As filed with the Securities and Exchange Commission on December 17, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
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DEERBROOK PUBLISHING GROUP, INC.
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(Name of Small Business Issuer in Its Charter)
Nevada 86-0960464
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4644 S. 36th Place, Phoenix, Az 85040
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(Address of Principal Executive Offices) (Zip Code)
(602) 437-8888
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(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
None
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(Title of Each Class to be so Registered)
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value per share
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(Title of Class)
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DEERBROOK PUBLISHING GROUP, INC.
FORM 10-SB
TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS........................................ 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS........................... 20
ITEM 3. DESCRIPTION OF PROPERTY........................................ 23
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................................ 24
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS.............................................. 25
ITEM 6. EXECUTIVE COMPENSATION......................................... 26
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 27
ITEM 8. DESCRIPTION OF SECURITIES...................................... 28
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS.................. 30
ITEM 2. LEGAL PROCEEDINGS.............................................. 30
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.................. 30
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES........................ 31
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS...................... 32
PART F/S.................................................................... 32
PART III
ITEM 1. INDEX TO EXHIBITS.............................................. 33
ITEM 2. DESCRIPTION OF EXHIBITS........................................ 33
SIGNATURES.................................................................. 34
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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-SB THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF APPLICABLE
SECURITIES LAWS. FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS REGARDING OUR
"EXPECTATIONS," "ANTICIPATION," "INTENTIONS," "BELIEFS," OR "STRATEGIES"
REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS ALSO INCLUDE STATEMENTS
REGARDING REVENUE, MARGINS, EXPENSES, AND EARNINGS ANALYSIS FOR FISCAL 2000 AND
THEREAFTER; FUTURE PRODUCTS OR PRODUCT DEVELOPMENT; OUR PRODUCT DEVELOPMENT
STRATEGIES, PARTICULARLY AS THEY RELATE TO THE INTERNET; POTENTIAL ACQUISITIONS
OR STRATEGIC ALLIANCES; AND LIQUIDITY AND ANTICIPATED CASH NEEDS AND
AVAILABILITY. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED
ON INFORMATION AVAILABLE TO US AS OF THE FILING DATE OF THIS REPORT, AND WE
ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. AMONG THE
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE FACTORS
DISCUSSED IN PART I, ITEM 1, "DESCRIPTION OF BUSINESS - SPECIAL CONSIDERATIONS."
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Deerbrook Publishing Group, Inc. acts as publisher, printer, and Internet
e-commerce provider of custom original artwork, prints, collectibles, and home
decor accessories. We design, create, publish, market, and distribute fine art,
collectibles, and home decor products. We also provide custom lithography,
serigraphy, etching, and monoprinting services to artists and publishers. In
September 1999, we launched Artup.com, which is an Internet portal site that
serves as an e-commerce enabled Internet art destination to bring together
artists, collectors, galleries, and distributors.
We maintain our principal executive offices at 4644 South 36th Place,
Phoenix, Arizona 85040, and our telephone number is (602) 437-8888. All
references to our business operations include the operations of Deerbrook
Publishing Group, Inc., our subsidiaries, operating divisions, and predecessor
entities.
ART INDUSTRY OVERVIEW
The fine arts products, collectibles, and home decor market is a
multi-billion dollar industry that includes products such as original and
reproduction artwork, frames, and statuary. A January 1997 report on the U.S.
giftware market by Packaged Facts, a consumer research organization, indicates
that this market is expected to grow to $9.2 billion by 2001. We believe that
key drivers of this growth include an increase in the number of residents in the
United States who own their homes and an accompanying trend towards enhancing
the home environment. According to the U.S. Census Bureau, the number of
owner-occupied housing units in the United States has increased throughout the
1990's and is expected to increase into the next century. In addition, we
believe that disposable income is a key economic indicator for the future
potential of the art industry. A recent report from the Bureau of Economic
Analysis indicates that real disposable personal income in the United States
increased in 1997, 1998, and the first three quarters of 1999. We believe that
these statistics, and other similar government reports, indicate a favorable
environment for the long-term potential of the art market.
Fine arts products are sold primarily through art galleries, specialty gift
stores, department stores, catalog retailers, and Internet services. Due to the
highly fragmented nature of the industry, and because many dealers and smaller
auction firms do not publicly report annual sales totals, we are not able to
precisely measure the fine art market. However, the two major art auction
houses, Christie's and Sotheby's, recently reported combined North American
sales of almost $2.15 billion for the twelve months ended June 30, 1999. This
represents an increase of nearly 30 percent over combined sales for the twelve
months ended June 30, 1997.
The Internet is an increasingly significant medium for the sale of all
types of consumer goods, including fine art. Forrester Research estimates that
by the end of 1999, 17 million U.S. households will be shopping online, with
online retail sales expected to top $20.2 billion. Forrester Research predicts
that by 2004 49 million U.S. households will shop online, spending $184 billion.
The auction segment of this e-commerce boom is also expected to grow at
breakneck speed, with Forrester Research predicting that Internet auction sales
will grow from $1.4 billion in 1998 to $19 billion in 2003. We believe that the
art industry can take particular advantage of the many unique features and
functions offered by the Internet.
STRATEGY
Our strategy is to establish and enhance our position as a provider of fine
art products and services to artists, galleries, and studios, as well as
consumers and collectors. Key elements of our strategy include the following:
* PROVIDE A WIDE RANGE OF ARTWORK FROM A VARIETY OF ARTISTS. We believe
that offering access to and providing distribution channels for a wide
variety of desirable artwork will enable us to expand our business and
sources of revenue. We currently contract with a core group of artists
who have an established following and produce images that meet the
expectations of our target market. We also
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seek to develop relationships with new and emerging artists in order
to expand our access to a broad range of artistic works that appeal to
consumers. We purchase these artists' works for resale to individuals,
galleries, wholesale distributors, or other sellers of fine art. We
seek to provide art images in different print forms and at varying
price levels in order to appeal to a wide range of collectors and
consumers. We also have designed and are continuing to develop our
Artup.com network to provide an innovative distribution channel for
the galleries, distributors, and artists that are part of the network.
* EXPAND STRATEGIC BUSINESS RELATIONSHIPS TO ENHANCE PRODUCT LINES AND
AUDIENCE REACH. We plan to seek out and develop co-branding
opportunities that deliver benefits to both our company and our
business partners. Our industry relationships with many preeminent
galleries, artists, and distributors provide us with opportunities to
expand our access to artistic content, our product offerings, and our
customer base, especially as these relate to our Artup.com network.
Establishing affiliates and partnerships within the art industry,
including galleries and artists, will be a key to establishing
Artup.com users, online inventory, and revenue streams.
* ENSURE A USER-FRIENDLY WEB SITE. In developing the Artup.com Web site,
we have expended substantial time and resources to ensure that the
site is easy to navigate and provides outstanding images and
information. We intend to continue these efforts as we expand and
refine our Web site. Artup.com offers a community network environment
that welcomes newcomers with an inviting and easy to use interface and
encourages repeat visits and purchases.
* PROVIDE HIGH-QUALITY PRODUCTS AND SERVICES. We believe that providing
high-quality products and services is essential to building a strong
reputation in the art industry and among consumers. While we expect
the demand for our products and services to increase, we remain
committed to providing high-quality products and art-related services.
Accordingly, we plan to improve quality control, increase capacity,
and shorten production time by developing innovative printing
processes and by maximizing distribution through our Artup.com Web
site.
* PURSUE STRATEGIC ACQUISITIONS. We believe that significant
consolidation opportunities exist in the highly fragmented fine art
industry. In evaluating acquisition candidates, we focus on companies
that we believe will benefit from our industry relationships and will
provide us with expanded product or service offerings, productivity
gains, and enhanced levels of service. We intend to seek acquisitions
that will enable us to offer products, services, or distribution
channels that complement or enhance our existing business, establish
additional product lines, provide us with access to additional
artistic content, and increase our ability to serve the needs of
artists, galleries, and consumers. As a first step in executing this
strategy, in November 1999 we executed a letter of intent to acquire
80% of the outstanding stock of Gregory Editions, Inc., a publisher
and distributor of fine art reproductions. See Part I, Item 7,
"Certain Relationship and Related Transactions."
PRODUCTS AND SERVICES
LIMITED EDITION PRINTS
We create limited edition prints from artists' original works. We believe
that the quality of our printing gives us a competitive advantage in terms of
attracting artists and publishers who seek unique marketing advantages for their
limited edition prints. We use industry standard printing processes, including
lithography, serigraphy, etching, and monoprinting, as well as two proprietary
printing processes, Serilith(TM) and Chromalith Replica(TM).
LITHOGRAPHY is one of the finest traditions in the history of printmaking
and has been used since the 1790s by many renowned artists, including Picasso,
Goya, Manet, Degas, Delacroix, Toulouse-Lautrec, Rauschenburg, and Johns.
