As filed with the Securities and Exchange Commission on December 6, 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
FIFTH 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.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION, DATED DECEMBER 6, 1999
- --------------------------------------------------------------------------------
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
2,689,447 shares of common stock
$0.001 per share
This is a public offering of 2,689,447 shares of the common stock of
WordCruncher Internet Technologies, Inc. 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 December 3, 1999 was $3.69 per share. We
have submitted 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.
_________________________
DECEMBER 6, 1999
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<PAGE>
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.
Table of Contents
Page
Prospectus Summary.............................................................3
Risk Factors...................................................................7
Transactions Effected in Connection With the Offering.........................12
Use of Proceeds...............................................................13
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................................33
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.
2
<PAGE>
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
Our company is a development stage company. We are developing and
intend to market a next-generation focused Internet site for business
professionals under the tradename "Spyhop". 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. Our product is currently under development and is unavailable for
sale or license.
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 modified 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 first quarter of 2000. 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.
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<PAGE>
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.
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The Offering
Total number of shares of common stock to be
offered by the selling stockholders................2,689,447
Common stock outstanding after the offering............13,438,449
Common stock owned by the selling
stockholders after the offering...................5,206,524
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 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 11,881,002 shares of common stock outstanding as of
September 30, 1999, but excludes approximately 440,000 shares of common stock
subject to outstanding options granted under employee stock options, of which
111,833 were exercisable as of September 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 150,000
shares of common stock as of September 30, 1999. The information set forth above
also assumes that 307,449 shares are issuable as of September 30, 1999, upon the
exercise of warrants that were issued in connection with the sale of our Series
A Preferred Stock, 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 in the event of the exercise of these outstanding warrants, as
of September 30, 1999, was 1,189,227 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 and 256,779 shares from the July reset period. See
"Description of Capital Stock."
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<PAGE>
Summary and Operating Data
<TABLE>
<CAPTION>
(a Development Stage Company)
Interim Period
Year Ended December 31, Ended September 30,
1998 1997 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues......................................... $ 82,678 $ 24,484 $ 22,499 $ 77,640
Cost of sales & royalties..................... 15,864 806 26,400 1,243
------------- ------------- ------------- -------------
Gross Profit (loss) 66,814 23,678 (3,900) 76,397
Operating costs & expenses:
Research & development........................ 266,563 126,281 477,347 32,690
Sales & marketing............................. 34,554 5,274 556,567 -
General & administrative...................... 217,318 206,874 668,828 133,685
Depreciation & amortization................... 10,406 6,419 80,948 7,543
Warrants & stock compensation expense
Amortization.................................. - - 710,583 -
------------- ------------- ------------- -------------
Total operating expense.......................... 528,841 344,848 2,494,274 173,918
------------- ------------- ------------- -------------
Operating Loss................................... (462,027) (321,170) (2,498,175) (97,521)
Other income and (expense), net.................. (20,882) (14,048) 154,867 (17,600)
------------- ------------- ------------- -------------
Loss before income taxes......................... (482,909) (335,218) (2,343,308) (115,120)
Provision for income taxes....................... - - - -
------------- ------------- ------------- -------------
Net loss......................................... (482,909) (335,218) (2,343,308) (115,120)
Deduction for dividends and accretion............ - - (6,239,007) -
------------- ------------- ------------- -------------
Net loss attributable to common stockholders $ (482,909) $ (335,218) $ (8,582,314) $ (115,120)
Basic and diluted loss per common share:
Basic loss per common share................... $ (0.08) $ (0.61) $ (0.723) $ (0.030)
Diluted loss per common share................. (0.08) (0.61) (0.723) (0.030)
Weighted average outstanding shares.............. 6,100,679 545,535 11,877,647 3,827,886
September 30, 1999
Actual
------------------
Balance Sheet Data:
Cash and cash equivalents........................ 4,060,802
Total assets..................................... 4,830,919
Long term liabilities, including current portion. 15,209
Deficit accumulated during development stage..... (9,400,442)
Total Stockholders' Equity....................... 4,716,710
</TABLE>
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<PAGE>
RISK FACTORS
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 first quarter of 2000. 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 a development stage company. 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 first quarter of 2000, 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 nine months of 1999, we incurred an
additional loss of $2,343,308 before the deduction for dividends and accretion.
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.
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<PAGE>
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.
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<PAGE>
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 has been and may be subject to extreme
fluctuations in response to business-related issues such as quarterly variations
in operating results, or announcements of our new products or our competitors.
In addition, the trading price of our common stock has been and may be subject
to fluctuations in response to 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, 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 13,438,449 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 issued in connection with the Series A Preferred Stock.
The shares registered hereunder will be freely transferable without restriction
or further registration under the Securities Act of 1933, except for any shares
purchased by our officers, directors and shareholders owning 10% or more of our
common shares. 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 officers, directors, and shareholders
owning 10% or more of our common shares. The remaining shares of common stock
outstanding are securities which are not freely tradable and have restrictions
on their transfer. 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."
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<PAGE>
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."
10
<PAGE>
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."
11
<PAGE>
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 a 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. In March
1999, the parties completed the purchase and sale of 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, on July 28, 1999, were eligible to receive an additional
256,779 common shares, and as of October 20, 1999, were eligible to receive an
additional 318,088 common shares based on the average price of our common stock
between October 6 and October 19, 1999. In connection with the transaction, the
investors also acquired 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
issued in connection with the sale of the Series A Preferred Stock. The number
of shares of common stock issuable on conversion of the outstanding Series A
Preferred Stock as of September 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, calculated by taking the 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 144 holders of record of our common stock and 8 holders of record
of our Series A Preferred Stock as of September 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 fourth fiscal quarter of 1998 and the first, second and third fiscal
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:
12
<PAGE>
Year Quarter High Low
---------- -------------------- ---------------- --------------------
1998 Fourth Quarter $ 6.81 $ 2.00
1999 First Quarter $36.25 $ 4.78
Second Quarter $ 7.81 $ 3.56
Third Quarter $ 6.13 $ 3.63
Upon completion of the offering, we will have outstanding an aggregate
of 13,438,449 shares of common stock. These amounts are inclusive of two times
the 624,999 shares of common stock we would be obligated to issue on the
conversion of the Series A Preferred Stock, and the 307,449 shares which we
would be obligated to issue on the exercise of the warrants. 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 440,000 shares issuable upon
exercise of outstanding options, of which 111,833 were exercisable as of
September 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 150,000 were
earned as of September 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 1% of the then outstanding
shares of common stock or 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 September 30,
1999 and as adjusted to give effect to the offering and the sale of the Series A
Preferred Stock in February and March 1999, as more particularly described in
the section entitled "Transactions Effected In Connection with the Offering."
