE AS SET FORTH
IN SECTIONS 6 AND 11 OF THIS AGREEMENT. EXCEPT FOR INDEMNITY FOR INTELLECTUAL
PROPERTY INFRINGEMENT PURSUANT TO SECTION 11, IN N O EVENT SHALL DATAWARE BE
LIABLE TO LICENSEE, END USERS, OR ANY OTHER ENTITY CLAIMING THROUGH OR UNDER
LICENSEE FOR AMOUNTS IN EXCESS OF THOSE PAID BY LICENSEE TO DATAWARE UNDER THIS
AGREEMENT.
7.2 UNDER NO CIRCUMSTANCE WILL EITHER PARTY BE LIABLE TO THE OTHER FOR
ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, INDIRECT OR EXEMPLARY DAMAGES ARISING
OUT OF THIS AGREEMENT, WHETHER BASED ON WARRANTY, CONTRACT, TORT (INCLUDING
NEGLIGENCE OR STRICT LIABILITY) OR OTHERWISE, WHETHER OR NOT SUCH DAMAGES ARE
FORESEEABLE AND REGARDLESS OF WHETHER SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
8. SUPPORT AND MAINTENANCE.
8.1 Technical Support and Maintenance. Dataware has no obligation to
provide technical support or telephone support or training or other support or
maintenance under this Agreement.
8.2 New Versions, Upgrades, Updates and Bug Fixes. Dataware has no
obligation to LICENSEE to provide Bug Fixes, as defined below, in the Search
Engine that arise after the 30 day warranty period or to produce New Versions,
as defined below, of the Search Engine. However, Dataware will promptly furnish
to LICENSEE at no charge all Bug Fixes and New Versions which Dataware makes
available FREE OF CHARGE to other licensees of the Search Engine. If Dataware
licenses New Versions to other licensees, Dataware agrees to offer such New
Versions to LICENSEE at the prevailing rate available to such other licensees,
where allowable under the terms and conditions of any applicable license
agreement. A "Bug Fix" is a rewritten or new section or sections of the Source
Code to the Search Engine which corrects an error in the program or prevents a
crash or other problem in the operation of the Search Engine or prevents an
unwanted side effect in the operation of the Search Engine or provides a missing
feature or functionality described in Search Engine product literature,
documentation, or marketing materials. A "New Version" is defined as an improved
or enhanced or modified version, upgrade, or update of the Search Engine which
adds a new function or feature or indexing or viewing capability to the Search
Engine or improves the efficiency of the Search Engine or improves the
effectiveness of the Search Engine or improves the capabilities of the Search
Engine to integrate with other software or reduces some existing limitation of
the Search Engine.
9. TRADEMARKS; MARKINGS.
9.1 Trademarks. Subject to Section 9.3, each party hereby grants to the
other the limited, nonexclusive right during the term of this Agreement to use
the trademarks, trade names and other marketing names used by the other, which
in the case of Dataware, shall be limited to trademarks, tradenames and other
marketing names associated with InQuery and InFilter, a current list of which is
set forth in Exhibit E hereto (the "Trademarks"), in connection with
advertising, promotion and marketing of LICENSEE's Web Site and Dataware's
products and services and in related product brochures and other materials.
Licensee may from time to time attach other or additional trademarks or names to
Web Site. Neither party grants any rights other than expressly granted
hereunder, and each party hereby agrees to and recognizes the other party's
exclusive ownership of its Trademarks and the renown of the other party's
Trademarks worldwide. Each party agrees not to take any action inconsistent with
such ownership and further agrees to take any action, at the cost of the other
party, including without limitation, the conduct of legal proceedings, which the
other party deems necessary to establish and preserve its exclusive rights in
and to its Trademarks.
9.2 Markings. Any reproduction of Dataware's Trademarks, logos, symbols
and other identifying marks shall be true reproductions.
9.3 Use of Dataware's and LICENSEE's Trademarks. Each party may use the
other party's Trademarks in advertising, marketing and promotional materials
subject to the other party's prior written approval, which approval shall not be
unreasonably withheld.
9.4 Copyright Notices. LICENSEE hereby agrees to insert in each Web
Site the following notice:
THE InQUERY(TM) SEARCH ENGINE COPYRIGHT (C)1999, DATAWARE TECHNOLOGIES,
INC. ALL RIGHTS RESERVED. (www.dataware.com)
The Dataware InQuery icon, provided to LICENSEE by Dataware, will be included
with the copyright notice. This notice will be included in an informational
screen display or "about this system" page easily accessible to End Users and
prominently in documentation for Web Site, and whatever the LICENSEE copyright
notice is displayed.
10. CONFIDENTIALITY.
10.1 Confidential Information. The term "Confidential Information"
means any technical or non-technical information relating to Dataware, LICENSEE,
the Search Engine, Documentation and Web Site, such as Source Code, product
plans, costs, prices, names, finances, marketing plans, business opportunities,
personnel and the like, which is disclosed by one party ("Disclosing Party") to
the other party ("Receiving Party") in a written or other tangible form clearly
marked "Confidential" or with a comparable legend. Oral or visual information
shall not be considered Confidential Information unless it is designated
confidential by Disclosing Party at the time of such oral or visual disclosure,
and subsequently reduced to writing clearly marked "Confidential" or with a
comparable legend, and sent to Receiving Party within thirty (30) days after
such oral or visual disclosure.
10.2 No Use of Confidential Information for Own Purpose. During the
term of this Agreement and thereafter, Receiving Party agrees to keep
Confidential Information of Disclosing Party in confidence, and shall neither
disclose it to any third party nor use the same for any purposes other than
those contained in this Agreement;. Notwithstanding the foregoing, Receiving
Party shall have no confidentiality obligation and no use restriction with
respect to any information that:
(a) the Disclosing Party approves, by prior written consent,
Receiving Party to release or disclose to any third parties;
(b) the Receiving Party already knows, as evidenced by its
written and dated records, when received from Disclosing Party;
(c) the Receiving Party receives in good faith from a third
party lawfully in possession thereof and having no similar obligation to keep
such information confidential;
(d) is or becomes publicly known at or after the Receiving
Party receives it from Disclosing Party through no fault of Receiving Party;
(e) the Receiving Party independently develops without using
the Disclosing Party's Confidential Information; or
(f) is disclosed pursuant to the requirement of a governmental
agency or disclosure is required by operation of law.
10.3 Injunctive Relief. In recognition of the fact that the
unauthorized disclosure, copying, or use of the Source Code could cause
irreparable harm and significant injury to Dataware, which may be difficult to
measure with certainty or to compensate through damages, LICENSEE agrees that
any court of competent jurisdiction shall grant such injunctive or other
equitable relief as Dataware may seek to enforce the provisions of this
Agreement.
11. INFRINGEMENT INDEMNITY.
11.1 Dataware's Indemnity.
(a) Dataware shall, at its own expense, defend and hold
harmless LICENSEE and its officers, directors, employees, affiliates and
subcontractors from and against any third party claim, action, suit, or
proceeding alleging that the Search Engine furnished and used within the scope
of this Agreement, infringes or violates any third party's patent, copyright,
trade secret, or other intellectual property rights; Dataware shall indemnify
LICENSEE for all losses, damages and all reasonable expenses and costs incurred
by LICENSEE as a result of a final judgment entered against LICENSEE in any such
claim, action, suit or proceeding, provided that LICENSEE gives Dataware prompt
written notice of any claim, sole authority to defend or settle as it sees fit
(except that Dataware may not enter into any agreement that would result in
liability to LICENSEE without LICENSEE's prior written consent), and reasonable
cooperation (at Dataware's expense).
(b) If the Search Engine, in whole or in part, is or in
Dataware's opinion may become, the subject of any claim, action, suit or
proceeding for infringement of, or if it is judicially determined that the
Search Engine, in whole or in part, infringes any third party's patent,
copyright, trade secret, or other intellectual property rights, or if the Search
Engine's use is enjoined, then Dataware may, at its option and expense: (i)
procure for LICENSEE the right to continue the Search Engine's sale and use; or
(ii) modify the Search Engine so as not to infringe such third party's patent,
copyright, trade secret, or other intellectual property rights while conforming
in all material respects to the Documentation. The foregoing remedial actions
shall not affect the payments due hereunder and do not relieve Dataware from its
obligations under Section 11.1(a).