Lithography, based on the principle that grease and water do not mix, produces
fine line quality and exceptional tonal gradations. The artist uses a greasy
substance to draw the image directly on a stone or plate. The stone or plate is
then chemically treated to retain water. When the printer rolls oil-based ink
over the
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surface, the ink sticks to the oily image, but not to the stone or plate. The
press then transfers the ink to the paper under extreme pressure.
SERIGRAPHY, also known as silk screening, is a stencil process in which
paint is pushed through a fine screen onto paper or canvas. Known for its rich
and vibrant colors, serigraphy also can print heavy layers of ink to produce a
textured print surface. For these reasons, serigraphy has developed the
reputation as the painter's medium. A skilled technician known as a "chromist"
analyzes a painting, dissects it into individual colors, and orders those
colors. The chromist then creates hand drawings of each color. These colors are
then layered one on top of the other over the course of several weeks.
Serigraphy may require up to 100 separate screens to produce a finished work.
Original works can take as long as three months to complete.
ETCHINGS are created by using a metal plate, usually copper or zinc, coated
with a ground of acid-resistant resin or wax. The artist draws the design on the
ground with a needle to expose the metal, then submerges the plate in acid to
cut into the exposed lines. Once the processing is complete, the artist removes
the plate. Frequently, the artist uses varnish to coat the lines that are dark
enough and resubmerges the plate to produce darker, heavier lines on the
unvarnished portions. Before printing, the artist removes the varnish and warms
the plate. The artist then applies a coating of ink and wipes it off, leaving
the ink only in the grooves. As a final step, the artist covers the plate with
moist paper and runs it through a press, thus transferring the image to the
paper.
MONOTYPE is a print produced directly from a plate to a piece of paper. The
artist applies ink or paint to a surface, such as copper, and uses hand pressure
to transfer the image directly to the paper. The fact that the ink or paint is
transferred directly to the paper makes each monotype unique. In the past 15
years, monotype production and experimentation has surged in popularity and
artists have pushed the process to the forefront of artistic media.
SERILITH(TM) is a proprietary process developed by Michael Raburn, an
artist and one of our founders and significant stockholders. The Serilith
process combines the advantages of lithography's line quality and tonal
gradations with serigraphy's brilliant color and textural range. These
interacting processes offer artists the optimum creative experience during the
printmaking process. The Serilith is a mixed-media original print composed of
hand drawn printing elements, which provides remarkable improvements in terms of
line quality and color brilliance over traditional printing processes. Serilith
prints do not have the dot patterns that are characteristic of four-color
process reproductions.
CHROMALITH REPLICA(TM), also developed by Michael Raburn, is a mixed media
process that combines the latest technology in commercial printing and
techniques of fine art printing. Mr. Raburn developed this process to meet the
needs of the limited edition print marketplace. The process uses
computer-generated continuous tone separations and separations prepared by hand.
We formulate the inks to exacting specifications and hand mix the inks for each
project. To achieve color saturation, we use multiple levels of ink layering on
100% rag paper with up to eight passes through the press. We modified the
presses that we use in order to accept the quality paper and canvas required for
this process. We believe the Chromalith Replica process results in prints that
are recognized in the industry for both their quality and detail.
PUBLISHING
As a publisher, we act as agent for artists seeking to distribute their
works. We assist the artist in determining the pieces of artwork the artist will
market, the printing process and printer the artist will use, the size of the
pieces, and the number of pieces the printer will produce. We assist the artist
in all phases of the process, from pre-production through final distribution.
Our publishing business relies on our established relationships with
well-known artists from around the world who have track records of successfully
marketing their images and their creations. We currently have established
alliances with many of these artists, including, most recently, Liliana Frasca
and Curt Walters. We developed these alliances to position us in specific market
niches that we believe will provide the greatest potential for profit and
growth. The products we publish include original works of art from these
artists, as well as prints
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from original works. We sell the original works to individuals, galleries,
wholesale distributors, and other sellers of fine art. We also create limited
edition prints of those original works that have proven most in demand.
In addition to contracting with a core group of known artists who have an
established following, we seek out new and upcoming artists and provide them
with a venue to publish their works at a reasonable cost. We have designed
Artup.com to expose our publishing business to numerous new and established
artists, making this one of our primary sources of new leads. Artup.com also
will enable us to track which artists sell the most product and even the types
of products that are most in demand. This will allow us to more effectively
manage our new product development.
ARTUP.COM
Artup.com is an Internet portal and an e-commerce enabled Internet art
destination designed to bring together artists, collectors, galleries, and
distributors. We have designed Artup.com to create a place that people with
different levels of interests in art can visit to learn about art, develop their
artistic tastes, round out a collection with a hard-to-find limited edition
print, or establish and foster relationships with others in the art industry.
Artup.com provides an extensive online and offline network of product and
service offerings that enable collectors and art professionals to find art,
art-related services, art-related news and information, and art events at no
cost. Our network offerings currently include the following:
* ARTUP.COM - The Artup.com Web site is the flagship of our Internet
network. Artup.com is a public site that is open to individual
collectors as well as members of the art industry. The site sells and
auctions limited edition prints, original works of art, prints, and
posters. Artwork is available from Artup.com as well as from co-branded
galleries appearing on the Artup.com Web site. Potential purchasers can
view a picture of the artwork and obtain the particulars about the
piece, including the artist, media, dimensions, and price. All artwork
available for sale on the network, whether owned by Artup.com or a
co-branded gallery within the network, is available for purchase
through the main Artup.com site. We plan to enhance this site by
offering links to content-oriented sites containing biographies and
information on artists, publishers, distributors, galleries, and
collectors. We plan to integrate all of the sites within the network
and to link artists' biographies to associated artwork offered through
the Artup.com network.
* TEMPLATES - We offer co-branded locations on the Artup.com site that
enable galleries, publishers, and artists to create their own Web sites
by using templates that we provide free of charge. Once the gallery,
publisher, or artist completes the template, the co-branded site
carries the Artup.com logo as well as the logo of the gallery,
publisher, or artist who wishes to offer works through the Artup.com
network. These online galleries have the same functionality as the main
Artup.com site, but display only the artwork offered by the co-branded
gallery. Thus, our templates allow a gallery to easily establish and
maintain a Web presence and each gallery can benefit from the traffic
generated by Artup.com as well as by the other galleries within the
network. We designed these co-branded arrangements to benefit all
parties: the branded gallery, artist, or publisher gains greater
exposure and distribution; their customers enjoy greater selection and
one-stop shopping; and we believe that Artup.com will reach a critical
mass of commerce faster.
* AUCTIONS - We offer auction services to our buyers and sellers. The art
items currently auctioned are offered by us or our co-branded
galleries. Only galleries and artists may offer items for auction
through our Web site. We display the artwork, artist name, media, size,
current bid price, bid increment, and the date and time on which
bidding will close. Our users can submit bids online and monitor the
status of an auction 24 hours per day, seven days a week. We handle the
actual sale of the item, and we collect a 15% commission on all auction
sales. We currently offer nearly 100 items for auction on our auction
page.
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We recognize revenue attributable to our Web site when we receive payment
of the purchase price. If we sell a piece of art owned by a co-branded gallery,
we purchase the piece from that gallery. The gallery ships the art to us, and we
ship it to the buyer. We then pay the gallery for that piece. The price we pay
the gallery is the purchase price paid by the buyer minus a percentage we
withhold for arranging for the sale. We recognize the full purchase price of the
artwork as revenue whether we or a co-branded gallery owned the artwork.
We also are developing additional offerings for the Artup.com network,
including the following:
* ARTUP.COM PRIVATE - This area of Artup.com, currently under development
and not yet available, will be accessible solely to commercial buyers
and sellers and will include auctions and catalogs for gallery owners,
publishers, distributors, and artists to buy and sell artwork to the
wholesale art community. It will feature a trade-only forum and
trade-only chat room to facilitate industry-wide communication.
Registered users also will receive an online newsletter announcing
upcoming trade-only events and industry news.
* KIDSPAINT.COM - Our future plans include establishing a co-branded
gallery focusing on artwork for children. As currently planned, the
site will have a catalog, auction, and content areas similar to those
offered on Artup.com. As with other co-branded galleries, all products
offered on the kidspaint.com site also will be available on the main
Artup.com Web site.
* ARTUP.COM KIOSKS - The galleries participating in the Artup.com network
will have the opportunity to install Artup.com kiosks at their
established retail locations. This online link will give galleries the
unprecedented ability to search worldwide availability of art through
the Artup.com Private Web site in order to locate and sell inventory.
As currently planned, the gallery representative and the collector will
be able to use this online resource to locate a desired work of art and
complete the transaction via the Artup.com Private Web site.
Artup.com uses state-of-the-art Web development technology to create an
exciting art community that is fully e-commerce enabled. We have designed our
Web site for intuitive navigation and rapid page uploads. Our criteria for the
Artup.com site include simplicity and fast performance. Featured technologies
that we use to accomplish these goals include the following current offerings:
* BACK-END DATABASE - rather than maintaining static pages, we derive
pages from our database, thus allowing for easy updating of our Web
site;
* AUCTION/ONLINE BIDDING - allows prospective buyers to bid online for
works of art;
* E-COMMERCE - enables secure credit card transactions for online
purchases;
* AUTO RESPONDERS - automatically alerts buyers that their purchase
requests have been received or that they have won an auction; and
* FLEXIBLE SOFTWARE ARCHITECTURE - allows growth through the use of
additional computer hardware without the need to develop new software.