13
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999
Actual Pro Forma
(Unaudited) (as adjusted)
----------- -------------
<S> <C> <C>
Long term liabilities, including accrued interest $3,065 $3,065
Stockholders' equity: $11,881 $12,506
Common stock, par value $0.001; 11,881,002
shares issued and outstanding, actual;
12,506,002 shares issued and outstanding,
proforma (as adjusted)
Series A Convertible Preferred stock, par $63 $ --
value $0.01; no shares issued and outstanding,
actual; 6,300 shares issued and outstanding,
proforma (as adjusted)
Additional paid-in capital $16,717,174 $16,716,612
Warrants to purchase common stock $258,000 $258,000
Deficit accumulated during the development stage $ (9,400,442) $(9,400,442)
Deferred compensation & professional services $ (2,869,967) $(2,869,967)
Total stockholders' equity $4,716,710 $4,716,710
Total capitalization $4,719,775 $4,719,775
========== ==========
</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 nine
month period ended September 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 nine months ended September 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".
(a Development Stage Company)
14
<PAGE>
<TABLE>
<CAPTION>
Interim Period
Ended September 30,
1998 1997 1996 1999 1998
------------ ------------ ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product Sales.................................. $ 32,884 $ 16,034 -0- $ 5,650 $ 28,782
Contract research revenues, royalties and
license fees........................... 49,794 8,450 -0- 16,849 48,858
------------ ------------ --- ------------ ------------
Total revenues............................. $ 82,678 $ 24,484 -0- $ 22,499 $ 77,640
Cost of sales & royalties...................... $ 15,864 $ 806 -0- $ 26,400 $ 1,243
------------ ------------ --- ------------ ------------
Gross Profit (loss) 66,814 23,678 -0- (3,900) 76,397
Operating costs and expenses:
Research & development......................... 266,563 126,281 -0- 477,347 32,690
Sales & marketing.............................. 34,554 5,274 -0- 556,567 -
General & administrative....................... 217,318 206,874 -0- 668,828 133,685
Depreciation & amortization.................... 10,406 6,419 -0- 80,948 7,543
Warrants & stock compensation expense
Amortization................................... - - -0- 710,583 -
------------ ------------ --- ------------ ------------
Total operating expense.................... 528,841 344,848 -0- 2,494,274 173,918
------------ ------------ --- ------------ ------------
Operating loss................................... (462,027) (321,170) -0- (2,498,175) (97,521)
Other income and (expense)
Interest income and other, net................. 7,276 3,077 -0- 158,428 5,753
Interest expense............................... (28,158) (17,125) -0- (3,561) (23,352)
------------ ------------ --- ------------ ------------
Total other income and (expense), net...... (20,882) (14,048) -0- 154,867 (17,600)
Loss before income taxes......................... (482,909) (335,218) -0- (2,343,308) (115,120)
Provision for income taxes....................... - - -0- - -
------------ ------------ --- ------------ ------------
Net loss......................................... $ (482,909) $ (335,218) -0- $(2,343,308) $ (115,120)
============ ============ === ============ ============
Deduction for dividends and accretion............ - - -0- (6,239,007) -
------------ ------------ --- ------------ ------------
Net loss attributable to common stockholders..... $ (482,909) $ (335,218) -0- $(8,582,314) $ (115,120)
============ ============ === ============ ============
Basic and Diluted loss per common share:
Basic loss per common share...................... $(0.08) $(0.61) -0- $(0.723) $(0.030)
Diluted loss per common share.................... $(0.08) $(0.61) -0- $(0.723) $(0.030)
Weighted average outstanding shares.............. 6,100,679 545,535 -0- 11,877,647 3,827,886
============ ============ === ============ ============
Balance Sheet Data:
Cash and cash equivalents........................ $ 425,702 $ 10,369 -0- $ 4,060,802 $ 751,049
Total Assets..................................... 623,617 139,928 -0- 4,830,919 912,644
Long term liabilities, including current portion. 147,620 342,272 -0- 15,209 210,214
Deficit accumulated during the development stage. (818,127) (335,218) -0- (9,400,442) (450,338)
Total Stockholders' Equity (deficit)............. 441,084 (208,943) -0- 4,716,710 690,273
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.
15
<PAGE>
Overview. We are a development stage company and our product is
currently unavailable for sale or license. 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 first quarter of 2000. 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 September 30, 1999, we had an accumulated earnings deficit of
$9,400,442. 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 nine month
interim periods ended September 30, 1998 and 1999.
<TABLE>
<CAPTION>
Interim Period Ended
Year Ended December 31, September 30,
1998 1997 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 82,678 $ 24,484 $ 22,499 $ 77,640
Cost of sales & royalties 15,864 806 26,400 1,243
------------- ------------- ------------- -------------
Gross profit (loss) $ 66,814 $ 23,678 $ (3,900) $ 76,397
Research & development 266,563 126,281 477,347 32,690
Sales & marketing 34,554 5,274 556,567 -0-
General & administrative 217,318 206,874 668,828 133,685
Depreciation & amortization 10,406 6,419 80,948 7,543
Warrants & stock compensation expense
Amortization - - 710,583 -
------------- ------------- ------------- -------------
Total operating expense 528,841 344,848 2,494,274 173,918
Operating Loss (462,027) (321,170) (2,498,175) (97,521)
Interest income 7,276 3,077 158,428 5,753
Interest expense (28,158) (17,125) (3,561) (23,352)
Net loss $ (482,909) $ (335,218) $(2,343,308) $ (115,120)
</TABLE>
16
<PAGE>
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.
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 $126,281 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 $206,874 to $217,318.
Depreciation and Amortization. Depreciation and amortization
expense increased from $6,419 in 1997 to $10,406 in 1998 due to the additional
property and equipment and software technology that we acquired in 1998.
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.