11.2 Limitation on Liability/Exclusive Remedy.
(a) Dataware will have no liability under Section 11.1 for any
infringement claim based upon: (i) the use or combination of the Search Engine
with software, hardware, or other materials not provided by Dataware (other than
as permitted or specified in Documentation provided by Dataware to Licensee);
and (ii) components or software which were not manufactured by Dataware.
(b) SECTIONS 11.1 AND 11.2 STATE DATAWARE'S ENTIRE OBLIGATION
AND LIABILITY WITH RESPECT TO ANY CLAIMS OF PATENT, COPYRIGHT, TRADE SECRET OR
OTHER PROPRIETARY OR INTELLECTUAL PROPERTY RIGHT INFRINGEMENT.
12. LICENSEE'S INDEMNITY.
LICENSEE shall, at its own expense, defend and hold harmless Dataware
and its officers, directors, employees, affiliates and subcontractors from and
against any third party claim, action, suit or proceeding alleging that Web
Site, excluding Search Engine, infringes any third party's patent, copyright,
trade secret, or other intellectual property rights, or based upon any act or
omission of LICENSEE. LICENSEE shall indemnify Dataware for all losses, damages
and all reasonable expenses and costs incurred by Dataware as a result of a
final judgment entered against Dataware in any such claim, action, suit or
proceeding; provided that Dataware gives LICENSEE prompt written notice of any
such claim, grants LICENSEE control of the defense and any settlement thereof,
and reasonably cooperates with LICENSEE at LICENSEE's expense.
13. TERM.
The initial term of the license granted to LICENSEE hereunder shall
expire three (3) years from the Effective Date of this Agreement (the "Initial
Term"). If during the Initial Term, LICENSEE shall pay to Dataware or its
designees in excess of $1,000,000 in fees hereunder, the license will renew for
additional successive terms of two (2) years, provided that (i) LICENSEE shall
pay to Dataware additional licensee fees for use of the Code in connection with
any Web Site that is to, in Dataware's reasonable judgment, substantially
similar to Web Sites launched by LICENSEE during the Initial Term, which fees
the parties shall negotiate in good faith and agree in writing; (ii) LICENSEE
shall enter into maintenance and support agreements with Dataware or its
designee containing such terms and conditions as the parties shall negotiate in
good faith and agree in writing at least thirty (30) days prior to the date of
expiry of each preceding term; and (iii) LICENSEE otherwise complies with the
terms and conditions of this Agreement. If during the Initial Term, LICENSEE
fails to pay to Dataware or its designee in excess of $1,000,000 in fees
hereunder, the license will renew for additional successive terms of two (2)
years, provided that (i) LICENSEE shall pay to Dataware additional license fees
for use of the Code in connection with any Web Site, which fees the parties
shall negotiate in good faith and agree in writing at least thirty (30) days
prior to the date of expiry of each preceding term; (ii) LICENSEE shall enter
into maintenance and support agreements with Dataware or its designee containing
such terms and conditions as the parties shall negotiate in good faith and agree
in writing at least thirty (30) days prior to the date of expiry of each
preceding term; and (iii) LICENSEE otherwise complies with the terms and
conditions of this Agreement and such other terms and conditions as the parties
shall negotiate in good faith and agree in writing at least thirty (30) days
prior to the date of expiry of each preceding term. The term of this Agreement
shall commence on the Effective Date and continue so long as any license granted
hereunder remains in force and effect, unless this Agreement is earlier
terminated in accordance with Section 13.
14. TERMINATION.
14.1 Termination for Cause by Either Party. Either party may, by
written notice to the other party, terminate this Agreement based upon the
occurrence of any one or more of the following events:
(a) Upon the failure of the other party to pay any monies when
payable hereunder, if such default continues for fifteen (15) business days or
ore after written notice to the other party.
(b) Upon material breach of this Agreement, including (without
limitation) failure of the other party to observe, keep or perform any of the
covenants, terms or conditions herein if such failure has not been cured within
forty five (45) days after written notice as provided for in section 14.3; or
(c) If the other party ceases to function as a going concern
or to conduct its operations in the normal course of business.
14.2 Termination by Dataware. Dataware may, by written notice to
LICENSEE, terminate this Agreement upon the occurrence of any one or more of the
following events, subject to the cure period set forth in Section 14.3:
(a) In the event LICENSEE or its sublicensees are in breach of
Sections 2, 3, 4, 6.3, 9,
10 or 12 of this Agreement.
(b) In the event LICENSEE or its sublicensees fail to fully
comply with any and all governmental laws and regulations pertaining to the Web
Site.
14.3 Termination Process and cure Period. Upon written notice by either
party to the other, via certified mail, return receipt requested, stating the
intent to terminate this Agreement and the reason(s) for termination, the other
party will have forty five e(45) days in which to cure or remove any legitimate
violations or defaults stated in such termination letter. If such violations or
defaults have not been removed or cured by the end of such forty five (45) day
period, termination will be effective as of the end of such forty five (45) day
period. THIS PROVISION SHALL NOT APPLY IN RELATION TO ANY DEFAULT IN PAYMENTS
DUE FROM LICENSEE UNDER THIS AGREEMENT, EXCEPT IN THE EVENT OF, AND ONLY TO THE
EXTENT OF, A GOOD FAITH DISPUTE.
14.4 Effect of Termination. Upon termination or expiration of this
Agreement:
(a) All licenses and rights granted to LICENSEE under this
Agreement shall terminate; provided, however, that LICENSEE's rights to operate
the Web Site including the Search Engine and LICENSEE's sublicensee's rights as
of the termination or expiration date of this Agreement shall continue for sixty
(60) days from the date of termination without cause or expiration of this
Agreement, subject to payment by LICENSEE of payments, if any, in accordance
with the terms of this Agreement.
(b) LICENSEE shall promptly return to Dataware all Source Code
for the Search Engine, marketing and selling materials, all manuals, all
technical data and all other documents and copies thereof previously supplied by
Dataware, except such documents as are necessary for LICENSEE to provide support
to End Users;
(c) LICENSEE shall cease using Dataware's Trademarks and
refrain thereafter from representing itself as a LICENSEE of Dataware;
(d) Any other rights of either party which may have accrued up
to the date of such termination or expiration shall not be affected.
15. GENERAL TERMS.
15.1 Assignment. Neither party may assign this Agreement in whole or in
part without the other party's prior written consent which consent shall not be
unreasonably withheld; provided, however, that either party may assign this
Agreement and its right and obligations hereunder to a third party in connection
with a merger, consolidation, or sale of all, or substantially all of its assets
without the other party's prior written consent.
15.2 Right to Enter Agreement. Each party has full power and authority
to enter into and perform this Agreement, and the person signing this Agreement
on behalf of each has been properly authorized and empowered to enter into this
Agreement. Each party further acknowledges that it has read this Agreement,
understands it, and agrees to be bound by it.
15.3 Notices. All notices, requests, consents and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed effective when mailed by registered or certified mail, postage prepaid,
and received by the party at its respective address and representative as set
forth on the signature page below. Either party may change its address by
written notice to the other.
15.4 Severability and Headings. If any of the provisions, or portions
thereof, of this Agreement is held by a court of competent jurisdiction to be
invalid under any applicable statute or rule of law, the parties agree that such
invalidity shall not affect the validity of the remaining portions of this
Agreement and further agree to substitute for the invalid provision a valid
provision which most closely approximates the intent and economic effect of the
invalid provision. Headings used in this Agreement are for reference purposes
only and in no way define, limit, construe or describe the scope or extent of
such section, or in any way affect this Agreement.
15.5 Non-Waiver. No term or provisions hereof shall be deemed waived
and no breach excused, unless such waiver or consent shall be in writing and
signed by the party claimed to have waived or consented. Any consent by any
party to, or waiver of, a breach by the other, whether express or implied, shall
not constitute a consent to, waiver of, or excuse for any other different or
subsequent breach.