Future technologies we plan to implement include the following:
* PANORAMIC TECHNOLOGY - will permit the prospective buyer to pan 360
degrees around three-dimensional sculptures;
* PRODUCT DETAIL VIEWING - will allow prospective buyers to "zoom" into
an art object photo to view detail and texture, without distorting the
image;
* E-MAIL "PUSH" TECHNOLOGY - will automatically notify a database of
online subscribers via e-mail about upcoming auctions, art exhibits,
and other events; and
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* FLASH TECHNOLOGY - will use streaming animation and sound to create a
dramatic presence on the Internet.
Future plans for Artup.com include expanding the network of co-branded
galleries and adding other art-related services. Those additional services may
include art appraisal, insurance, and restoration and repair as well as links to
other luxury product sites.
CUSTOMERS
Established and upcoming artists who can benefit from our sophisticated
printing facility and proprietary printing processes represent the primary
target customers for our printing services. As the public demand for artwork
continues to increase, more artists are finding economic reward in producing
more works per year. We can assist artists in their efforts to further their
careers by providing the limited edition printing tools, techniques, and
processes that maximize creativity, productivity, and profitability. We
continually search for new and emerging artists who can benefit from our
printing processes and publishing services. We anticipate that, through the
expansion of our co-branded galleries and the anticipated increase in our
industry profile, our Artup.com network will provide a source of contacts with
artists who can benefit from our product and service offerings. In addition, by
tracking the sales of art on the Artup.com network, we can determine which
artists' works or style of work have the most potential for limited edition
print sales.
The target market for our retail Internet products consists of consumers
with greater than average disposable income who possess a willingness to buy
artistic and collectible products online. In 1998, 74% of online U.S. retail
sales were to households with more than $50,000 of income, according to
Forrester Research. We believe that an even larger percentage of retail art
sales will come from households with more than $50,000 of income. In many cases,
we anticipate that our customers will have recently purchased a new home and
will be searching for decorator items or artwork to beautify their homes. We
also expect to attract art collectors who primarily seek and collect the work of
one or two artists.
In addition to the consumer market, Artup.com plans to provide a
business-to-business trade market. We plan to target artists and gallery owners
who make their living creating, buying, and selling art. We also plan to
leverage our current industry relationships to establish our initial customer
base. We also intend to develop business-to-business customers from the artists
and galleries that utilize our co-branded Web services.
For the year ended September 30, 1999, one customer represented
approximately 20% of our sales and another customer represented approximately
17% of our sales. Because of the nature of our business, we anticipate that
customers that represent 10% or more of our total revenue will vary from period
to period depending upon the placement of significant orders by a particular
customer or customers in any given year.
MARKETING AND PROMOTION
Our marketing approach for our printing and publishing businesses consists
of direct mailings to art galleries and prior customers as well as word of mouth
referrals. We maintain a database, currently consisting of approximately 10,000
contacts, through which we generate our mailings.
Our marketing strategy for Artup.com is to aggressively build the Artup.com
brand name, increase consumer traffic to our Web site, and add new customers
through a variety of marketing techniques, including increased use of our
co-branding strategy as well as through increased expenditures in both Internet
and offline media.
CO-BRANDING
We plan to increase the number of co-branded galleries appearing on our
network in order to provide marketing and cross-promotional opportunities,
increase brand recognition of the Artup.com network, and build traffic on our
network. We used our database to distribute information about the Artup.com
network to galleries and have currently identified nearly 1,000 galleries as
potential users of our co-branding approach. The addition
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of even a small percentage of these galleries to our network would significantly
increase the number and variety of artwork available through Artup.com.
INTERNET ADVERTISING
We have entered into advertising agreements with AOL, Lycos, and Go2Net
pursuant to which these companies will display Internet banner advertisements
for Artup.com. These advertisements will appear when users of AOL, Lycos, or
Go2Net search for certain key words, such as "gallery." The advertisements will
allow users to click on the advertisement to link directly to the Artup.com Web
site. The agreements will require us to pay the portal sites based on the number
of impressions we receive. We plan to initiate these advertisements during 2000.
We also intend to continue to seek new opportunities to expand our presence
within top-tier portal sites and highly trafficked content sites.
OFFLINE ADVERTISING
We intend to actively pursue a variety of offline advertising channels to
promote the Artup.com brand. Our efforts in this area will focus on promoting
the brand through print advertisements. While we have not spent significant
marketing dollars in this area in the past, we expect to significantly increase
our offline advertising campaign in the future.
CUSTOMER SERVICE AND ORDER FULFILLMENT
Artup.com features technology that allows our customers to use their credit
cards to purchase artwork through our Web site. If the artwork is part of our
existing inventory, we ship the artwork directly to the customer. If the
customer orders artwork that belongs to a co-branded gallery, we purchase the
artwork from that gallery and the co-branded gallery ships the artwork to us. We
then ship the artwork to the customer. We handle all product returns and
customer complaints regarding product sales and work with the co-branded
galleries, as necessary, to resolve any problems. We maintain a call center at
our Phoenix headquarters to handle customer inquiries and service requirements.
INFRASTRUCTURE AND TECHNOLOGY
Our network infrastructure, our Web site, and e-commerce and database
servers are hosted by Integrated Information Systems, or IIS, in Tempe, Arizona.
IIS also developed our Web site. Our technology infrastructure is based on an
architecture designed to be secure, reliable, and expandable. We have designed
our software to be scaled, usually by purchasing additional readily-available
hardware, to meet or exceed future capacity requirements. Monitoring of all
servers, networks, and systems is performed on a continuous basis. We employ
firewall systems to protect our databases, e-commerce servers, customer
information, and artwork archives. Backups of all databases, data, and media
files are performed on a daily basis.
In addition to our own Web site, we maintain through IIS the technology
used to develop and host our co-branded galleries. All of the co-branded
galleries design their own Web sites through our template software. Once
completed, these galleries then use the servers and systems at IIS to host the
co-branded site.
Like other Internet sites, sites on our network from time to time have
experienced interruption and overload. Our business requires the uninterrupted
operation of our network of sites on the Internet and transaction processing
system. IIS attempts to maintain, to the greatest extent possible, the
reliability of these systems. We are in the process of developing a
comprehensive disaster recovery plan to respond to system failures.
COMPETITION
The fine art printing and publishing industry is highly competitive. We
believe that the principal competitive factors include:
* the quality, features, diversity, and prices of products and services,
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* the ability to develop and maintain effective marketing programs,
* the public recognition of artists and the ability to attract new and
upcoming artists,
* the quality of customer service, and
* the speed of order fulfillment.
Most of our printing and publishing competitors possess regional or
customer-specific strengths and do not attempt to compete on a national level.
We must address the above criteria in order to successfully expand our customer
base.
The e-commerce market is new, rapidly evolving, and intensely competitive,
and we expect competition to intensify in the future. Barriers to entry are
minimal and competitors may develop and offer similar services in the future. We
currently or potentially compete with other Web sites offering art and
art-related products as well as with traditional offline art distributors,
dealers, and galleries.
Many of our existing or potential competitors in the printing, publishing,
and e-commerce markets have greater market recognition and substantially greater
financial, marketing, production, distribution, and other resources than we
possess. We cannot assure you that we will be able to successfully compete in
any or all of these markets in the future.
INTELLECTUAL PROPERTY
Our Internet operations use proprietary software that has been developed
for us by third parties. Our proprietary software is protected by copyright
laws. As part of our confidentiality procedures, we generally enter into
agreements with our employees and consultants and limit access to and
distribution of our software, documentation, and other proprietary information.
The steps we take may not prevent misappropriation of our technology, and the
agreements we enter into for that purpose may not be enforceable. Third parties
may independently develop similar software or they could copy or otherwise
obtain and use our software or other proprietary information without our
authorization. It may be difficult or impossible for us to police unauthorized
use of our technology. In addition, the laws of other countries may afford us
little or no effective protection of our intellectual property outside the
United States.
Our Internet operations also rely on a variety of technologies that we
license from third parties. These third-party technology licenses may not
continue to be available to us on commercially reasonable terms. Our loss or
inability to maintain or obtain upgrades to any of these technology licenses
could result in delays in completing our Internet software enhancements and
developments until we identify, license, develop, and integrate equivalent
technology. Any such delays could have an adverse effect on our Internet
business.