17
<PAGE>
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 Nine Month Periods. Results for the first nine months of
1999 reflect a continued reduction in revenues, with significant increases in
research and development expense to $477,347 and sales and marketing expense to
$556,567. This is consistent with the final stages of development of our new
Spyhop product, which is scheduled for delivery in the first quarter of 2000.
General and administrative expense also increased to $668,828 for the first nine
months of 1999, from $133,685 in the nine months ended September 30, 1998, as we
built the infrastructure necessary to support our operations. Depreciation and
amortization expense increased to $80,948 for the first nine months of 1999,
from $7,543 in the nine months ended September 30, 1998. Warrant and stock
compensation expense amortization for the nine months ended September 30, 1999,
totaled $710,583. The change in interest expense was negligible due to our
reduced reliance on debt in 1999, while interest income grew significantly to
$158,428 for the first nine 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 nine months of 1999 amounted to $2,343,308, as
compared to our net loss of $115,120 for the first nine months of 1998. This is
before the deduction for dividends and accretion of $6,239,007 for the period,
resulting in a total loss attributable to common shareholders of $8,582,314.
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 $348,872, 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 September 30, 1999, we had total assets of
$4,830,919. Our total liabilities as of that date were $114,209, and our
stockholders' equity was $4,716,710. This includes a charge to retained earnings
of $6,239,007 and a credit to paid-in capital for a like amount in recognition
of the beneficial conversion feature of our convertible preferred shares issued
during the period. Our cash or cash equivalents at September 30, 1999 totaled
$4,060,802.
A summary of our audited balance sheets for the years ended December
31, 1997 and 1998 and our interim unaudited statements for September 30, 1999
are as follows:
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<TABLE>
<CAPTION>
Year Ended December 31, Interim Period Ended
1998 1997 September 30, 1999
------------------ -------------------- -------------------------
<S> <C> <C> <C>
Cash and Cash Equivalents $425,702 $10,369 $4,060,802
Current Assets $425,702 $15,369 $4,068,796
Total Assets $623,617 $139,928 $4,830,919
Current Liabilities $170,919 $321,307 $111,209
Total Liabilities $182,533 $348,872 $114,209
Total Stockholders' Equity $441,084 $(208,943) $4,716,710
Total Liabilities & Stockholders' Equity $623,617 $139,928 $4,830,919
</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.
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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.
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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. We are a development stage company and there
have been no placements of our product at this time.
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.
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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.
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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.
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<PAGE>
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 the speed of indexing and of
returning search results to users, and 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.
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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 first quarter of 2000.
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 first quarter of 2000 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.
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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 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 this license. The WordCruncher
technology constitutes the core search technology we use in our "Spyhop"
product.
The term of this 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.
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<PAGE>
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 a 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 $5,907,900 from the sale. In
connection with the transaction, we also issued warrants to both the purchasers
and the placement agent 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
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 September 30,
1999, Columbia had earned warrants to purchase 150,000 shares.
Corporate Development. Our predecessor in interest was incorporated in
the State of California on May 2, 1997, as Dunamis, Inc. Dunamis, Inc. was
formed for the purpose of publishing and marketing books and audio and video
tapes. On June 25, 1998, Dunamis, Inc. completed a merger with a Nevada
corporation that had been created for the sole purpose for changing Dunamis,
Inc.`s domicile from California to Nevada. On July 14, 1998, the surviving
entity in that transaction completed a merger with WordCruncher Publishing
Technologies, Inc., formerly known as 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.
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Employees. We have 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 agreement. 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, or $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.
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<PAGE>
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.
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<PAGE>
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, which was 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, as 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 an act or
omission that involves intentional misconduct or a knowing violation of a law,
or 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
$100,000 during each of the past two fiscal years. Those persons are referred to
throughout this prospectus as the "named executive officers." During the fiscal
year ended December 31, 1996, none of our officers received any cash
compensation, bonuses, stock appreciation rights, long-term compensation, stock
awards or long-term incentive rights:
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<PAGE>
Summary Compensation Table
All Other
Annual Compensation Compensation
--------------------------- ----------------
Name and Principal Position Fiscal Year Salary($)
- ----------------------------- ----------- -------------
M. Daniel Lunt 1998 $102,000 -
President, CEO, Director 1997 (1) -
-
James W. Johnston 1998 $102,000 -
Chairman of the Board, 1997 (1) -
Executive Vice President -
Kenneth W. Bell 1998 $102,000 -
Senior Vice President, CFO 1997 (1) -
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 September 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 either the exercise of
vested options or warrants held by that person and that are exercisable within
60 days after September 30, 1999 or 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.
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<PAGE>
<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
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-Quaiz(8) 216,512 1.8% 216,512 - -
Series A Preferred Stockholder
Urban Development Est.(8) 108,256 * 108,256 - -
Series A Preferred Stockholder
Yasser M. Zaidan(8) 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 Management(8) 189,000 1.6% 189,000 - -
Warrantholder
- -------------------------------
</TABLE>
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<PAGE>
* Less than 1% of the outstanding common stock.
(1) Percentage of beneficial ownership prior to offering is based on
11,881,002 shares of common stock outstanding as of September 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
13,438,449 shares of common stock. See "Summary". That figure assumes the sale
of all the shares registered hereunder. The actual number of shares sold may be
less than the total registered hereunder. See footnote number 8 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) We are required to register for the benefit of the holders of the
Series A Preferred Stock and the warrants issued in connection with the sale of
the Series A Preferred Stock 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
secured a 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. Mssers. Johnston, Bell, and Lunt have
received no direct or indirect consideration for their securing this line of
credit. 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.
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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. Five
thousand dollars of the $10,000 loan was repaid by offsetting amounts we
otherwise owed Mr. Lunt, and the other $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 issued in connection with the
sale of the Series A Preferred Stock. 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 pursuant to the terms of the purchase agreement for the Series A
Preferred Stock.
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.
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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 for the Series A Preferred Stock, 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.