15.6 Force Majeure. If the performance of this Agreement, or any
obligation hereunder, except the making of payments hereunder, is prevented,
restricted or interfered with by reason of fire, flood, earthquake, acts of God,
explosion or other casualty of war, labor dispute, inability to procure or
obtain delivery of parts, supplies or power, violence, any law, order,
regulation , ordinance, demand or requirement of any governmental agency, or any
other act or condition whatsoever beyond the reasonable control oft he affected
party, the party so affected, upon giving prompt notice to the other party, will
be excused from such performance to the extent of such prevention, restriction
or interference.
15.7 Independent Contractor. The parties' relationship shall be solely
that of cooperative independent contractors and nothing contained in this
Agreement shall be construed to make either party an agent, co-venturer,
representative or principal of the other for any purpose, and neither party
shall have any right whatsoever to incur any liability or obligation on behalf
of or binding upon the other party.
15.8 Survival. Sections 2.3, 4.1, 4.2, 7, 10, 11, 12, 14.4 and 15 of
this Agreement shall survive the termination of this Agreement.
15.9 Governing Law. This Agreement shall be governed by and construed
under the laws of the Commonwealth of Massachusetts.
15.10 Entire Agreement; Amendment. This Agreement, including Exhibits A
to D inclusive, which are hereby incorporated into and made a part of this
Agreement, constitute the final, complete, exclusive and entire agreement
between the parties with respect to the subject matter hereof and supersedes any
previous proposals, negotiations, agreements, arrangements, or warranties,
whether verbal or written, made between the parties with respect to such subject
matter. It is expressly understood and agreed that any form or request submitted
by LICENSEE to Dataware shall be subject to the provisions of this Agreement,
and in no event shall the terms and conditions set forth in such form or
request, whether it is Dataware's standard or not, be applicable to the
transactions between the parties under this Agreement. This Agreement shall
control over any additional or conflicting term in any of LICENSEE's forms or
requests. This Agreement may only be amended or modified by mutual agreement of
authorized representatives of the parties in writing.
WORDCRUNCHER INTERNET TECHNOLOGIES INC. DATAWARE TECHNOLOGIES, INC.
By: /S/ By: /S/
----------------------------------- --------------------------------
Name: Martin Creer
Name: Grant Challenger
Title: VP Product Development
Title: Director of Tunnels
Date: 2/22/99
Date: 7/22/99
<TABLE>
<CAPTION>
EXHIBIT A
LICENSEE PRODUCTS
The following table describes each Web Site:
<S> <C> <C> <C> <C> <C>
- --------------------]------------------]-------------------]------------------]------------------]--------------------
Web Hosting ] Location of Web ] Base URL ] Target Market ] Territory ] Other Features
Company or ] Server ] ] ] ]
organization ] ] ] ] ]
- --------------------]------------------]-------------------] -----------------]------------------]--------------------
WCTI ] Utah ] www.spyhop.com ] Research and ] US Domestic ] Source Code with
] ] ] Development ] ] Internal Web Site
- --------------------] -----------------]-------------------]- ----------------]------------------]--------------------
U.S.A., To Be ] U.S.A., To Be ] www.spyhop.com ] Business Portal ] US Domestic ] Object Code with
Determined ] Determined ] ] ] ] a Web Site
- --------------------] -----------------]-------------------]------------------]------------------]--------------------
This Exhibit A may be amended or modified from time to time by mutual agreement of authorized representatives of
the parties in writing, or by payment of fees defined in Exhibit C.
</TABLE>
EXHIBIT B
SEARCH ENGINE AND DELIVERY
1. Search Engine
The Search Engine shall consist of all current versions of the InQuery
retrieval system, including Versions 4.3 and 5.0, in object and executable code
and source code formats for Microsoft NT version 4.0 and Sun Solaris operating
systems, and other platform versions which may be developed by or for Dataware,
except that C-Tree will be delivered in object and executable code format only.
The Search Engine will also include any New Versions of InQuery through 5.x
which may be created by or for Dataware. The Search Engine also includes the
current version and New Versions of the InFilter filtering and routing engine
and the language modules.
2. Operating Systems:
- Microsoft NT 4.0,
- Sun Solaris
- Other operating systems which may be supported by Dataware in the
future
- NEW VERSIONS OF THE FINAL PRODUCT CREATED BY LICENSEE INCLUDING PORTS
TO OPERATING SYSTEMS NOT SUPPORTED BY DATAWARE, MAYBE SUBLICENSED AND
DISTRIBUTED BY LICENSEE UNDER THIS AGREEMENT, BUT LICENSEE UNDERSTANDS
THAT DATAWARE WILL NOT PROVIDE SUPPORT OR MAINTENANCE OR TRAINING OR
CONSULTING OF ANY KIND FOR SUCH NEW VERSIONS
Languages
The InQuery and InFilter components of the Search Engine will function in t he
English language as shipped by Dataware. Dataware will furnish to LICENSEE
existing source code developed by Dataware for an application of InQuery version
4.3 to enable THE USE OF THE SEARCH ENGINE WITH THE FINAL PRODUCT IN EUROPEAN
LANGUAGE VERSIONS. LICENSEE ACKNOWLEDGES AND AGREES THAT NO VERSION OF INQUIRY
OTHER THAN VERSION 4.3 WILL ENABLE THE USE OF THE SEARCH ENGINE WITH THE FINAL
PRODUCT IN EUROPEAN LANGUAGE VERSIONS WITHOUT MODIFICATION BY LICENSEE. LICENSEE
assumes all responsibility for developing functionality in languages other than
English.
3. Delivery Milestones
Dataware hereby agrees to the following delivery schedule:
LICENSEE will be provided FTP access to download the Search Engine and the
Source Code for the Search Engine within one (1) Business Day of the Effective
Date of this Agreement so long as any and all payments due on the Effective Date
shall have been successfully wire transferred to Dataware or its designee as of
the Effective Date (provided however, that LICENSEE acknowledges and agrees that
certain portions of the Source Code for certain versions may take a few
additional days to be made available, but that at least that amount of source
code necessary for Licensee to commence project work with the Search Engine will
be accessible initially). Dataware will notify LICENSEE promptly when Bug Fixes
or New Versions have been developed and distributed to other licensees of the
Search Engine and simultaneously provide LICENSEE with FTP access to download
the Bug Fixes and the Source Code for the New Versions.
EXHIBIT C
FEES
LICENSEE shall pay to Dataware or its designee $350,000 upon the Effective Date
of this Agreement in connection with LICENSEE's incorporation of Object Code
with a Web Site hosted on a Web Server in the United States and having the URL,
target market and other features described in Exhibit A, and use of Source Code
in support of the authorized use of the Search Engine.
If Licensee sues Code in connection with any additional Web Site, whether hosted
on a different Web Server, or having a different URL or target market, or
comprising a mirror site, LICENSEE shall pay to Dataware or its designee
$250,000 as follows: $50,000 shall be due upon commencement of development of
the additional Web Site and the remaining $200,000 shall be due upon the posting
of any portion of the Web Site to a Web Server.
If during the Initial Term, LICENSEE shall pay to Dataware or its designee in
excess of $1,000,000 in fees hereunder, LICENSEE shall have no obligation to pay
to Dataware additional license fees for use of the Code in connection with
additional Web Sites that are, in Dataware's reasonable judgment, substantially
similar to Web Sites launched by LICENSEE during the Initial Term, provided that
LICENSEE otherwise complies with the terms of this Agreement.
EXHIBIT D
TRADEMARKS
Dataware Trademarks (used and/or registered) Associated with InQuery and
Infilter
InQuery (TM)
Best Passage
Automatic Collection Selection
Smart Merge
Local Context Analysis
InFinder
InFilter
Dataware
Contextual Thesaurus
LICENSEE Trademarks
PROJECT ESTIMATE
To: Peter Stoop
Word Cruncher ("Client")
From: Stephanie Otto, Vice President Interactive & Convergent Media
Pittard Sullivan, Inc.