GOVERNMENT REGULATION
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than environmental regulations, regulations
applicable to businesses generally, and laws or regulations directly applicable
to access to online commerce. As a result of the increasing popularity and use
of the Internet and other online services, however, it is possible that a number
of laws and regulations may be adopted with respect to the Internet or other
online services. These laws and regulations could cover issues such as user
privacy, pricing, content, copyrights, distribution, sales and other taxes, and
the characteristics and quality of products and services. The growth and
development of the market for online commerce may prompt more stringent consumer
protection laws that may impose additional burdens on companies that conduct
business online. The adoption of any additional laws or regulations may decrease
the growth of the Internet or other online services, which in turn could
decrease the demand for the products and services we offer, increase our cost of
doing business, or otherwise have an adverse effect on us. We are uncertain as
to how existing laws that govern issues such as property ownership, sales and
other taxes, pornography, and personal privacy will apply to the Internet and
other online services. Any such developments may take years to resolve.
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Because the Artup.com network is available over the Internet throughout the
United States and foreign countries and we plan to sell to numerous consumers
residing throughout the United States and in numerous foreign countries, these
jurisdictions may claim that we are required to collect sales or other similar
taxes on sales of products in those jurisdictions. These jurisdictions also may
claim that we are required to qualify to do business as a foreign corporation in
each such state and foreign country. A successful assertion by one or more
states or foreign countries that we should collect sales or other taxes could
adversely affect our business. Our failure to qualify as a foreign corporation
in a jurisdiction where we are required to do so could subject us to taxes and
penalties for the failure to qualify. Any such new legislation or regulation,
the application of laws and regulations of jurisdictions whose laws we believe
do not currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services, could have a material
adverse effect on our business.
ENVIRONMENTAL MATTERS
Our printing business involves the use, handling, storage, and disposal of
potentially toxic substances or wastes, such as printing dye and thinner.
Accordingly, we are subject to regulation by federal, state, and local
authorities establishing requirements for the use, management, handling, and
disposal of these materials and health and environmental quality standards,
liability related to those standards, and penalties for violations of those
standards. We believe that we do not have any material environmental
liabilities. Compliance with environmental laws, ordinances, and regulations has
not had, and we do not expect such compliance to have, a material adverse effect
on our business, financial condition, or results of operations.
INSURANCE
We are an additional named insured on an insurance policy that covers our
property and provides general liability coverage of $1,000,000 per occurrence
with a $2,000,000 aggregate. We believe our insurance coverage is adequate.
EMPLOYEES
As of December 15, 1999 we had 17 employees, including nine in printing and
publishing, four in Internet operations, and four in management and
administrative support. We have experienced no work stoppages and are not a
party to a collective bargaining agreement. We believe that we maintain good
relations with our employees.
SPECIAL CONSIDERATIONS
You should carefully consider the following risk factors, in addition to
those discussed elsewhere in this Report, in evaluating our business.
WE WILL NEED ADDITIONAL CAPITAL TO EXPAND OUR BUSINESS.
We historically have secured financing for operations, the acquisition of
additional inventory and equipment, and the development of our Internet
operations through private placements of equity securities and from loans. As of
December 15, 1999, we had outstanding short-term notes payable and capital lease
obligations totaling approximately $161,150. We have incurred significant losses
since inception and will be required to seek additional equity or debt financing
to further develop our Internet operations, to finance future acquisitions or
develop new product lines, to obtain equipment and inventory necessary to expand
our in-house printing capabilities, or to provide funds to take advantage of
other business opportunities. The timing and amount of any such capital
requirements cannot be predicted at this time. We have from time to time
encountered difficulties in obtaining adequate financing on acceptable terms and
there can be no assurance that such financing will be available on acceptable
terms in the future. If such financing is not available in sufficient amounts or
on satisfactory terms, we may be unable to repay creditors or to continue as a
going concern. Our inability to obtain adequate financing on a timely basis also
could adversely affect our operating results, may require us to restructure our
business and operations, and could significantly interfere with our efforts to
expand our business at
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the desired rate. Debt financing increases expenses and must be repaid
regardless of operating results. Equity financing could result in additional
dilution to our existing stockholders.
WE HAVE EXPERIENCED LOSSES FROM OPERATIONS, OUR AUDITORS' REPORT ON OUR
FINANCIAL STATEMENTS IS QUALIFIED WITH RESPECT TO OUR ABILITY TO CONTINUE AS A
GOING CONCERN, AND OUR FUTURE PROFITABILITY IS UNCERTAIN.
We have incurred operating losses since inception, and reported a net loss
of approximately $1,005,000 for the year ended September 30, 1999. As of
September 30, 1999, we had an accumulated deficit of approximately $1,300,000.
Losses incurred during fiscal 1999 are attributable primarily to expenses we
incurred to develop, enhance, manage, monitor, and operate the Artup.com Web
site. We cannot assure you that we will generate sufficient operating revenue,
expand sales of our products and services, or control our costs sufficiently to
achieve or sustain profitability. Our financial statements for the year ended
September 30, 1999, have been prepared assuming that we will continue as a going
concern. The report by our independent public accountants on our financial
statements for the year ended September 30, 1999 states that the significant
losses and our working capital deficiency as of that date make our ability to
continue as a going concern uncertain. Our financial statements for the year
ended September 30, 1999 do not include any adjustments relating to the
realization of assets and the satisfaction of liabilities that might result in
the event that we become unable to continue as a going concern.
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR POTENTIAL
FOR FUTURE SUCCESS.
Our company was incorporated in March 1997 and we did not commence active
business operations in the fine arts industry until August 1998. We launched our
Artup.com Web site in September 1999. Accordingly, we have a limited operating
history, especially on the Internet, and limited historical financial
information upon which you can evaluate our existing business and our potential
for future success. We face numerous risks, expenses, delays, and uncertainties
associated with establishing a new business, especially in the new and rapidly
evolving Internet market. Some of these risks and uncertainties relate to our
ability to
* develop brand awareness and brand loyalty,
* increase traffic to Artup.com;
* increase customer acceptance of our products and services,
* develop and renew strategic relationships,
* obtain access to new product and service offerings or distribution
channels,
* anticipate and adapt to the changing market for Internet services and
electronic commerce,
* continue to upgrade and enhance our systems to accommodate expanded
service offerings and increased consumer traffic,
* provide or contract for satisfactory customer service and order
fulfillment, and
* integrate any acquired businesses, technologies, and services.
We may not be successful in addressing these risks and uncertainties. The
failure to do so would materially and adversely affect our business.
As a result of our limited operating history, our plan for rapid growth,
and the increasingly competitive nature of the markets in which we compete, our
historical financial data are of limited value in anticipating future operating
expenses. Our planned expense levels will be based in part on our expectations
concerning future revenue, which is difficult to forecast accurately based on
our stage of development. We may be unable to adjust spending in a timely manner
to compensate for any unexpected shortfall in revenue. Further, business
development and marketing expenses may increase significantly as we expand
operations. To the extent that these
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expenses precede or are not rapidly followed by a corresponding increase in
revenue, our business, operating results, and financial condition may be
materially and adversely affected.
WE DEPEND ON KEY MANAGEMENT AND OTHER PERSONNEL.
We depend upon the expertise and business connections of our executive
officers and other key personnel, particularly Mark L. Eaker, our President and
Chief Executive Officer. Our future success also will depend upon our ability to
attract and retain qualified personnel. The loss of Mr. Eaker's services or the
services of our other key personnel, or our inability to attract and retain
qualified personnel in the future, could have a material adverse effect on our
business.
FAILURE OF THE ARTUP.COM CONCEPT TO DEVELOP AS AN E-COMMERCE SOLUTION COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Visitors to Artup.com may decide not to make online purchases in the future
if we do not provide a convenient, economical, and secure shopping experience or
do not offer the products and services they seek. Our existing galleries may not
continue to use our network, and we may not be able to attract new galleries, if
online sales are lower than anticipated. The failure of Artup.com to develop as
a viable e-commerce solution could have a material adverse effect on our
business.
WE MAY NOT BE COMPETITIVE IF WE FAIL TO ENHANCE OUR PRODUCT AND SERVICE
OFFERINGS AND DISTRIBUTION CHANNELS.
The failure to develop or acquire new or enhanced products, services,
distribution channels, and online features and functions could have a material
adverse effect on our business. To remain competitive, we must continue to
* expand our product and service offerings and develop or acquire new
distribution channels,
* enhance our offerings of art-related news, information, and features,
* enhance the ease of use, responsiveness, functionality, and features of
our Artup.com network,
* attract and retain additional members of our network, and
* improve the consumer purchasing experience on our network of Web sites.
These efforts may require us to develop or license increasingly complex
technologies. We may not be successful in developing or introducing new
products, services, distribution channels, and online features and functions and
the products, services, channels, features, and functions that we develop may
not result in increased revenue. We also may not be able to develop, acquire, or
enter into alliances for Web sites designed to attract consumers and suppliers
of art-related products and services to our network.
Developing, launching, and promoting new product and service offerings or
expanding into new markets will require us to make significant investments of
financial, management, and operational resources. These efforts also could
strain our ability to support our existing business and product and service
offerings or to provide an enjoyable online experience to visitors to our
network. Our business could be materially and adversely affected if we fail to
achieve these goals.