35
<PAGE>
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 September 30,
1999, there were 11,881,002 shares of common stock and 6,300 shares of Series A
Preferred Stock outstanding. As of that date, an additional 440,000 shares of
common stock may be issued upon the exercise of outstanding share options (of
which 111,833 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 150,000
shares to date), an additional 307,449 shares may be issued upon the exercise of
the outstanding warrants issued in connection with the sale of the Series A
Preferred Stock 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 September 30, 1999, there were approximately 144 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 is convertible into shares of common stock on the earlier of the day this
registration statement becomes effective or June 1, 1999. Up to 20% of the
Series A Preferred Stock can be converted into common stock during each month
following that. 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 conversion price
of $10.08 per share, 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] / $10.08
/ 10). Based on the trading price of our common stock during the 10 business day
period following October 6, 1999, the holders of the Series A Preferred Stock
are entitled to receive an additional 318,088 shares of common stock. This is in
addition to the 256,779 shares they are entitled to receive based on the price
of our stock at the July 8 reset date. 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.
36
<PAGE>
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 them warrants. These 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, or 125% of the closing bid
price for our common stock on the day prior to the closing of the purchase
agreement for the Series A Prefered Stock at any time through the fifth
anniversary of the closing of the transaction. 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, 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, or 105%
of the closing price, at any time through the warrant expiration date. If the
holders exercise all of these 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 September 30, 1999, that party has earned warrants to purchase
150,000 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:
- the "registerable securities" covered by the rights include any of
our shares of capital stock which are acquired on exercise of the
warrants issued in connection with the sale of the Series A
Preferred Stock 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.
- 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.
- 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.
37
<PAGE>
- 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.
- 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 sale of assets or reorganization, or
- any plan of merger or any plan of exchange, if 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 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 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 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 for holders of preferred stock, the highest liquidation
value of the preferred sock.
38
<PAGE>
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 the interest of the
corporations employees, suppliers, creditors and customers, the economy of the
state and the nation, the interest of the economy and of society and 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.
39
<PAGE>
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-7
Notes to Consolidated Financial Statements..........................F-9
Interim Financial Statements (Unaudited):
Balance Sheets at September 30, 1999 and 1998......................F-17
Statement of Operations for the Nine Months Ended
September 30, 1999 and 1998..............................F-19
Statement of Stockholders' Equity (Deficit) for the Nine
Months Ended September 30, 1999 and 1998 ................F-20
Statement of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998..............................F-21
Notes to the Interim Financial
Statements...............................................F-22
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
40
<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. (a development stage company) as of December 31,
1998 and 1997 and the related statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1998, 1997 and 1996 and from
inception of the development stage on November 5, 1996 through December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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. (a development stage company) as of December 31,
1998 and 1997 and the results of its consolidated operations and cash flows for
the years ended December 31, 1998, 1997 and 1996 and from inception of the
development stage on November 5, 1996 through December 31, 1998 in conformity
with generally accepted accounting principles.
Crouch, Bierwolf & Chisholm
Salt Lake City, Utah
January 21, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
(a Development Stage Company)
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>
F-2
<PAGE>
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
(a Development Stage Company)
Consolidated Balance Sheets continued
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31,
1998 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
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 182,533 348,872
------------- -------------
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
Deficit accumulated during the development stage (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>
F-3
<PAGE>
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
(a Development Stage Company)
Consolidated Balance Sheets
From inception on
For the Year ended November 5, 1996
December 31, through December 31,
1998 1997 1996 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES $ 82,678 $ 24,484 $ - $ 107,162
COST OF SALES 15,864 806 - 16,670
------------- ------------- ------------- -------------
GROSS PROFIT 66,814 23,678 - 90,492
------------- ------------- ------------- -------------
SELLING EXPENSES 34,554 5,274 - 39,828
RESEARCH & DEVELOPMENT 266,563 126,281 - 392,844
GENERAL &
ADMINISTRATIVE EXPENSES 227,724 213,293 - 441,017
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 528,841 344,848 - 873,689
------------- ------------- ------------- -------------
OPERATING LOSS (462,027) (321,170) - (783,197)
------------- ------------- ------------- -------------
OTHER INCOME
AND (EXPENSES)
Interest income 7,276 2,877 - 10,153
Miscellaneous income - 200 - 200
Interest expense (28,158) (17,125) - (45,283)
------------- ------------- ------------- -------------
Total Other Income and (Expenses) (20,882) (14,048) - (34,930)
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAXES (482,909) (335,218) - (818,127)
PROVISIONS FOR INCOME
TAXES (Note 1) - - - -
------------- ------------- ------------- -------------
NET LOSS $ (482,090) $ (335,218) $ - $ (818,127)
============= ============= ============= =============
LOSS PER COMMON SHARE
net loss $ (.08) $ (.61) $ - $ (.25)
============= ============= ============= =============
WEIGHTED AVERAGE
OUTSTANDING SHARES 6,100,679 545,535 $ - 3,323,107
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
(a Development Stage Company)
Consolidated Statements of Stockholders' Equity
From Inception on November 5, 1996 through December 31, 1998
Deficit
Accumulated
Additional During the
Common Stock Paid-in Development
Shares Amount Capital Stage
------------- ------------- ------------- -------------
<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 9,885,435 9,886 (8,550) -
reorganization adjustment
July 98 - Stock issued for cash at $.725 690,000 690 499,310 -
per share
July 98 - Stock issued for debt conversion 13,500 13 12,987 -
at $.96 per share
October 98 - Shares issued for services at 39,000 39 70,161 -
$1.90 per share
October 98 - Shares issued for software 13,000 13 23,387 -
technology at $1.80 per share
November 98 - Shares issued for insurance 25,000 25 24,975 -
coverage at $1.0 per share
Net Loss for the year ended December 31, - - - (482,909)
------------- ------------- ------------- -------------
1998
------------- ------------- ------------- -------------
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>
F-5
<PAGE>
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
(a Development Stage Company)
Consolidated Statements of Cash Flows
From inception on
For the Year ended November 5, 1996
December 31, through December 31,
1998 1997 1996 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (482,909) $ (335,218) $ - $ (818,127)
Non-cash items:
Depreciation & amortization 10,406 6,419 - 16,825
Stock issued for services 95,200 125,525 - 220,725
(Increase)/decrease in current assets:
Interest receivable (7,141) (2,877) - (10,018)
Increase/(decrease) in current
liabilities:
Accounts payable 4,251 1,170 - 5,421
Accrued expenses 19,063 5,429 - 24,492
------------- ------------- ------------- -------------
Net Cash Provided (Used)
by Operating Activities (361,130) (199,552) - (560,682)
------------- ------------- ------------- -------------
Cash Flows from Investing Activities
Cash paid for property, equipment (18,627) - - (18,627)
and software technology
Cash received on notes receivables 5,000 - - 5,000
Cash advanced on notes receivable (23,200) (82,000) - (105,200)
Cash paid for deposits (5,076) - - (5,076)
------------- ------------- ------------- -------------
Net Cash Provided (Used) by Investing (41,903) (82,000) - (123,903)
------------- ------------- ------------- -------------
Activities
Cash Flows from Financing Activities
Cash received from stock issuance 1,000,000 750 - 1,000,750
Cash received from debt financing 13,000 300,000 - 313,000
Principal payments on long-term debt (194,634) (8,829) - (203,463)
------------- ------------- ------------- -------------
Net Cash Provided (Used) by Financing 818,366 291,921 - 1,110,287
Activities
Increase/(decrease) in Cash 415,333 10,369 - 425,702
Cash and Cash Equivalents at Beginning of 10,369 - - -
Period
------------- ------------- ------------- -------------
Cash and Cash Equivalents at End of Period $ 425,702 $ 10,369 $ - $ 425,702
============= ============= ============= =============
Supplemental Cash Flow Information:
Cash paid for interest $ 29,888 $ 14,656 $ - $ 44,544
Cash paid for income taxes $ - $ - $ - $ -
Non-cash financing transaction:
Purchase of equipment with lease $ - $ 51,190 $ - $ 51,190
obligations
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-6
<PAGE>
WordCruncher Internet Technologies, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
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. Pursuant to SOP 97-2, 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.