Job #: 1I-WCI-9902
Re: WordCruncher Name/Identity ("Project") Date: June 24, 1999
Estimate #: E-3201-WCI-9902-004
________________________________________________________________________________
Project Description:
[ ] Communication Development
[ ] See Attached Schedule A
[ ] Creative And Production Services: Estimated Total $65,000.00
Contingency costs are identified below and will be billed in addition
to the estimated total stated above.
[ ] Notes:
[ ] Client agrees that it has hired Pittard Sullivan (PS) to
present concepts and/or designs for this project and that
upon presentation of a satisfactory concept or design,
the Client will authorize PS to produce the Project.
Since PS desires to produce any concept or design that it
presents, Client agrees that it will not itself use or
engage any other entity to produce the concepts, ideas or
designs presented by PS, without the explicit prior
written consent by PS.
[ ] Pittard Sullivan to receive credit.
[ ] Client assumes all responsibility for client supplied
materials.
[ ] Deliver via ftp
[ ] Deliver as digital files on optical media and written
document.
[ ] Contingencies:
[ ] Contingent upon level of production required in approved
designs
[ ] Changes from approved list of deliverable items
[ ] Revisions to finished production
[ ] Rush charges, cancellation fees, overtime or delays due
to client
[ ] Travel and expenses (plus handling fee.)
[ ] Deliveries/shipping charges plus handling fee.
(You may supply your own vendor number if desired.)
[ ] Sales Tax, or any other tax or charge, if required by
applicable State law.
Other Terms and Conditions:
You have designed and authorized Mr. Peter Stoop as client's representative for
all Project approvals. Our billing terms are: payment in full of the Estimate
Total to initiate the Project. Please send your company check payable to Pittard
Sullivan, Inc. to us, Attention: Accounting Dept. This Project Estimate shall be
governed by the laws applicable to agreements both entered into and performed
entirely in the State of California. By utilizing our services, you acknowledge
and accept the descriptions, terms and conditions set forth in this Project
Estimate. However, we would appreciate it if you confirm your acceptance by
signing the enclosed copy of this Project Estimate and returning it to us.
Pittard Sullivan will not knowingly infringe upon the rights of others in
creating images, designs, trademarks and/or related work product. However,
Pittard Sullivan cannot give any warranty against claims, and legal clearance
for use of images, designs, trademarks and/or related work product selected by
Client will be Client's sole responsibility. By authorizing Pittard Sullivan to
proceed with work hereunder, Client indemnifies and holds Pittard Sullivan
harmless from any costs including reasonable legal fees and judgments, arising
from a claim of image, design, trademark and/or related work product
infringement.
On a personal note, I am pleased that you selected our company for this Project.
We look forward to serving you and will use our best efforts on your behalf. If
you have any questions please feel free to contact me.
Prepared by: /s/
___________________________________________________________________
Stephanie L. Otto VP Interactive & Convergent Media 6/24/99
Accepted by:
___________________________________________________________________
Peter Stoop Vice President Sales and Marketing Date
SCHEDULE A FOR WORDCRUNCHER BRANDING PROJECT
Last Revised: 1 July 1999
DELIVERABLES LIST
Communications Development July 15 - August 15
Your brand strategy will become the core values from which all communications
will be based. It will develop the overarching identity for the service and be
documented in a comprehensive "Brand Bible" as will include:
Deliverables:
1. Create a Service Name
2. Design a Service Logo / Mark
3. Animated Service Logo
4. Focus Group Testing (To be determined)
5. Graphics Standards
6. Taglines
7. Key Marketing Messages
8. Brand Bible
9. Template for Power Point
SCHEDULE A FOR WORDCRUNCHER BRANDING PROJECT
Last Revised: 1 July 1999
DELIVERABLES LIST
Communications Development July 15 - August 15
Your brand strategy will become the core values from which all communications
will be based. It will develop the overarching identity for the service and be
documented in a comprehensive "Brand Bible" as will include:
Deliverables:
1. Create a Service Name
2. Design a Service Logo / Mark
3. Animated Service Logo
4. Focus Group Testing (To be determined)
5. Graphics Standards
6. Taglines
7. Key Marketing Messages
8. Brand Bible
9. Template for Power Point
<PAGE>
PROJECT ESTIMATE
To: Peter Stoop
WordCruncher ("Client")
From: Stephanie Otto, Vice President Interactive & Convergent Media
Pittard Sullivan, Inc.
Job #: 1I-WCI-9903
Re: WordCruncher Strategy ("Project") Date: June 30, 1999
Estimate #: E-3204-WCI-9903-003
Project Description
[ ] Refine the Strategy and Positioning for WordCruncher
[ ] See Attached Schedule A
[ ] Creative And Production Services: Estimated Total $75,000.00
Contingency costs are identified below and will be billed in
addition to the estimated total stated above.
[ ] Notes
[ ] Client agrees that it has hired Pittard Sullivan (PS) to
present concepts and/or designs for this project and that
upon presentation of a satisfactory concept or design,
the Client will authorize PS to produce the Project.
Since PS desires to produce any concept or design that it
presents, Client agrees that it will not itself use or
engage any other entity to produce the concepts, ideas or
designs presented by PS, without the explicit prior
written consent by PS.
[ ] Pittard Sullivan to receive credit.
[ ] Client assumes all responsibility for client supplied
materials.
[ ] Deliver as a written document.
[ ] Contingencies:
[ ] Contingent upon level of production required in approved
designs
[ ] Changes from approved list of deliverable items
[ ] Revisions to finished production
[ ] Rush charges, cancellation fees, overtime or delays due
to client
[ ] Travel and expenses (plus handling fee)
[ ] Deliveries/shipping charges plus handling fee
(You may supply your own vendor number if desired)
[ ] Sales Tax, or any other tax or charge, if required by
applicable State law
Other Terms and Conditions
You have designated and authorized Mr. Peter Stoop as client's representative
for all Project approvals. Our billing terms are: payment in full of the
Estimate Total to initiate the Project. Please send your company check payable
to Pittard Sullivan, Inc. to us, Attention: Accounting Dept. This Project
Estimate shall be governed by the laws applicable to agreements both entered
into and performed entirely in the State of California. By utilizing our
services, you acknowledge and accept the descriptions, terms and conditions set
forth n the Project Estimate. However, we would appreciate it if you confirm
your acceptance by signing the enclosed copy of this Project Estimate and
returning it to us.
Pittard Sullivan will not knowingly infringe upon the rights of others in
creating images, designs, trademarks and/or related work product. However,
Pittard Sullivan cannot give any warranty against claims, and legal clearance
for use of images, designs, trademarks and/or related work product selected by
Client will be Client's sole responsibility. By authorizing Pittard Sullivan to
proceed with work hereunder, Client indemnifies and holds Pittard Sullivan
harmless from any costs, including reasonable legal fees and judgments, arising
from a claim of image, design, trademark and/or related work product
infringement.
On a personal note, I am pleased that you selected our company for this Project.
We look forward to serving you and will use our best efforts on your behalf. If
you have any questions please feel free to contact me.
Prepared by: /S/
____________________________________________________________________
Stephanie L. Otto VP Interactive & Convergent Media 6/24/99
Accepted by: /S/ 7/15/99
____________________________________________________________________
Peter Stoop Vice President Sales and Marketing Date
SCHEDULE A FOR WORDCRUNCHER STRATEGY PROJECT
Last Revised: 1 July 1999
DELIVERABLES LIST
Strategic Compass(TM) June 28 - August 15
The Strategic Compass(TM) will provide the foundation for a prevailing brand
strategy and will entail interviewing your key executives, analyzing your target
audience and your competitors, identifying internal resources and creating an
overall positioning strategy for WordCrunchers Internet Service. The Strategic
Compass(TM) will be expressed in a written document in order to memorialize all
of the conclusions and gain consensus with your internal management team. Some
of the specific deliverables in the document are as follows:
Deliverables:
1. Overview on Target Audience and Competitors
2. Develop the Brand Vision
3. Develop the Brand Mission
4. Develop the Brand Positioning
5. Develop the Corporate Positioning versus Service Positioning
6. Create the Brand Strategy
7. Develop the Core Values
Invoice
June 23, 1999
Invoice No. 7747
Job No. WCI-9903
Terms: Due Upon Receipt
WordCruncher
Peter Stoop
405 East 12450 South Suite B
Draper, UT 84020
Job title: WordCruncher Strategy
[ ] Creative and Production Services
[ ] For services rendered per estimate number
E-3204-WCI-9903-001 $75,000.00
_________
TOTAL DUE $75,000.00
Account Manager ___________________________________________
<PAGE>
PROJECT ESTIMATE
To: Peter Stoop
SpyHop ("Client")
From: Stephanie Otto, Vice President Interactive & Convergent Media
Pittard Sullivan, Inc.