CHANGES IN ECONOMIC CONDITIONS AND CONSUMER SPENDING MAY ADVERSELY AFFECT OUR
BUSINESS.
The fine arts industry is subject to cyclical variations. Retail collectors
and consumers consider fine art to be a luxury item and purchase art only if
they have discretionary funds available. As a result, such purchases tend to
decline during periods of national or regional economic recession and may also
decline at other times. Declines in consumer confidence levels, even if
prevailing economic conditions are favorable, can also adversely affect consumer
spending on luxury goods. Our success depends in part upon a number of economic
factors relating to discretionary consumer spending, including employment rates,
business conditions, future economic
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prospects, interest rates, and tax rates. In addition, our business is sensitive
to consumer spending patterns and preferences. Shifts in consumer discretionary
spending away from art products, as well as general declines in consumer
spending, could have a material adverse effect on our business.
WE MAY INCUR SIGNIFICANT EXPENSES IN AN UNSUCCESSFUL ATTEMPT TO PROMOTE AND
MAINTAIN RECOGNITION OF THE ARTUP.COM BRAND.
Our success depends in part on our ability to build the brand identity of
Artup.com and increase traffic to our network. We believe that the importance of
brand recognition will increase due to the growing number of art-related
Internet sites and the relatively low barriers to entering this market. We may
incur significant marketing costs in our effort to create and maintain a strong
brand identity among artists, galleries, distributors, and retail art
purchasers. Our business could be adversely affected if any of these
constituencies identifies the "Artup.com" name with any company other than ours.
We will require significant additional capital to build our brand identity,
distinguish the Artup.com network, and successfully grow our business. Our
business, operating results, and financial condition could be materially and
adversely affected if we cannot obtain sufficient capital for these purposes or
if we incur excessive expenses in an unsuccessful attempt to promote and
maintain recognition of the Artup.com brand.
INCREASED USE OF THE INTERNET WILL BE CRITICAL TO OUR SUCCESS.
Our current business plan and future success depend to a significant extent
on the continued growth in Internet use. Use of the Internet as a commercial
marketplace is relatively new and is rapidly evolving. Demand for and market
acceptance of products and services offered over the Internet remain uncertain.
We cannot predict whether a large enough number of galleries and art purchasers
will shift from traditional to online activities. Many factors may inhibit
Internet usage, including our ability to accurately reproduce artistic works
online, poor Internet access, unreliable performance, and security and privacy
concerns. Our business would be adversely affected if Internet usage does not
continue to grow.
OUR FAILURE TO DEVELOP AND MAINTAIN AN EFFECTIVE SALES AND MARKETING FORCE COULD
ADVERSELY AFFECT OUR BUSINESS.
We currently do not employ an experienced sales and marketing team, other
than our senior management. Establishing our sales and marketing team will
involve a number of risks, including the following:
* we have not previously employed dedicated sales and marketing
personnel,
* we may not have adequate financial and marketing resources to establish
such a team,
* we may be unable to hire, retain, integrate, and motivate sales and
marketing personnel and their support staff, and
* new sales and marketing personnel may require a substantial period of
time to become productive.
OUR FAILURE TO EFFECTIVELY MANAGE OUR GROWTH COULD IMPAIR OUR BUSINESS.
Our failure to manage our growth effectively could have a material adverse
effect on our business, operating results, and financial condition. In order to
manage our growth, we must take various steps, including the following:
* arrange necessary capital to expand our facilities and equipment,
* obtain products and services from third parties on a timely basis, and
* successfully hire, train, retain, and motivate additional employees.
We anticipate that our future growth in our operations will place a
significant strain on our management systems and resources. We will be required
to increase staffing and other expenses as well as make expenditures
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on capital equipment to attempt to meet the anticipated demand of our customers.
Sales of fine art and art-related products are subject to changing consumer
tastes. We may increase our expenditures in anticipation of future orders that
do not materialize, which would adversely affect our profitability. Demand for
unexpectedly popular products or services may increase orders on short notice,
which would place an excessive short-term burden on our resources.
WE MAY BE UNABLE TO IDENTIFY OR SUCCESSFULLY INTEGRATE POTENTIAL ACQUISITIONS.
We may wish to acquire complementary businesses, products, services, or
technologies in the future. We may not be able to identify suitable acquisition
candidates or make acquisitions on commercially acceptable terms. Any
acquisitions would be accompanied by other risks commonly encountered in such
transactions, including the following:
* difficulties related to integrating the operations and personnel of
acquired companies,
* the additional financial resources required to fund the operations of
acquired companies,
* the potential disruption of our business,
* our ability to maximize our financial and strategic position by the
incorporation of acquired technology or businesses with our product and
service offerings,
* the difficulty of maintaining uniform standards, controls, procedures,
and policies;
* the potential loss of key employees of acquired companies,
* the impairment of employee and customer relationships as a result of
changes in management, and
* the incurrence of significant expenses in consummating acquisitions.
WE MAY NOT BE ABLE TO ADAPT TO RAPIDLY CHANGING TECHNOLOGIES OR WE MAY INCUR
SIGNIFICANT COSTS IN DOING SO.
The Internet is characterized by rapidly changing technologies, evolving
industry standards, frequent new service introductions, and changing customer
demands. As a result of the rapidly changing nature of the Internet environment,
we may be subject to risks, now and in the future, of which we are not currently
aware. To be successful, we must adapt to our rapidly evolving market by
continually enhancing our network of Web sites and introducing new products and
services to address our users' changing demands. We may use new technologies
ineffectively or we may fail to adapt our network, transaction-processing
systems, and infrastructure to meet customer requirements, competitive
pressures, or emerging industry standards. We could incur substantial costs if
we need to modify our services or infrastructure. Our business could be
materially and adversely affected if we incur significant costs to adapt, or
cannot adapt, to these changes.
WE MAY BE UNABLE TO SUPPORT INCREASED VOLUME ON OUR WEB SITE.
Growth in the number of users accessing our Web site may strain or exceed
the capacity of the computer systems of our Internet hosting service and lead to
impaired performance or system failures. The current systems of our Internet
hosting service may be inadequate to accommodate rapid traffic growth on our
network. If this occurs, customer service and satisfaction may suffer, which
could lead to dissatisfied users, reduced traffic, and an adverse impact on our
business. Our Internet hosting service plans to upgrade and add to our existing
technology and network infrastructure and to implement new systems so that our
network can perform better and handle increased traffic. Failure to implement
these systems effectively or within a reasonable period of time could have a
material adverse effect on our business, operating results, and financial
condition.
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WE FACE INTENSE COMPETITION.
The fine art production and distribution market is highly competitive.
There are several large companies providing products and services similar to
ours, some of which have greater market recognition and greater financial
resources. We believe that Kato Art Studio, Colibri, and Colton Graphics
represent the primary competitors for our printing services. We believe that
Colville Publishing, Chalk & Vermillion Fine Art, and Collectors Editions
represent the primary competitors for our publishing services. We believe that
Art.com, Guild.com, Artnet.com, Barewalls.com, and NextMonet.com represent our
primary competitors for the Internet sale of fine arts products.
Larger, well-established and well-financed companies may enter the art
industry in an effort to consolidate smaller businesses and to provide online
and offline services that compete with our business. Certain of our competitors
may be able to secure merchandise from manufacturers exclusively or on more
favorable terms, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory availability policies, and
devote substantially more resources to Web site and systems development than we
can. Increased competition may result in reduced operating margins, loss of
market share, and a diminished brand franchise. New technologies and the
expansion of existing technologies may increase the competitive pressures on us.
Our ability to compete successfully depends on a number of factors both
within and outside our control, including the following:
* the quality, features, diversity, and prices of our products and
services,
* our ability to generate traffic to our Artup.com network and to develop
an online community that attracts galleries, distributors, artists, and
consumers,
* our ability to obtain new product and service offerings or distribution
channels through strategic alliances or acquisitions,
* our ability to develop and maintain effective marketing programs,
* the quality of our customer service,
* our ability to recognize industry trends and anticipate shifts in
consumer demands,
* the public recognition of our existing artists and our ability to
continue to attract new and upcoming artists,
* the continued popularity of fine art products,
* product introductions by our competitors,
* the number, nature, and success of our competitors in a given market,
and
* general market conditions.
Because these factors change rapidly, customer demand also can shift quickly. We
could experience a material adverse effect on our business, operating results,
and financial condition if we are unable to respond quickly to market changes or
a slowdown in demand for the products we sell and services we provide.
WE DO NOT HAVE FORMAL AGREEMENTS FOR SOME OF OUR IMPORTANT BUSINESS
RELATIONSHIPS.
We do not have formal written agreements that document several important
relationships on which we depend. We currently conduct our operations in a
building leased by Michael Raburn. While we currently pay the lease obligations
for this building, we are not a party to the lease and occupy the building under
an oral agreement with Mr. Raburn. We also lease our printing presses from Mr.
Raburn pursuant to an oral agreement.