This product is sold separately without future performance such as upgrades or
maintenance, and is not sold separately with future performance such as upgrades
or maintenance, and is not sold with PCS services, therefore according to SOP
97-2.08 revenue is recorded upon the sale and delivery of the product. Licensing
fees are also generated from the sublicensing of the technology which is
included in the products of the sublicense entities 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 its parent and will lose its S-Corporation status.
No provision for income taxes has been recorded due to net operating
loss carry forwards totaling approximately $460,00 that will be offset against
future taxable income. These 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:
F-7
<PAGE>
WordCruncher Internet Technologies, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
1997 1998
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 reserve 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.
F-8
<PAGE>
WordCruncher Internet Technologies, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
j. Development Stage Company
The Company is a development stage company as defined in Financial
Accounting Standards Board Statement No. 7. It is concentrating substantially
all of its efforts in raising capital and developing its internet version of
Spyhop for future commercial release.
F-9
<PAGE>
WordCruncher Internet Technologies, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
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 358 -
depreciation - equipment
Accumulated (16,333) (6,419)
depreciation - leased equipment
------------- -------------
Total Property & Equipment $ 81,419 $ 44,682
============= =============
F-10
<PAGE>
WordCruncher Internet Technologies, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
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 principal due January 1, 2000. 66,700 56,250
Note receivable from Kenneth Bell, an officer,
bears interest at 8%, principal and interest
due January 1, 2002. 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:
December 31,
1998 1997
------------- -------------
Notes payable related party is detailed
as follows:
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 obligation to a corporation
for computer equipment, lease payments
due monthly of $234 through December 2001,
bears interest at 14%, secured by computer $ 6,818 $ 8,386
equipment.
F-11
<PAGE>
WordCruncher Internet Technologies, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
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.
F-12
<PAGE>
WordCruncher Internet Technologies, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
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 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, 1997, 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
license covers the underlying period of the patent as provided for by federal
law, which is 17 years. 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 was required to maintain BYU's equity interest of 10% through July
1998.
F-13
<PAGE>
WordCruncher Internet Technologies, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
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 per share, a cumulative dividend of 6%. The Company
issued 6,300 shares 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 conversion price was based
on the average closing price of the Company's common stock during the 20 day
period immediately preceding the closing of the preferred issuance. The
preferred shares hold no voting rights, and up to 20% of the preferred stock can
be converted into common during each month following June 1, 1999 or the
effective date of the Company's prospectus, whichever occurs earliest.
The preferred stock includes a "lock-out" provision, which prevents the
preferred shareholders from converting into common stock for a period of 5
months after the issuance of the preferred stock. 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.
On the dates that the Series A Preferred Stock was issued, the
intrinsic values of the beneficial conversion feature were $10,995,740 and
$31,944 respectively. The intrinsic value was derived by the difference between
the conversion price and the market value of the common stock on the day of the
preferred stock issuance, times the number of common shares into which the
preferred stock was convertible. The proceeds received from the sale of the
convertible instruments were $6,100,000 and $200,000 respectively. Since the
intrinsic values of the beneficial conversion feature are greater than the
proceeds, the discounts assigned to the convertible instruments are $6,100,000
and $31,944 respectively, creating a total discount of $6,131,944. This amount
is being accreted over a five month period, which is the period to the
security's earliest conversion date of November 30, 1999.
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 the common stock on the
day prior to the closing of the 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.
F-14
<PAGE>
<TABLE>
<CAPTION>
Interim Financial Statements
WordCruncher Internet Technologies, Inc.
(a Development Stage Company)
Balance Sheet
ASSETS
September 30,
1999 1998
------------------ ----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,060,802 $ 1,049
Stock subscription receivable - 750,000
Accounts receivable 1,485 9,990
Interest receivable 3,840 -
Notes receivable - current portion 2,669 -
------------------ ----------------
Total Current Assets 4,068,796 761,039
------------------ ----------------
PROPERTY & EQUIPMENT 756,045 41,439
------------------ ----------------
OTHER ASSETS
Organization costs 1,002 1,336
Notes receivable-related party long-term portion - 100,200
Interest receivable-long term - 8,630
Deposits 5,076 -
------------------ ----------------
Total Other Assets 6,078 110,166
------------------ ----------------
TOTAL ASSETS $ 4,830,919 $ 912,644
================== ================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
Interim Financial Statements
WordCruncher Internet Technologies, Inc.