Job #: II-WCI-9901
Re: SpyHop Website Design ("Project") Date: June 23, 1999
Estimate #: E-3202-WCI-9901-001
Project Description:
[ ] Design the Interface and Website for Wordcruncher's Business
to Business portal.
[ ] See Attached Document for Project Outline and Initial
Deliverables List
[ ] Creative And Production Services: Estimated Total $225,000.00
Contingency costs are identified below and will be billed in addition
to the estimated total stated above.
[ ] Notes:
[ ] Client agrees that it has hired Pittard Sullivan (PS) to
present concepts and/or designs for this project and that
upon presentation of a satisfactory concept or design,
the Client will authorize PS to produce the Project.
Since PS desires to produce any concept or design that it
presents, Client agrees that it will not itself use or
engage any other entity to produce the concepts, ideas or
designs presented by PS, without the explicit prior
written consent by PS.
[ ] Pittard Sullivan to receive credit.
[ ] Client assumes all responsibility for client supplied
materials.
[ ] Client will sign all stock footage agreements and pay
applicable fees directly to stock footage supplier. Stock
footage costs have not been included in this estimate.
[ ] Deliver as layered Photoshop files and After Effect files
[ ] Pittard Sullivan will make best efforts to proof all copy
for grammar, punctuation, dates, times, numbers and
accuracy. However, final proofing and approval of
materials for printing and/or production are solely the
responsibility of Client.
[ ] Contingencies:
[ ] Contingent upon level of production required in approved
designs
[ ] Tape stock and dubs - (plus handling fee.)
[ ] Additional graphics or other items
[ ] Changes from approved list of deliverable items
[ ] Changes from approved designs or progressive steps during
production
[ ] Revisions to finished production
[ ] Rush charges, cancellation fees, overtime or delays due
to Client
[ ] Fixes to Client supplied materials
[ ] Stock or archival footage
[ ] Camera ready art for Client use
[ ] Travel and expenses (plus handling fee.)
[ ] Live action footage
[ ] Deliveries/shipping charges plus handling fee.
(You may supply your own vendor number if desired.)
[ ] Music
[ ] Sales Tax, or any other tax or charge, if required by
applicable State law.
Other Terms and Conditions:
You have designed and authorized Mr. Peter Stoop as Client's representative for
all Project approvals. Our billing terms are 50% of the estimated price to
initiate the Project, 40% upon approval of creative direction or commencement of
principle photography (if a live shoot is involved), and the balance thereof
(and any contingencies) upon completion of this Project. Please send your
initial company check payable to Pittard Sullivan, Inc. to us, Attention:
Accounting Dept. This Project Estimate shall be governed by the laws applicable
to agreements both entered into and performed entirely in the State of
California. By utilizing our services, you acknowledge and accept the
descriptions, terms and conditions set forth in this Project Estimate. However,
we would appreciate it if you confirm your acceptance by signing the enclosed
copy of this Project Estimate and returning it to us.
Pittard Sullivan will not knowingly infringe upon the rights of others in
creating images, designs, trademarks and/or related work product. However,
Pittard Sullivan cannot give any warranty against claims, and legal clearance
for use of images, designs, trademarks and/or related work product selected by
Client will be Client's sole responsibility. By authorizing Pittard Sullivan to
proceed with work hereunder, Client indemnifies and holds Pittard Sullivan
harmless from any costs, including reasonable legal fees and judgments, arising
from a claim of image, design, trademark and/or related work product
infringement.
On a personal note, I am pleased that you selected our company for this Project.
We look forward to serving you and will use our best efforts on your behalf. If
you have any questions please feel free to contact me.
Prepared by: /S/
___________________________________________________________________
Stephanie L. Otto VP Interactive & Convergent Media 6.23.99
Accepted by: /S/ 7/15/99
___________________________________________________________________
Peter Stoop Vice President & and Marketing Date
SCHEDULE A FOR WORDCRUNCHER WEBSITE PROJECT
Last Revised: 1 July 1999
DELIVERABLES LIST
Phase I: Creative Concept / Strategic Analysis June 28 - August 15
This process will begin with an intensive period of conceptual exploration, an
analysis of competing web sites, and initial product recommendations for the Web
site. We will establish the communication system in order to provide design and
technical documentation to SpyHop in order to produce the site effectively.
Pittard Sullivan will work collaboratively with SpyHop in order to produce the
site effectively, Pittard Sullivan will work collaboratively with SpyHop and
Digital Boardwalk to determine the scope of the project by developing a
flowchart based upon content and the overall architecture for SpyHop. Once the
flowchart has been approved, Pittard Sullivan will work with SpyHop and Digital
Boardwalk to create a functional guide that will serve as the foundation for
Phase II that will comply with the new branding standards, as they are set.
Deliverables:
1. Content Analysis
2. Functionality Guide
3. Initial design recommendations
4. Creative brief
5. Initial structural flowchart outlining content categories and
sections
6. Dedicated FTP server
7. Defined deliverables list
8. Initial schedule
9. 2 - 3 different design directions, based on the 3 - 4 key
frames
Phase II: Design Creation August 15 - September 15
Once the design direction is established and approved by SpyHop, Pittard
Sullivan's creative team will design and create all of the elements throughout
the site and further establish the navigation and functionality. Our goal will
be to create a dynamic interface and exciting site utilizing quality design that
will build brand image, enhance customer participation and interaction, improve
communication with all of the SpyHop's consistencies and drive viewers to the
site.
Deliverables:
1. Completed navigation scheme for entire site.
2. Applets
3. Develop templates for each section of the site.
4. 3 Case Scenarios / Programmed Working Model (B&W)
Phase III: Production / Implementation September 15 - October 1
Upon further approval of the design and navigation, Pittard Sullivan's creative
team will begin production, which is the execution phase of our process. This is
where each element of the project is produced as art, prepared and delivered to
SpyHop/Digital Boardwalk in order to be implemented into the site.
- All Digital Files
- Layered Photoshop Files
5. Templates for each section of the site, including design of
title bars and backgrounds for the following sections:
- SpyHop
- The Site Directory
- General Management
- Legal & Government
- Finance & Accounting
- Operations & Production
- Sales
- Marketing
- Human Resources
- Computing & Information Technology
- The Site Content
- The Search Engine
- Browsing
- Full Text Search
- Basic Search Functionality
- Results Views: Site Information, Distribution
Frequency
- Sort Options
- The Data Feeds
- The User Applications
- Messaging Service
- Pager News Feed Service
- Financial Calculator
- E-Mail Service
- Calendar Service
- Industry Specific Pages?
Phase IV: Testing / Style Guide Preparation October 1 - November 15
Once the site has been designed and programmed, Pittard Sullivan will assist
SpyHop and Digital Boardwalk in an extensive testing phase. This will ensure the
interactivity of the site on various platforms, including Netscape, Internet
Explorer and other platforms predetermined by SpyHop. Pittard Sullivan will also
design and produce an Initial Style Guide that will define the specific
navigation, fonts, colors, title bars and backgrounds.
- Style Guide
Invoice
June 23, 1999
Invoice No. 7749
Job No. WCI-9901
Terms: Due Upon Receipt
SpyHop
Peter Stoop
405 E. 12450 S. Suite B
Draper, UT 84020
Job Title: SpyHop Website Design
[ ] Creative And Production Services
[ ] 50% advance deposit for services rendered
per estimate number E-3202-WCI-9901-001 $112,500.00
___________
TOTAL DUE $112,500.00
Account Manager /S/
______________________________________________
DIGITAL BOARDWALK
WORDCRUNCHER
"SPYHOP PORTAL APPLICATION SITE"
Web Site
PROFESSIONAL SERVICES
Client Agreement
This Client Agreement (the "Agreement") by and between Digital Boardwalk, Inc.