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Mr. Raburn also owns the rights to the Serilith and Chromalith Replica printing
processes. While Mr. Raburn has granted us the right to use these processes,
this agreement has not been reduced to writing. To the extent that our business
depends on these arrangements, our operations could be significantly disrupted
if we are unable to continue to enforce our rights to these resources.
SERVICE FAILURES OR INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Any sustained or repeated failure or interruption in our computer systems
or the computer systems or equipment of our Internet hosting service would
reduce the appeal of our Web site to customers, galleries, and other users.
Unanticipated problems affecting these systems may cause interruptions in our
services. Interruptions or failures could result if we fail to maintain our
systems, our Internet hosting service fails to maintain its computer systems and
equipment in effective working order, or if telecommunications providers fail to
provide the capacity we require. Our Internet hosting service also must protect
its computer systems against damage from fire, power loss, water, vandalism and
other malicious acts, and similar unexpected adverse events. In addition, our
users depend on telecommunications providers, Internet service providers, and
network administrators for access to our Web site. The systems and equipment of
our Internet hosting service could experience outages, delays, and other
difficulties as a result of system failures unrelated to its systems. Any
damage, interruption, or failure that interrupts or delays our operations could
cause users to stop using our services and have a material adverse effect on our
business.
OUR NETWORK MAY BE ADVERSELY AFFECTED BY UNKNOWN SOFTWARE DEFECTS.
Our network depends on complex software developed for us by a third party.
Complex software often contains defects, particularly when first introduced or
when new versions are released. Although we conduct extensive testing, we may
not discover software defects that affect our new or current services or
enhancements until after they are deployed. These defects could cause service
interruptions, which could damage our reputation or increase our service costs,
cause us to lose revenue, delay market acceptance, or divert our development
resources, any of which could materially and adversely affect our business.
FAILURE OF OUR ONLINE SECURITY MEASURES COULD ADVERSELY AFFECT OUR BUSINESS.
As with any computer network, our network is vulnerable to computer
viruses, physical or electronic break-ins, and similar disruptions. We expect
that these problems will occur from time to time. Security breaches and
inadvertent transmissions of computer viruses could expose us to litigation or
to a material risk of loss, which could have a material adverse effect on our
business.
We rely on technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information, such as consumer credit card numbers. Unauthorized persons may be
able to compromise or breach the algorithms that we use to protect our
consumers, transaction data, or software, to misappropriate proprietary
information, or to cause interruptions in our operations. We may be required to
invest a significant amount of money and other resources to protect against
security breaches or to alleviate problems caused by any breaches that do occur.
Any well-publicized compromise of security could deter use of the Internet in
general or use of our network to conduct commercial transactions.
WE HAVE LIMITED PROTECTION OF OUR INTELLECTUAL PROPERTY, AND OTHERS COULD
INFRINGE ON OR MISAPPROPRIATE OUR RIGHTS.
Our performance and ability to compete will depend on consumer and art
industry recognition of the "Artup" brand, the quality of our internally
developed content, and software technology. We rely upon intellectual property
and related laws to protect our intellectual property. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our services or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our proprietary rights is difficult. Our failure to
adequately protect our intellectual property could materially and adversely
affect our business, operating results, and financial position.
Our business and ability to compete will depend to a significant degree on
the value of our various tradenames and marks, as well as our proprietary
technology and other rights that we own or that we license from
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third parties. Our competitors or others may adopt product or service names
similar to our service marks or trademarks, which could impede our ability to
build brand identity and could lead to customer confusion. We have not applied
for registration of our trademarks or service marks in the United States or any
other country. We may not be able to obtain effective trademark, service mark,
copyright, and trade secret protection in the United States or other countries
in which our products and services are made available online. We may find it
necessary to take legal action in the future to enforce or protect our
intellectual property rights or to defend against claims of infringement.
Litigation can be very expensive and can distract management's time and
attention, which could adversely affect our business. In addition, we may not be
able to obtain a favorable outcome in any intellectual property litigation.
WE DO NOT OWN THE PROCESSES OR TRADEMARKS ON WHICH WE RELY.
We rely on a combination of trademark laws, confidentiality procedures, and
contractual provisions to protect our intellectual property. We may receive
notices from third parties that claim the printing processes, software, or other
aspects of our business that we own or have the right to use infringe their
rights. Any future claim, with or without merit, could result in significant
litigation costs and diversion of resources, including the attention of
management, and could require us to enter into royalty and licensing agreements,
all of which could have a material adverse effect on our business, financial
condition, and results of operations. These royalty and licensing agreements, if
required, may not be available on terms acceptable to us or at all. Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversion of our management's attention and our other resources, which
could have a material adverse effect on our business, financial condition, and
results of operations.
WE MAY BE UNABLE TO ACQUIRE OR MAINTAIN THE NECESSARY WEB DOMAIN NAMES.
We currently hold several Web domain names, including "Artup.com" and
"kidspaint.com." The acquisition of similar domain names by third parties could
create confusion that diverts traffic to other Web sites, which could adversely
affect our business. The regulation of domain names in the United States and in
foreign countries is subject to change in the near future. Internet regulatory
bodies may establish additional top-level domains, appoint new or additional
domain name registrars, or modify the requirements for holding domain names. As
a result, we may be unable to acquire or maintain relevant domain names in all
countries in which we conduct business. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon, or
otherwise decrease the value of our proprietary rights.
LEGAL UNCERTAINTIES SURROUND THE DEVELOPMENT OF THE INTERNET.
There currently are few laws or regulations that specifically regulate
communications or commerce on the Internet. However, federal, state, or foreign
governments may adopt laws and regulations in the future to address issues such
as
* user privacy,
* pricing issues,
* the characteristics and quality of products and services,
* access charges,
* consumer protection issues,
* cross-border commerce, and
* transmission of certain types of information over the Internet.
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Regulation of these and other issues could increase the cost of transmitting
data over the Internet. We cannot be certain how existing laws governing issues
such as property ownership, copyrights, encryption and other intellectual
property issues, taxation, libel, obscenity, personal privacy, and export or
import matters will apply to the Internet. The vast majority of these laws were
adopted prior to the advent of the Internet and related technologies and, as a
result, do not contemplate or address the unique issues presented by the
Internet and related technologies. Those laws that do reference the Internet
have not yet been interpreted by the courts and their applicability and reach
are therefore uncertain. Any new laws or regulations relating to the Internet
could adversely affect our business.
OUR SALES COULD DECREASE IF WE BECOME SUBJECT TO ADDITIONAL SALES OR OTHER
TAXES.
Our sales and operating results could be adversely affected if one or more
states or foreign countries successfully assert that we should collect sales or
other taxes on the sale of our products over the Internet. We currently do not
collect sales or other similar taxes for physical shipments of goods into states
other than those in which we operate. One or more local, state, or foreign
jurisdictions may seek to impose sales tax collection obligations on us. In
addition, any new operations in other states or countries outside those in which
we operate could subject us to sales taxes under current or future laws. Several
proposals have been made at the state and local level that would impose
additional taxes on the sale of goods and services through the Internet. In
1998, the U.S. federal government enacted legislation prohibiting states or
other local authorities from imposing new taxes on Internet commerce until
October 21, 2001. This tax moratorium does not prohibit states or the Internal
Revenue Service from collecting taxes on our income, if any, or from collecting
existing taxes that are due under existing tax rules. A successful assertion by
one or more states or any foreign country that we should collect sales or other
taxes on the exchange of merchandise on our sites could harm our business. In
addition, a number of trade groups and government entities have publicly stated
their objections to this tax moratorium and have argued for its repeal. The
Federal Advisory Commission on electronic commerce is in the process of
evaluating these issues and is expected to make its recommendations to Congress
in April 2000. Future laws may impose taxes or other regulations on Internet
commerce. The three-year moratorium may be repealed, or the moratorium may not
be renewed when it expires. Any of these events could substantially impair the
growth of electronic commerce.
If we become obligated to collect sales taxes, we will need to update the
system that processes customers' orders to calculate the appropriate sales tax
for each customer order and to remit the collected sales taxes to the
appropriate authorities. These upgrades would increase our operating expenses.
In addition, our customers may be discouraged from purchasing products from us
if they have to pay sales tax. As a result, we may need to lower prices to
retain these customers.
WE COULD BE SUBJECT TO LIABILITY FOR INFORMATION DISPLAYED ON OUR WEB SITES.
We may be subjected to claims for obscenity, defamation, negligence,
copyright, or trademark infringement or claims based on other theories relating
to the information or reproductions of artwork we publish on our Web sites.
These types of claims have been brought, sometimes successfully, against online
services as well as other print publications in the past. We also could be
subjected to claims based upon the content that is accessible from our network
through links to other Web sites. Our insurance may not adequately protect us
against these types of claims.
WE FACE RISKS ASSOCIATED WITH "YEAR 2000" COMPLIANCE.
We depend upon complex computer software and systems to operate our Web
site. The failure of any of our software or systems to be Year 2000 compliant
could disrupt the operation of our network, our financial and management
controls, and our reporting systems, or could prevent us from being able to
process or fulfill orders from our customers.