(a Development Stage Company)
Balance Sheet (cont'd)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
1999 1998
-------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 60,794 $ -
Accrued expenses 38,141 10,587
Accrued interest 65 1,570
Current portion of long-term liabilities 12,209 195,005
-------------- ---------------
Total Current Liabilities 111,209 207,162
-------------- ---------------
LONG TERM LIABILITIES
Notes payable-related party - 180,000
Capital lease obligations 15,209 30,214
Less current portion (12,209) (195,005)
-------------- ---------------
Total Long Term Liabilities 3,000 15,209
-------------- ---------------
TOTAL LIABILITIES 114,209 222,371
-------------- ---------------
STOCKHOLDERS' EQUITY
Preferred stock (Note 1) 63 -
Common stock 11,881 11,800
Additional Paid-in capital 16,717,174 1,128,811
Warrants to purchase common stock (Note 3) 258,000 -
Deficit accumulated during the development stage (9,400,442) (450,338)
Deferred compensation (Note 2) (2,805,467) -
Deferred professional services (Note 3) (64,500) -
-------------- ---------------
Total Stockholders' Equity 4,716,710 690,273
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 4,830,919 $ 912,644
============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
Interim Financial Statements
WordCruncher Internet Technologies, Inc.
(a Development Stage Company)
Statement of Operations
For the Nine Months Ended September 30,
1999 1998
-------------------- -------------------
<S> <C> <C>
REVENUES $ 22,499 $ 77,640
COST OF SALES & ROYALTIES 26,400 1,243
-------------------- -------------------
GROSS PROFIT (LOSS) (3,900) 76,397
-------------------- -------------------
RESEARCH & DEVELOPMENT 477,347 32,690
SALES & MARKETING 556,567 -
GENERAL & ADMINISTRATIVE 668,828 133,685
DEPRECIATION AND AMORTIZATION 80,948 7,543
WARRANTS & STOCK COMPENSATION EXPENSE
AMORTIZATION (NOTE 2 and 3) 710,583 -
-------------------- -------------------
TOTAL OPERATING EXPENSE 2,494,274 173,918
-------------------- -------------------
OPERATING LOSS (2,498,175) (97,521)
-------------------- -------------------
OTHER INCOME AND (EXPENSES)
Interest income 158,428 5,753
Interest expense (3,561) (23,352)
-------------------- -------------------
Total Other Income and (Expenses), net 154,867 (17,600)
-------------------- -------------------
LOSS BEFORE INCOME TAXES (2,343,308) (115,120)
PROVISION FOR INCOME TAXES - -
-------------------- -------------------
NET LOSS (2,343,308) (115,120)
==================== ===================
DEDUCTION FOR DIVIDENDS & ACCRETION (NOTE 1) (6,239,007) $ -
==================== ===================
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (8,582,314) $ (115,120)
==================== ===================
BASIC AND DILUTED LOSS PER COMMON SHARE
Basic loss per common share (Note 4) $ (0.723) $ (0.030)
Diluted loss per common share (Note 4) (0.723) (0.030)
WEIGHTED AVERAGE OUTSTANDING SHARES 11,877,647 3,827,886
==================== ===================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
INTERIM FINANCIAL STATEMENTS
WORDCRUNCHER INTERNET TECHNOLOGIES, INC.
(a Development Stage Company)
Statement of Stockholders' Equity
From January 1, 1999 through September 30, 1999
Deficit
Warrants Accumulated Deferred
Additional to during the Compensation
Preferred Stock Common Stock Paid-in Purchase Development &
Common Professional
Shares Amount Shares Amount Capital Stock Stage Services
-------- -------- --------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance on January 1, - - 11,877,002 $11,877 $1,247,334 - $(818,127) -
1999
January 1999-Warrants - - - - - 258,000 (258,000)
granted in exchange for
services (Note 3)
February 1999-Issuance 6,100 61 - - 5,719,839 - - -
of preferred stock for
cash at $1,000 per
share, $.01 par value
(Note 1)
March 1999-Issuance of 200 2 - - 187,998 - - -
preferred stock for
cash at $1,000 per
share, $.01 par value
(Note 1)
March 1999-Adjusting - - - - 51 - - -
journal entry to
account for petty cash
account
Deferred compensation - - - - 3,322,550 - - (3,322,550)
related to options
granted during the
interim period ended
September 30, 1999 (Note 2)
Charge for deferred - - - - - - - 517,083
compensation related to
options granted during
the interim period
ended September 30,
1999 (Note 2)
Charge for deferred - - - - - - - 193,500
professional services
related to warrants
granted in January 1999
(Note 3)
August 1999-Issuance of - - 4,000 4 396 - - -
common stock pursuant
to exercise of stock
options (Note 2)
Net Loss for the - - - - - - (2,343,308) -
interim period ended
September 30, 1999
Dividends and Accretion - - - - 6,239,007 - (6,239,007) -
of convertible -------- -------- --------- --------- ----------- --------- ----------- ---------
preferred stock (Note 1)
Balance on September 6,300 $63 11,881,002 $11,881 $16,717,174 $258,000 $(9,400,442) $(2,869,967)
30, 1999 ===== === ========== ======= =========== ======== ============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
Interim Financial Statements
WordCruncher Internet Technologies, Inc.
(a Development Stage Company)
Statement of Cash Flows
For the Nine Months Ended For the Nine Months
September 30 Ended September 30
1999 1998
--------------------------- -------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (2,343,308) $ (115,120)
Non-cash items:
Depreciation & amortization 791,532 7,543
(Increase)/decrease in current assets:
Accounts receivable (1,485) (9,990)
Interest receivable 6,177 (5,753)
Notes receivable (2,669) -
Increase/(decrease) in current liabilities:
Accounts payable 50,373 (1,170)
Accrued expenses 13,714 6,728
--------------------------- -------------------------
Net Cash Provided (Used) by Operating Activities (1,485,666) (117,762)
--------------------------- -------------------------
Cash Flows from Investing Activities
Cash paid for property, equipment and software (752,822) (4,300)
technology
Cash received on notes receivables 110,200 5,000
Cash advanced on notes receivable (12,500) (23,200)
--------------------------- -------------------------
Net Cash Provided (Used) by Investing (655,122) (22,500)
Activities --------------------------- -------------------------
Cash Flows from Financing Activities
Cash received from preferred stock issuance 6,300,000 -
Cash received from stock options exercised 400 -
Cash received from debt financing 10,000 283,000
Cash paid for fees associated with preferred (392,100) -
stock issuance
Principal payments under capital lease (12,412) (12,058)
obligations
Principal payments on long-term debt (130,000) (140,000)
--------------------------- -------------------------
Net Cash Provided (Used) by
Financing Activities 5,775,888 130,942
--------------------------- -------------------------
Increase/(decrease) in Cash 3,635,100 (9,320)
Cash and Cash Equivalents at Beginning of Period 425,702 10,369
--------------------------- -------------------------
Cash and Cash Equivalents at End of Period $ 4,060,802 $ 1,049
=========================== =========================
Supplemental Cash Flow Information:
Cash paid for interest $ 3,561 $ 23,352
Cash paid for income taxes $ 100 $ -
Non-cash financing transactions:
Purchase of equipment with lease obligations $ - $ -
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-19
<PAGE>
Notes To Interim Financial Statements
WordCruncher Internet Technologies, Inc.