("DBI") and WordCruncher (the "Client") sets forth the terms and conditions,
including compensation payable to DBI for services performed in connection with
Client's World Wide Web site (the "Site"). Such compensation is designed and
offered as fair and equitable payment to DBI for such services, as set forth in
the section "DBI's Deliverables" herein. The Client understands and agrees that
said compensation is a binding obligation of the client.
DBI's Deliverables: DBI will provide Professional Services as defined
by the Statement of Work (Exhibit A), incorporated
herein by reference.
Client's Deliverables: Client agrees to provide DBI the items detailed in
Statement of Work (Exhibit A), incorporated herein
by reference.
Professional Services Fee: Client agrees to pay DBI a one-time fee of
$50,000.00, due and payable upon execution of this
Agreement.
Additional Labor: Client agrees to pay for the consumption of
additional services (beyond those defined in
Exhibit A) according to the following schedule:
Strategic Consulting $250.00 per hour
Programming $175.00 per hour
Content Editing $ 85.00 per hour
Rates for rush work or after hours/weekends/holiday
work will be billed at 2 times the normal and
customary rates. DIB will inform Client prior to
incurring any such Additional Labor charges and
shall provide an estimate of such charges prior to
commencing any such Additional Labor.
Travel & Expenses: Client agrees to pay DBI for all reasonable travel
and expenses relating to Client requested travel in
conjunction with this project, due and payable upon
receipt of Invoices for such Expenses.
Customer Service: DBI will not provide any direct customer service to
the Site's end-users. Client's customers will use
Client as primary point of contact for all
questions and problems.
Title to Creative Content: Client expressly retains all
right and title to any and all graphics, design and
content (text and graphics) developed by Client or
developed for Client by DBI in the course of this
Agreement.
Title to
Developed Software: DBI expressly retains all right and title to any
and all software that may be developed by DBI and
its employees. DBI grants to Client a
non-exclusive, worldwide, royalty-free, fully
paid-up source license to use such Developed
Software in association with the "SpyHop Portal
Application Site" Site and derivative related
works.
Title to Third Party
Software Applications: DBI expressly retains all right and title to any
and all software licenses that are owned by DBI.
Representations and
Warranties of DBI: DBI hereby represents and warrants to the Client
that the individuals performing services hereunder
possess the prerequisite skills and training as
would reasonably be expected for such individuals
and that the individual executing this Agreement is
a duly authorized representative of DBI. However,
DBI makes no representations or warranties, either
express or implied, with respect to particular
functionality of the resultant work product. Except
as specifically set forth herein, neither DBI nor
any of its suppliers and licensors makes any
representations or warranties of any kind, express
or implied, with respect to any Developed Software,
Third Party Software Applications, the Site, or the
services provided, or the functionality,
performance or results of use thereof. Neither DBI
nor any of its suppliers and licensors warrants
that any custom developed software, Third Party
Software Applications, the Site, or the Services
provided or the operation thereof are or will be
100% accurate, error-free, or uninterrupted.
Representations and
Warranties of Client: Client hereby represents and warrants to DBI that
it has reviewed DBI's Deliverables in detail and
that it agrees that such deliverables fully and
accurately reflects the services to be performed by
DBI. Client further represents and warrants that
the individual executing this Agreement is a duly
authorized representative of Client. Client further
represents that neither the content nor other
materials appearing on the Site, nor Client's
exploitation thereof by means of the Site, will
violate or infringe upon the copyright, patent,
literary, privacy, publicity, trademark, service
mark, trade secret or any other personal, moral, or
property right of any person, or constitute a libel
or defamation of any person whatsoever; that Client
is and will continue to be the sole owner of all
right, title and interest, including without
limitation all rights under copyright in and to the
content and each element thereof, except for
elements of content that are in the public domain
or validly licensed to Client for use as
contemplated herein; that Client will comply in all
material respects with all applicable federal,
state, and local laws, statutes, ordinances, rules,
and regulations within the United States and any
foreign country having jurisdiction; and that the
content for the site will be factually accurate and
neither the content nor the products or services
offered through the Site will cause any loss,
injury, damage or death.
Confidential & Proprietary Page 1 of 3
Last printed 06/09/99 4:17 PM Agreed by DBI:
Agreed by Client:
Ability to Reference: Client agrees to allow DBI to factually represent
its involvement in this project to any and all
parties. Further, Client agrees to allow the
placement of a "Technology Services by Digital
Boardwalk" credits that appear on the site with a
hyperlink to DBI's web site.
Inherent Nature of the
Internet: Client understands and agrees that the Internet is
comprised of many privately owned systems and
networks of telephone wires and switches and
wireless technologies and is dependent for its
ongoing operations upon computers and other
electronic hardware that are often unstable and
subject to malfunctions, and therefore, it is the
inherent nature of these systems and networks, and
the Internet to experience systems and hardware
failures, packet losses and downtime. Accordingly,
Client releases and forever discharges DBI from any
and all costs, losses, liability or damages
resulting from downtime or any of the failures
described or referred to above.
Liability: DBI assumes no liability for any cost, losses,
liability or damages including but not limited to
loss of revenues, profits or customers and loss of
server uptime (collectively defined herein as
"Losses") that may be incurred by Client unless
such Losses were the result of DBI's gross
negligence or willful misconduct. DBI shall carry
adequate comprehensive errors and omissions
insurance and shall furnish a copy of such
insurance policy to Client upon request. Client is
advised to carry appropriate errors and omissions,
product liability, and interruption of business
insurance, with DBI named as an additional insured
under such insurance policies. This provision shall
survive the term of this Agreement.
Indemnification: Client shall indemnify and hold DBI harmless from
any cost, losses, liability or damages that may
result from product liability claims, order
fulfillment claims, credit card related claims, or
trademark, copyright or patent claims unless such
losses result from DBI's gross negligence or
willful misconduct.
Confidentiality and
Non-Disclosure: Client and DBI both acknowledge that they
necessarily will share trade secrets during the
term on the Engagement, and both parties agree that
such trade secrets are valuable property of their
holders. Each party agrees not to disclose this
information to any third parties without the prior
consent of the other party, and further not to use
such information in a manner that would be
detrimental to the interests of the other. This
provision will survive any termination of the
Client Agreement.
Governing Law: This Client Agreement is entered into in the State
of California and shall be construed under and
enforced in accordance with the laws of the State
of California.
Non-Solicitation: Client understands and agrees that for the duration
of this Engagement, and for one year after the
completion of the DBI Deliverables ("the Restricted
Period"), it shall refrain from soliciting for
employment or other business purposes any employee
of DBI or any independent contract of DBI, either
directly or indirectly on Client's own behalf or on
behalf of a third party, who is or was employed by
DBI, or a contractor, subcontractor, supplier,
vendor, customer or client of DBI during the
Restricted period.
Arbitration: Any controversy or claim arising out of or relating
to this Agreement shall be determined by
arbitration in accordance with the Arbitration
Rules of the American Arbitration Association. The
place of arbitration shall be Los Angeles,
California and when applicable, use California
Governing Law.
Attorney's Fees: Upon the occurrence of a default, the prevailing
Party shall have all reasonable expenses (including
court costs and reasonable attorneys' fees) paid by
the other Party.
Inability to Perform: Neither Party shall be responsible for delays in
the performance of its obligations hereunder
(except payments due) caused by events beyond its
reasonable control.
Miscellaneous: If any provision of this Agreement is found to be
invalid or otherwise unenforceable under any
applicable law, such invalidity or unenforceability
shall not render any other provision contained
herein invalid or unenforceable, and all such other
provisions shall be given full force and effect to
the same extent as though the invalid and
unenforceable provision was not contained herein.