In addition to the systems and software that we use directly, our
operations also depend on the performance of software and systems of our
third-party vendors and service providers. These include providers of Internet
hosting, financial, telecommunications, and parcel delivery services. We cannot
assure you that our service providers have, or will have, operating software and
systems that are Year 2000 compliant.
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We have conducted an analysis of our material operating software and
systems to assess and assure Year 2000 compliance. We also have communicated
with our important third-party vendors and service providers and others with
whom we do business to coordinate Year 2000 readiness. Any failure of our
computer software and systems or the systems of third parties to achieve timely
Year 2000 compliance could have a material adverse effect on our business,
operating results, and financial position.
RIGHTS TO ACQUIRE SHARES OF COMMON STOCK WILL RESULT IN DILUTION TO OTHER
HOLDERS OF COMMON STOCK.
As of December 15, 1999, warrants to acquire a total of 600,000 shares of
our common stock at an exercise price of $.01 per share were outstanding. The
number of warrants will increase to 1,200,000 if our common stock is trading for
$5.00 or less per share on October 26, 2000. If our common stock is trading
for more than $5.00 but less than $10.00 per share on October 26, 2000, the
number of warrants will increase to 900,000. In addition, we issued warrants in
connection with an employment agreement. We also have reserved 2,000,000 shares
of common stock for issuance upon exercise of stock options or other awards that
may be granted under our 1999 Incentive Stock Plan. Holders of these options and
warrants will have the opportunity to profit from an increase in the market
price of our common stock, with resulting dilution in the interests of holders
of our common stock. The existence of these stock options and warrants could
adversely affect the terms on which we can obtain additional financing, and the
option and warrant holders can be expected to exercise these options and
warrants at a time when we, in all likelihood, would be able to obtain
additional capital by offering shares of our common stock on terms more
favorable to us than those provided by the exercise of these options and
warrants.
OUR STOCK IS THINLY TRADED AND MAY EXPERIENCE PRICE VOLATILITY.
Our common stock currently is quoted in the National Quotation Bureau's
"Pink Sheets." The trading volume of our common stock historically has been
limited, and there can be no assurance that an active public market for our
common stock will be developed or sustained. The trading price of our common
stock in the past has been, and in the future could be, subject to wide
fluctuations. See Part II, Item 1, "Market Price of and Dividends on the
Registrant's Common Equity and Other Shareholder Matters." These fluctuations
may be caused by a variety of factors, including the following:
* quarterly variations in our operating results;
* actual or anticipated announcements of new products or services by us
or our competitors;
* changes in analysts' estimates of our financial performance;
* general conditions in the markets in which we compete; and
* worldwide economic and financial conditions.
The stock market in general also has experienced extreme price and volume
fluctuations that have particularly affected the market prices for many rapidly
expanding companies and often have been unrelated to the operating performance
of such companies. These broad market fluctuations and other factors may
adversely affect the market price of our common stock.
"PENNY STOCK" RULES MAY MAKE BUYING OR SELLING COMMON STOCK DIFFICULT.
Our common stock is subject to the "penny stock" rules as promulgated under
the Securities Exchange Act of 1934. These rules require any broker or dealer
engaging in a transaction in our common stock will be required to provide each
customer with a risk disclosure document, disclosure of market quotations, if
any, disclosure of the compensation of the broker-dealer and its salesperson in
the transaction, and monthly account statements showing the market values of our
securities held in the customer's accounts. The bid and offer quotation and
compensation information must be provided prior to effecting the transaction and
must be contained on the customer's confirmation. Certain brokers and dealers
are less willing to engage in transactions involving
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"penny stocks" as a result of the additional disclosure requirements described
above, which may make it more difficult for holders of our common stock to
dispose of their shares.
SALES OF LARGE NUMBERS OF SHARES COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON
STOCK.
Sales of substantial amounts of common stock by our shareholders, or even
the potential for such sales, are likely to have a depressive effect on the
market price of our common stock and could impair our ability to raise capital
through the sale of equity securities. Of the 7,623,224 shares of common stock
outstanding as of December 15, 1999, approximately 4,886,524 shares are eligible
for resale in the public market without restriction unless held by an
"affiliate" of our company, as that term is defined under applicable securities
laws. The approximately 2,736,700 remaining shares of common stock currently
outstanding are "restricted securities," as that term is defined in Rule 144
under the securities laws, and may be sold only in compliance with Rule 144,
pursuant to registration under the securities laws, or pursuant to an exemption
from the securities laws. Affiliates also are subject to certain of the resale
limitations of Rule 144. Generally, under Rule 144, each person who beneficially
owns restricted securities with respect to which at least one year has elapsed
since the later of the date the shares were acquired from us or an affiliate of
ours may, every three months, sell in ordinary brokerage transactions or to
market makers an amount of shares equal to the greater of 1% of our
then-outstanding common stock or, if the shares are quoted on a stock exchange
or Nasdaq, the average weekly trading volume for the four weeks prior to the
proposed sale of such shares. Sales under Rule 144 also are subject to certain
manner-of-sale provisions and notice requirements and to the availability of
current public information about our company. A person who is not an affiliate,
who has not been an affiliate within three months prior to sale, and who
beneficially owns restricted securities with respect to which at least two years
have elapsed since the later of the date the shares were acquired from us or
from an affiliate of ours is entitled to sell such shares under Rule 144(k)
without regard to any of the volume limitations or other requirements described
above.
WE DO NOT PLAN TO PAY CASH DIVIDENDS.
We have never paid any cash dividends on our common stock and do not
currently anticipate that we will pay dividends in the foreseeable future.
Instead, we intend to apply earnings to the expansion and development of our
business.
CHANGE IN CONTROL PROVISIONS MAY ADVERSELY AFFECT EXISTING STOCKHOLDERS.
Our articles of incorporation and Nevada law contain provisions that may
have the effect of making more difficult or delaying attempts by others to
obtain control of our company, even when those attempts may be in the best
interests of our shareholders. Our articles of incorporation also authorize our
board of directors, without shareholder approval, to issue one or more series of
preferred stock, which could have voting, liquidation, dividend, conversion, or
other rights that adversely affect or dilute the voting power of the holders of
our common stock.
OUR ACTUAL RESULTS MAY DIFFER FROM THE FORWARD-LOOKING STATEMENTS CONTAINED IN
THIS REPORT.
Certain statements and information contained in this Report concerning our
future, proposed, and anticipated activities, certain trends with respect to our
revenue, operating results, capital resources, and liquidity, or with respect to
the markets in which we compete or the fine arts industry in general, and other
statements contained in this Report regarding matters that are not historical
facts are forward-looking statements, as that term is defined in the Securities
Act of 1933. Forward-looking statements, by their very nature, include risks and
uncertainties, many of which are beyond our control. Accordingly, actual results
may differ, perhaps materially, from those expressed in or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include those discussed else where under this Part 1, Item 1,
"Description of Business - Special Considerations."
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data
and is qualified in its entirety by the more detailed Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Report. The data has
been derived from the consolidated financial statements audited by Semple &
Cooper, L.L.P., independent public accountants.
Year Ended Period Ended
September 30, September 30,
1999 1998
----------- -----------
CONSOLIDATED STATEMENTS OF OPERATIONS:
Net sales ........................................ $ 57,692 $ --
Cost and expenses:
Cost of sales .................................. (49,303) --
General, administrative, and product
development expense ........................... (1,015,480) (287,287)
Operating loss ................................... (1,002,091) (287,287)
Interest income (expense) and other, net ......... (2,913) --
Loss before income taxes ......................... (1,005,004) (287,287)
Income taxes ..................................... -- --
Net loss ......................................... $(1,005,004) $ (287,287)
=========== ===========
Basic earnings per common share and
common share equivalent (1) .................... $ (.16) $ (.10)
=========== ===========
Basic weighted average number of common shares
and common share equivalents outstanding........ 6,404,953 2,751,228
CONSOLIDATED BALANCE SHEET DATA
(AT END OF PERIOD):
Cash ............................................. $ 27,832 $ --
Working capital (deficit) ........................ (55,374) 107,479
Total assets ..................................... 995,608 128,448
Notes payable to banks and long-term debt ........ 112,649 --
Total stockholders' equity ....................... 428,590 108,448
- ----------
(1) Diluted earnings per share have not been presented as they are antidilutive.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We focus on the fine arts publishing and distribution business. We contract
with nationally recognized artists to publish original artwork in the form of
oil paintings, original lithographs, serigraphs, posters, and gift items. In
addition to the sales of original artwork, we select certain pieces to print in
the form of limited edition lithographs and serigraphs or posters that we
distribute on a wholesale or retail basis. Our distribution network consists of
retail galleries, interior designers, print sales representatives, national
trade shows, and, most recently, our Web site.