(a Development Stage Company)
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 per share, a
cumulative dividend of 6%. The Company issued 6,300 shares 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 conversion price was based on the average closing price of the
Company's common stock during the 20 day period immediately
preceding the closing of the preferred issuance. The preferred
shares hold no voting rights, and up to 20% of the preferred stock
can be converted into common during each month following June 1,
1999, or the effective date of the Company's prospectus, whichever
occurs earliest.
The preferred stock includes a "lock-out" provision, which
prevents the preferred shareholders from converting into common
stock for a period of 5 months after the issuance of the preferred
stock. 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. Shares
issued pursuant to this provision are termed preferred stock reset
shares. 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. As of September 30, 1999, 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 an additional 256,779 shares of common stock.
On the dates that the Series A Convertible Preferred Stock were
issued, the intrinsic values of the beneficial conversion feature
were $10,995,740 and $31,944 respectively. The intrinsic value was
derived by the difference between the conversion price and the
market value of the common stock on the day of the preferred stock
issuance, times the number of common shares into which the
preferred stock was convertible. The proceeds received form the
sale of the convertible instruments were $6,100,000 and $200,000
respectively. Since the intrinsic values of the beneficial
conversion feature are greater than the proceeds, the discounts
assigned to the convertible instruments are $6,100,000 and $31,944
respectively, creating a total discount of $6,131,944. This amount
is being accreted over a five month period, which is the period to
the security's earliest conversion date of November 30, 1999, and
is reflected on the statement of operations as a deduction for
dividends and accretion.
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 the common
stock on the day prior to the closing of the 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. The total number of shares of common stock
issuable upon the exercise of these outstanding warrants, as of
September 30, 1999, was 307,449.
F-20
<PAGE>
NOTE 2 - Stock Options
The Company measures compensation expense for its stock-based
employee compensation using the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25 (APB 25), Accounting
for Stock Issued to Employees, and provides pro forma disclosures
of net income and net income per share as if the fair value based
method prescribed by Statement of Financial Accounting Standards
No. 123 (SFAS 123), Accounting for Stock-Based Compensation, had
been applied in measuring compensation expense.
During the interim period ended September 30, 1999, 444,000 shares
of the company's common stock have been reserved for issuance to
employees, directors, or consultants under terms and provisions
established by the Board of Directors. Nonstatutory options may be
granted to employees, directors and consultants, at prices
determined by the Board of Directors. The options generally vest
at a rate of at least 33% per year and expire three and a half
years from the date of grant.
The intrinsic value of the options granted during the interim
period ended September 30, 1999 was $3,322,550. Of this amount,
$517,083 has been amortized to date and $2,805,467 is being
carried forward as deferred compensation. The total intrinsic
value of $3,322,550 is being recognized as an expense ratably over
the vesting period of the options.
The following table summarizes the additional shares of common
stock that may be issued upon the exercise of outstanding share
options for the interim period ended September 30, 1999:
Weighted
Number Average
Of Exercise
Shares Price
------------- --------------
Outstanding at December 31, 1997 - $ -
Granted - -
Exercised - -
Forfeited - -
------------- --------------
Outstanding at December 31, 1998 - -
Granted 444,000 0.10
Exercised 4,000 0.10
Forfeited - -
------------- --------------
Outstanding at September 30, 1999 440,000 0.10
============= ==============
Options exercisable at September 30, 1999 111,833 0.10
============= ==============
SFAS 123 pro forma disclosure
The Company's pro forma net loss before the deduction for
dividends and accretion would have been $2,344,394 for the interim
period ended September 30, 1999, if compensation expense had been
measured under the fair value method prescribed by SFAS 123. The
Company's pro forma net loss for the interim period ended
September 30, 1998 would not have changed under the fair value
method. The Company's pro forma basic and diluted net loss per
share for the interim period ended September 30, 1999, would have
been $0.723 if compensation expense had been measured under the
fair value method and would not have changed for the interim
period ended September 30, 1998. See NOTE 4 for loss per share
discussion.
F-21
<PAGE>
The Company calculated the minimum fair value of each option grant
on the date of grant using the Black-Scholes option-pricing model
as prescribed by SFAS No. 123 using the following assumptions in
1999:
NOTE 2 - Stock Options (continued)
Risk-free interest rate 6.50%
Expected life (in years) 3.5 years
Dividend yield 0%
Expected volatility 50%
The weighted average expected life was calculated based on the
vesting period and the exercise behavior. The risk-free interest
rate was calculated in accordance with the grant date and expected
life.
The options outstanding and currently exercisable price at
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
---------------------------------------- ----------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercisable Number Contractual Exercise Options Exercisable
Prices Outstanding Life (years) Price Exercisable Price
------ ----------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$0.10 440,000 2.94 $0.10 111,833 $0.10
</TABLE>
22
<PAGE>
NOTE 3 - Warrants Issued for Services
In January 1999, the Company issued warrants to purchase 200,000
shares of the company's Common Stock to their Investor Relations
consultant. The warrants have an exercise price of $5.00 per share
and vest quarterly over a one-year term. The fair value of the
warrants is reflected as deferred professional services and is
being recognized as an expense ratably over the consultant's
one-year term of service.
The fair value of the warrants granted during January 1999 was
$258,000. Of this amount, $193,500 has been amortized to date and
$64,500 is being carried forward as deferred professional services.
The total fair value of $258,000 is being amortized over a one-year
term.