The Section headings contained herein are for
convenience only and shall have no affect on the
substantive provisions of this Agreement.
Entire Agreement: This Agreement supersedes and replaces any prior
agreements, understanding or arrangements, whether
oral or written, heretofore made between the
Parties and relating to the subject matter hereof.
This Agreement shall not be modified, changed or
amended except by an express written agreement
signed by duly authorized persons of both parties.
Agreed: The undersigned hereby agree that this document
constitutes a binding agreement, executed in Los
Angeles, CA on Wednesday, June 09, 1999.
For Digital Boardwalk: For Client:
---------------------- --------------------
Signature Signature
William Sears
---------------------- --------------------
Printed Name Printed Name
VP, Technology & New
Business Dev.
---------------------- --------------------
Title Title
Wednesday June 09, 1999
---------------------- --------------------
Date Date
- --------------------------------------------------------------------------------
Exhibit A
Statement of Work
From June 7, 1999 through July 2, 1999, Digital Boardwalk will work with
WordCruncher to draft the Functional Specification document for the "SpyHop
Portal Application Site" project. Digital Boardwalk will make itself available
for meetings several times during this period to fully explore various aspects
of the subsequent development phase. Areas to be explored and documented
include:
[ ] User Services and features
[ ] Web application flow
[ ] Security model and methodology
[ ] Methodology for integration with third party data sources
[ ] Methodology for connecting the application to WordCruncher's
existing data infrastructure, including database replication
End of Exhibit A
- --------------------------------------------------------------------------------
Exhibit B
Statement of Client Deliverables
[ ] Access to personnel with relevant knowledge to the project.
[ ] Complete database schema for relevant databases.
[ ] Collaboration and business perspective on all areas to be
explored.
End of Exhibit B
- --------------------------------------------------------------------------------
Consulting Agreement
THIS CONSULTING AGREEMENT (this "Agreement'), made and entered into
this 22nd day of July, 1999, by and between Wordcruncher Technologies Inc., with
an address at 405 East 12450 South, Draper UT 84092 (hereinafter "Customer"),
and ACSIOM, Inc., a corporation organized and existing under the laws of the
Commonwealth of Massachusetts, with an address at 100 Venture Way, Hadley, MA
01035 (hereinafter "Consultant"; collectively, the "Parties"):
SECTION 1. SCOPE OF SERVICES
1.1 Services. Consultant agrees to provide, and Customer agrees to
accept, the consulting services described in Exhibit A hereto.
1.2 Conduct of Services. All work shall be performed in a workmanlike
and professional manner.
1.3 Method of Performing Services. Consultant shall have the right to
determine the method, details, and means of performing the work to be performed
for Customer. Customer shall ,however, be entitled to exercise general power of
supervision and control over the results of work performed by Consultant to
assure satisfactory performance, including the right to inspect, the right to
make suggestions or recommendations as to the details of the work, and the right
to propose modifications to the work.
1.4 Scheduling. The services provided by Consultant are expected to
require a substantial part of Consultant's available business time and
availability.
1.5 Reporting. Customer and Consultant shall develop appropriate
administrative procedures for coordinating with each other. Customer shall
periodically provide Consultant with evaluations of Consultant's performance.
1.6 Place of Work. Consultant will perform its work for Customer
primarily at Consultant's premises except when such projects or tasks require
Consultant to travel off site or to Customer.
SECTION 2. TERM AND TERMINATION
2.1 Term. The term of this Agreement shall commence on the date set
forth above and shall continue through December 31, 1999. Thereafter, Customer
and Consultant can renew this Agreement for further terms.
2.2 Termination. This Agreement may be terminated by either party upon
written notice, if the other party breaches any obligation provided hereunder
and the breaching party fails to cure such breach within the 60-day period;
provided that the cure period for any failure of Customer to pay fees and
charges due hereunder shall be fifteen (15) days from the date of receipt by
Customer of notice of such failure.
2.3 Remaining Payment. Within 60 days of termination of this Agreement
for any reason, Consultant shall submit to Customer an itemized invoices for any
fees or expenses theretofore accrued under this Agreement.
SECTION 3. FEES, EXPENSES, AND PAYMENT
3.1 Fees. In consideration of the services to be performed by
Consultant, Consultant shall be entitled to compensation as described in Exhibit
B hereto. If compensation is due on a periodic basis (e.g., weekly, bi-weekly),
then the compensation that accrues in each period shall be paid to Consultant on
the last day of such period. All other compensation shall be paid to Consultant
within ten (10) days after receipt of Consultant's invoice.
3.2 Estimates. Estimates of total fees may be provided by Consultant,
upon request of Customer. Such estimates are not guaranteed by Consultant.
Consultant will, however, notify Customer as soon as possible if the estimate
will be exceeded, and Customer may then terminate the project and pay only for
services actually rendered if Customer chooses.
3.3 Reimbursement of Expenses. In addition to the foregoing, Customer
shall pay Consultant its actual out-of-pocket expenses as reasonably incurred by
Consultant in furtherance of its performance hereunder. Consultant agrees to
provide Customer with access to such receipts, ledgers, and other records as may
be reasonably appropriate for Customer or its accountants to verify the amount
and nature of any such expenses. Expenses shall be reimbursed within ten (10)
days after receipt of Consultant's voice.
SECTION 4. RESPONSIBILITIES OF CONSULTANT FOR TAXES AND OTHER MATTERS
4.1 Taxes. As an independent contractor, Consultant shall pay and
report all federal and state income tax withholding, social security taxes, and
unemployment insurance applicable to Consultant. Consultants shall not be
entitled to participate in health or disability insurance, retirement benefits,
or other welfare or pension benefits (if any) to which employees of Customer may
be entitled.
SECTION 5. CONFIDENTIALITY
5.1 Restrictions. The Parties acknowledge that in order to perform the
services called for in this Agreement, it shall be necessary for the Parties to
disclose to each other certain Trade Secret(s) of the other. The Parties agree
that they shall not disclose, transfer, use, copy, or allow access to any such
Trade Secrets to any third parties, except as authorized by disclosing party in
writing.
5.2 Trade Secrets Defined. As used herein, the term "Trade Secret(s)"
shall mean any scientific or technical data, information, design, process,
procedure, formula, or improvement that is commercially valuable to the other
party and not generally known in the industry. Trade Secrets, shall not include:
(1) information generally available to the public, (2) information released by
the disclosing party to the receiving party without restriction, (3) information
independently developed or acquired by the party or its personnel without
reliance in any way on other protected information of the other party, or (4)
information approved for the use and disclosure by the disclosing party or its
personnel without restriction.
SECTION 6. RIGHTS IN WORK PRODUCT
6.1 Ownership of Work Product. All Work Product shall be considered
work(s) made by Consultant for hire for Customer and shall belong exclusively to
Customer and its designees. If by operation of law any of the Work Product,
including all related intellectual property rights, is not owned in its entirety
by Customer automatically upon creation thereof, then Consultant agrees to
assign, and hereby assigns, to Customer and its designees the ownership of such
Work Product, including all related intellectual property rights.
6.2 Incidents and Further Assurances. Customer may obtain and hold in
its own name copyrights, registrations, and other protection that may be
available in the Consultant. Consultant agrees to take such further actions and
execute and delivery such further agreements and other instruments as Customer
may reasonably request to give effect to this Section 6.
6.3 Pre-existing Materials. Consultant may include in the work Product
pre-existing work or materials provided they are owned or licensable without
restriction by Consultant. To the extent that pre-existing work or materials
owned or licensed by Consultant are included in the Work Products, Consultant
shall endeavor to identify any such work or materials. Consultant grants to
Customer (as an exception to the transfer and assignment provided in this
Section 6) an irrevocable, nonexclusive, worldwide, royalty-free right and
license to use, execute, reproduce, display, perform, and distribute (internally
and externally) copies of, and prepare derivative works based upon, such work
and materials, and the right to authorize others to do any of the foregoing.
6.4 This section intentionally left blank
6.5 Third Party Materials. Consultant has advised Customer that in
connection with the services to be performed hereunder, that Customer shall
necessarily enter into a licensing arrangement for the acquisition of "Source
Code Rights" to the Dataware inquiry search engine.