The following table summarizes the warrant activity during the
Interim period ended September 30, 1999:
Weighted Average
Exercise
Number of Shares Price
------------- -------------
Outstanding at December 31, 1997 - -
Granted - -
Exercised - -
Forfeited - -
------------- -------------
Outstanding at December 31, 1998 - -
Granted 200,000 5.00
Exercised - -
Forfeited - -
Outstanding at September 30, 1999 200,000 5.00
============= =============
Warrants exercisable at September 30, 1999 150,000 5.00
============= =============
Weighted Average Fair Value of Warrants
granted during the year ended:
December 31, 1997 $ -
=============
December 31,1998 $ -
=============
September 30, 1999 $ 1.29
=============
NOTE 4 - Loss Per Share
Basic loss per share is computed on the basis of the weighted
average number of common shares outstanding. Diluted loss per
share is computed on the basis of the weighted average number of
common shares outstanding plus the effect of outstanding preferred
shares using the "if-converted" method, assumed net-share
settlement of common stock structured repurchases, and outstanding
stock options using the "treasury stock" method. Since the company
has a loss for the interim periods shown and the inclusion of
additional potential common shares is antidilutive, the
calculation for basic and dilutive is the same. Potentially
dilutive shares are shown, however, since these could potentially
dilute basic earningt per share in the future.
The components of basic and diluted loss per share were as
follows:
F-23
<PAGE>
Interim Period Ended September 30 1999 1998
Net loss $ (2,343,308) $(115,120)
Preferred stock dividends and accretion (NOTE 1) 6,239,007 -
________________________________________________________________________________
Net loss attributable to common shareholders $ (8,582,314) $(115,120)
________________________________________________________________________________
Average outstanding shares of common stock 11,877,647 3,827,886
Potentially dilutive effect of: - -
Stock options 254,086 -
Preferred stock 535,460 -
Preferred stock-Reset
shares (NOTE 1) 219,992 -
Warrants for services 88,563 -
Warrants A, B, & C 262,469 -
________________________________________________________________________________
Common stock and common equivalents that are
potentially dilutive 13,238,217 3,827,886
________________________________________________________________________________
Earnings per share
________________________________________________________________________________
Basic and Diluted $ (0.723) (0.030)
24
<PAGE>
We have not authorized any dealer,
salesperson or other person to give
any information or represent
anything not contained in this 2,689,447 SHARES
prospectus. You must not rely on
any unauthorized information. This
prospectus does not offer to sell
or 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 December 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 a purchase agreement. The Series A
Preferred Stock was issued for an aggregate of $6.3 million.
II-1
<PAGE>
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
II-2
<PAGE>
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
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.
II-3
<PAGE>
(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.
II-4
<PAGE>
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 December 6, 1999.
WORDCRUNCHER INTERNET TECHNOLOGIES, INC.
a Nevada Corporation
By: /s/
-----------------------------------------------
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: /s/ Date: April 29, 1999
------------------------------------------
James W. Johnston
Chairman of the Board, Executive Vice President
By: /s/ Date: April 29, 1999
-------------------------------------------
Kenneth W. Bell
Senior Vice President, Chief Financial Officer,
Treasurer, Secretary, Director
By: /s/ Date: April 29, 1999
-------------------------------------------
M. Daniel Lunt
President, Chief Executive Officer, Director
CONSENT OF COUNSEL
The undersigned hereby consents to the reference to the firm of Parsons
Behle & Latimer under the caption "Legal Matters" in the Fifth Amendment to 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
December 6, 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 Fifth Amendment to the 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/
--------------------------
Todd D. Chisholm
Salt Lake City, Utah
December 6, 1999
December 6, 1999
WordCruncher Internet Technologies, Inc.
405 East 12450 South
Suite B
Draper, Utah 84020
RE: WORDCRUNCHER INTERNET TECHNOLOGIES, INC.
REGISTRATION STATEMENT ON FORM S-1
(REGISTRATION NO. 333-79357)
Gentlemen:
We are acting as counsel to WordCruncher Internet Technologies, Inc., a
Nevada corporation (the "Company"), in connection with the preparation of the
above-referenced Registration Statement on Form S-1 (the "Registration
Statement"), filed by the Company with the Securities and Exchange Commission
(the "Commission") on May 28, 1999. The Registration Statement relates to the
registration under the Securities Act of 1933, as amended (the "Act"), of
2,689,447 common shares, par value $0.001 per share (the "Shares"), previously
issued by the Company. Capitalized terms used herein and not otherwise defined
have the meanings given to them in the Registration Statement.
This opinion is delivered in accordance with the requirements of Item
601(b)(5) of Regulation S-K promulgated under the Act.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Amended and Restated Articles of Incorporation of the Company; (ii) the
By-laws of the Company as amended to date; (iii) certain resolutions and written
consents of the Board of Directors of the Company relating to the issuance and
registration of the Shares; (iv) the Registration Statement, and (v) such other
documents as we have deemed necessary or appropriate as the basis for the
opinions set forth below. In such examination, we have assumed the genuineness
of all signatures, the legal capacity of natural persons, the authenticity of
all documents submitted to us as originals, the conformity to original documents
of all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. As to any facts material
to this opinion which we did not independently establish or verify, we have
relied upon statements and representations of officers and other representatives
of the Company and others.
Members of our firm are admitted to the practice of law in the State of
Utah, and we express no opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized and validly issued, and are fully paid and
non-assessable.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
our firm under the caption "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are included in the
category of persons whose consent is required under Section 7 of the Act or the
rules and regulations of the Commission.
Very truly yours,
PARSONS BEHLE & LATIMER
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,
1999 FOR WORDCRUNCHER INTERNET TECHNOLOGIES, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001085278
<NAME> WORDCRUNCHER INTERNET TECHNOLOGIES, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 4,060,802
<SECURITIES> 0
<RECEIVABLES> 1,485
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,068,796
<PP&E> 756,045
<DEPRECIATION> 80,948
<TOTAL-ASSETS> 4,830,919
<CURRENT-LIABILITIES> 111,209
<BONDS> 0
0
63
<COMMON> 11,881
<OTHER-SE> 16,975,174
<TOTAL-LIABILITY-AND-EQUITY> 4,830,919
<SALES> 22,499
<TOTAL-REVENUES> 22,499
<CGS> 26,400
<TOTAL-COSTS> 2,494,274
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,561
<INCOME-PRETAX> (2,343,308)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,343,308)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,343,308)
<EPS-BASIC> (.723)
<EPS-DILUTED> (.723)
</TABLE>