SECTION 7. ASSURANCES
7.1 No Conflict. Consultant represents and warrants that it has no
obligations to any third party which will in any way limit or restrict its
ability to perform consulting services to Customer hereunder. Consultant agrees
that it will not disclose to Customer, nor make use in the performance of any
work hereunder, any trade secrets or other proprietary information of any third
party, unless Consultant may do so without Consultant or Customer incurring any
obligation (past or future) to such third party for such work or any future
application thereof.
7.2 Additional Value from Hiring. Customer acknowledges that Consultant
provides a valuable service by identifying and assigning personnel for
Customer's work. Customer further acknowledges that Customer would receive
substantial additional value, and Consultant would be deprived of the benefits
of its work force, if Customer directly hires Consultant's personnel after they
have been introduced to Customer by Consultant.
7.3 No Hiring Without Prior Consent. Without the prior written consent
of Consultant, Customer shall not recruit or hire any personnel of Consultant
who are or have been assigned to perform work until two (2) years after the
completion of the last services performed by Consultant.
7.4 Hiring Fee. In the event that Customer hires any personnel of
Consultant who are or have been assigned to perform work for Customer within two
(2) years of the date of such hiring, Customer shall pay Consultant an amount
equal to twenty-five percent (25%) of the total first year compensation Customer
pays such personnel as a fee for the additional benefit obtained by Customer,
and in no event shall be less than twenty-five percent (25%) of the annualized
amount billed to Customer by Consultant for such personnel.
SECTION 8. LIMITATIONS
8.1 CONSULTANT DOES NOT MAKE ANY WARRANTY, EXPRESS OR IMPLIED, WITH
RESPECT TO THE SERVICES RENDERED BY ITS PERSONNEL OR THE RESULTS OBTAINED FROM
THEIR WORK, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL
CONSULTANT BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, SPECIAL OR INDIRECT DAMAGES,
OR FOR ACTS OF NEGLIGENCE WHICH ARE NOT INTENTIONAL OR RECKLESS IN NATURE,
REGARDLESS OF WHETHER IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
8.2 Total Liability. Customer agrees that Consultant's liability
hereunder for damages, regardless of the form of action, shall not exceed the
total amount paid for services under the applicable estimate or in the
authorization for the particular service if no estimate is provided.
SECTION 9. MISCELLANEOUS
9.1 Force Majeure. Consultant shall not be liable to Customer for any
failure or delay caused by events beyond Consultant's control, including,
without limitation, Customer's failure to furnish necessary information,
sabotage, failure or delays in transportation or communication, failures or
substitutions of equipment, labor disputes, accidents, shortages of labor, fuel,
raw materials or equipment, or technical failures.
9.2 Governing Law. This Agreement shall be governed and construed in
all respects in accordance with the laws of the Commonwealth of Massachusetts as
they apply to a contract entered into and performed entirely in that State. The
Parties do hereby consent to jurisdiction and venue in a court of competent
jurisdiction in the county of Consultant's principal place of business at the
time of bringing such action.
9.3 Independent Contractors. The parties are and shall be independent
contractors to one another, and nothing herein shall be deemed to cause this
Agreement to create an agency, partnership, or joint venture between the
parties. Nothing in this Agreement shall be interpreted or construed as creating
or establishing the relationship of employer and employee between Customer and
either Consultant or any employee or agent of Consultant.
9.4 Notices. All notices required or permitted hereunder shall be in
writing addressed to the respective parties as set forth herein , unless another
address shall have been designated, and shall be delivered by hand or by
registered or certified mail, postage prepaid.
9.5 Entire Agreement. This Agreement constitutes the entire agreement
of the parties hereto and supersedes all prior representations, proposals,
discussions, and communications, whether oral or in writing. This Agreement may
be modified only in writing and shall be enforceable in accordance with its
terms when signed by the party sought to be bound.
9.6 Indemnification. Customer shall defend, indemnify and hold harmless
Consultant from and against all claims, liability, losses, damages and expenses
(including attorneys' fees and court costs) arising from or in connection with
the use or application of Consultant's work by Customer or any direct or
indirect purchaser or licensee of Customer.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives, on the date and year first
above written.
CUSTOMER: Wordcruncher Technologies
By: Martin Cryer
Title: V.P. Product Development
Date: 22nd July, 1999
CONSULTANT: ACSIOM, Inc.
By: Robert Eaton
Title: Director of Business Development
Date: July 22, 1999
Exhibit A
Description of Consulting Services
Services provided under this contract are to be focused on assisting
WordCruncher with the first release of Spyhop, a vertical business web portal.
ACSIOM/CIIR's expertise in search engine design and high-end implementation is
where most assistance shall be provided. ACSIOM suggests the following work
plan, but recognizes that the scope and work to be performed will adapt to meet
WordCruncher's goals. The following description of services shall be used as a
guideline.
The services provided under this contract, will be in two areas:
1) Consulting on Search Site design, architecture, optimization, and
problem areas. ACSIOM will provide access to senior researchers, staff,
and other experts on the Inquery search engine. The initial design
phase is where this effort will start. After this phase, additional
areas needing this advanced expertise will be more evident. It is
expected that at least four different consultants will provide services
on different aspects of the system design. The researchers from the
University of Massachusetts most likely to contribute are Bruce Croft
(Director of CIIR), Jamie Callan (Assistant Director of CIIR), James
Allan (Leading CIIR Researcher), and Zhehong Lu (Ph.D. and expert in
Inquery optimization).
2) Provide a senior developer to work closely with WordCruncher's staff,
the researchers and designers in CIIR, and Dataware. The developer will
coordinate the activities provided through our consultants and take on
areas of development where ACSIOM can be of the greatest assistance.
For example, in areas where Inquery source code need modification. It
is planned that this developer will be central to additional contracts
between WordCruncher and ACSIOM. ACSIOM's central role in the search
facility development will allow us to integrate new technologies in the
next round of development.
Licenses for the Inquery search engine shall be provided in a separate license
document.
Exhibit B
FEES
The services provided under this contract are broken into three categories:
high-end consulting, development, and support.
Consulting: Rates on consulting will vary from $1,000 to $2,500 per day,
depending on the consultant involved. All rates and a work plan will be agreed
upon prior to start of work. These services are expected to run at $50,000 to
$70,000 through the end of this contract.
Developer: The developer will have a constant run rate of $100 to $120 per hour.
ACSIOM will assign this person to the project beginning in July and continue
through the end of this contract. These services are not to exceed $125,000
without prior written authorization of WordCruncher's project manager.
Support: The support fee is in effect as the Dataware/Wordcruncher license dated
July 22, 1999 is in effect (3-5 years). The support fee is based on an annual
rate of 15% of the software licensed under the Dataware/Wordcruncher License
dated July 22, 1999. The support fee will be reduced to an annual rate of 7.5%
during months where ACSIOM is supplying more than 80 hours of development
services. A software support fee will be billed in quarterly installments.
All travel expense related to these services are to be paid by WordCruncher.
Travel time is expensed portal to portal.
All work provided through this contact will be invoiced monthly.
CONSENT OF COUNSEL
The undersigned hereby consents to the reference to the firm of Parsons
Behle & Latimer under the caption "Legal Matters" in the Registration Statement
on Form S-1/A of WordCruncher Internet Technologies, Inc.
PARSONS BEHLE & LATIMER
By: /S/
--------------------------
Scott R. Carpenter
Salt Lake City, Utah
August 17, 1999
CONSENT OF CROUCH BIERWOLF & CHISHOLM
INDEPENDENT AUDITORS
We hereby consent to the reference of our firm under the captions
"Selected Consolidated Financial Data" and "Experts" and to the use of our
report dated January 21, 1999, with respect to the consolidated financial
statements included in the Amended Registration Statement (Form S-1/A) and
related prospectus of WordCruncher Internet Technologies, Inc. for the
registration of its common stock.
Crouch Bierwolf & Chisholm
By: /S/
--------------------------
Tod Chisholm
Salt Lake City, Utah
August 17, 1999
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