We were originally incorporated in the state of Colorado on March 31, 1997
under the name "Biovid Corporation." We were not actively engaged in any
business before August 1998, other than raising capital. We entered the fine
arts industry when we acquired Signature Editions, Inc. in August 1998. We
changed our name to "Deerbrook Publishing Group, Inc." in October 1998 and
subsequently acquired Interarts Incorporated and Cimarron Studio, Inc. In
September 1999, we changed our name to "Artup.com Network, Inc." In December
1999, we effected a merger whereby we became a Nevada corporation and changed
our name back to "Deerbrook Publishing Group, Inc."
During fiscal 1999 we derived our revenue from our printing operations and
from the sale of original works of art, prints, and posters. Cost of sales
includes maintaining our printing operations and important industry
relationships with artists, galleries, and consumers. Operating expenses include
general corporate expenses, sales salaries, product development costs, taxes,
and fringe benefits, as well as the cost of support services to the printing
operations.
RESULTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND THE PERIOD ENDED
SEPTEMBER 30, 1998
REVENUE. Revenue for the year ended September 30, 1999 totaled $57,692. We
did not have any revenue during the period from the date of inception (June 9,
1998) through September 30, 1998, as we were not actively engaged in business
prior to September 30, 1998. The increase in revenue is attributable mainly to
our acquisition of Cimarron Studio, Inc. on September 6, 1999.
COST OF GOODS SOLD; GROSS PROFIT. Cost of goods sold totaled $49,303 during
the year ended September 30, 1999. We did not have any cost of goods sold during
the period from the date of inception (June 9, 1998) through September 30, 1998,
as we were not actively engaged in business prior to September 30, 1998. Gross
profit was $8,389, or approximately 15% of revenue, in fiscal 1999.
GENERAL, ADMINISTRATIVE, AND PRODUCT DEVELOPMENT EXPENSE. General,
administrative, and product development expense increased 253% to $1,015,480 in
the year ended September 30, 1999 from $287,287 in the period from the date of
inception (June 9, 1998) through September 30, 1998. The increase is
attributable primarily to costs incurred to develop our Web site and for
professional fees.
DEPRECIATION AND AMORTIZATION. Total depreciation and amortization for the
year ended September 30, 1999 was $1,220 as compared with $0 for the period from
the date of inception (June 9, 1998) through September 30, 1998. Depreciation
and amortization of $1,220 in fiscal 1999 was included in general,
administrative, and product development expense. We anticipate that depreciation
expense will continue to increase as we expand our operations by purchasing
additional property, plant, and equipment during 2000 and subsequent years.
OTHER INCOME (EXPENSE), NET. Other expense in fiscal 1999 was $2,913. We
did not have any other income or expense in the period from the date of
inception (June 9, 1998) through September 30, 1998. Interest expense in fiscal
1999 was approximately $3,173 due to interest incurred on notes payable and
capital lease obligations. We did not have any interest expense in the period
from the date of inception (June 9, 1998) through September 30, 1998.
NET LOSS BEFORE INCOME TAXES. Net loss before income taxes for fiscal 1999
increased 250% to $1,005,004 over net loss before income taxes of $287,287 for
the period from the date of inception (June 9, 1998)
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through September 30, 1998. This increase is primarily the result of increased
general, administrative, and product development expense for fiscal 1999.
PROVISION FOR INCOME TAXES. As of September 30, 1999, we had a net
operating loss carryforward balance of approximately $1,300,000 from losses
incurred in 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital decreased to a negative position of $80,374 at
September 30, 1999 from a positive position of $107,479 at September 30, 1998.
Current assets increased to $416,137 at September 30, 1999 from $127,479 at
September 30, 1998. These increases were due primarily to increases in inventory
and prepaid expenses.
Our operating activities used net cash of $848,529 during the year ended
September 30, 1999. The major element contributing to net operating cash flow
was cash paid for product development costs.
During the period from the date of inception (June 9, 1998) through
September 30, 1998, we borrowed $20,000 pursuant to demand notes bearing
interest at the rate of 12% per annum. We repaid these notes in fiscal 1999.
During fiscal 1999, we entered into a capital lease obligation for the
purchase of computer equipment in the approximate amount of $112,000. The lease
provides for monthly rental payments of approximately $2,500 and expires in
October 2004.
During fiscal 1999, we sold an aggregate of 3,571,524 shares of common
stock for a total purchase price of $892,881, or $0.25 per share and we issued
an aggregate of 135,700 shares of common stock, valued at $33,925, or $0.25 per
share, to nine employees for services.
During fiscal 1999, we borrowed $35,000 pursuant to demand notes bearing
interest at the rate of 12% per annum. We repaid $5,000 of these notes in fiscal
1999 and repaid the balance of these notes in fiscal 2000.
During fiscal 1999, we granted a warrant to purchase 1,000,000 shares of
our common stock pursuant to an employment agreement. The warrant provided it
was immediately exercisable for 500,000 shares. We terminated the employment
agreement in September 1999 and the former employee has notified us that he
wishes to exercise the warrant with respect to the 500,000 shares that were
exercisable. We have disputed the former employee's right to exercise the
warrant and currently are in negotiations with him with respect to the shares
issuable upon exercise of the warrant.
In November 1999, we sold an aggregate of 600,000 warrants to purchase our
common stock for a total purchase price of $450,000. The warrants have an
exercise price of $.01 per share. See Part I, Item 8, "Description of Securities
- -- Warrants."
In November 1999, Keith Chesser, Mike Santellanes, and Michael Raburn
returned an aggregate of 2,345,000 shares of common stock to our company.
Messrs. Chesser, Santellanes, and Raburn returned these shares in order to
attract additional management personnel, including Mark Eaker, and to pursue
additional acquisition opportunities while minimizing the dilution to our
existing stockholders. We did not pay Messrs. Chesser, Santellanes, and Raburn
any consideration for these shares.
In November 1999, we executed a letter of intent with Mark Eaker to acquire
80% of the outstanding stock of Gregory Editions, Inc., a publisher and
distributor of fine art reproductions. The letter of intent provides for a total
purchase price of $3,300,000, consisting of $2,700,000 cash and 400,001 shares
of our common stock. The acquisition will be subject to usual and customary
conditions precedent to closing, including satisfactory completion of due
diligence reviews of the respective businesses and the negotiation and execution
of a purchase agreement.
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We currently are seeking additional sources of financing, which may include
one or more private placements of debt or equity securities. We can provide no
assurance that any additional financing will be available on terms that are
acceptable to us, if at all. Our inability to obtain such financing could result
in our inability to continue as a going concern. If such financing is not
available in sufficient amounts or on satisfactory terms, we also may be unable
to expand our business or to develop new customers at the rate desired, and the
lack of capital could have a material adverse effect on our business.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries to represent years in the date code field.
Computer systems and products that do not accept four-digit year entries will
need to be upgraded or replaced to accept four-digit entries to distinguish
years beginning with 2000 from prior years.
We have finished conducting our review of our information technology and
non-information technology systems. We purchased or leased all new information
technology, both hardware and software, during 1999 as part of our planned
business expansion. We have determined that all of this equipment is Year 2000
compliant. In addition, we have assessed all of our non-information systems and
have determined that, to the best of our knowledge, no such systems contain
embedded technology. As a result, we believe that all of our non-information
systems are also Year 2000 compliant.
We also have addressed the Year 2000 readiness of our Internet hosting
company, our payroll processor, and our bank. We have obtained verbal assurance
from all of these companies that they have completed their assessment of Year
2000 issues and that they are Year 2000 compliant.
The costs of our Year 2000 remediation program were not material to our
business due to the fact that we possess limited assets and we purchased Year
2000 compliant hardware and software as part of our planned business expansion.
We do not believe that we will incur material costs of remediation in the
future.
In our reasonably likely worst case Year 2000 scenario, our Internet
hosting service will fail due to its systems or those systems to which it is
connected. This could prevent us from being able to process or fulfill orders
from our customers, which could cause users of our Web sites to consider
alternative Web providers. In addition, purchases from our Web site are made
with credit cards, and our operations may be materially and adversely affected
to the extent our customers are unable to use their credit cards due to Year
2000 issues that are not rectified by the end of 1999.
We have not developed a comprehensive contingency plan for interruptions
related to the Year 2000 due to our comfort with our current systems and the
assurances we have received.
ITEM 3. DESCRIPTION OF PROPERTY.
Our executive offices and production facility are located at 4644 South
36th Place, Phoenix, Arizona 85040, occupying 9,606 square feet of space leased
through May 2004. This facility is leased to Michael Raburn, one of our founders
and a principal stockholder. Since May 1, 1999, we have been paying the lease
payments under a verbal agreement with Mr. Raburn. The lease provides for a
variable annual gross rent, which amounts to approximately $6,250 per month
through April 2000 and $6,625 per month for the twelve months after that, not
including our pro rata share of taxes, insurance, building maintenance and
occupancy costs. We believe our present facility is in good operating condition
and is adequate for our present and future requirements.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of December 15, 1999 by (i) each of
our directors and executive officers, (ii) all of our directors and executive
officers as a group, and (iii) each other person known by us to be the
beneficial owner of more than five percent of our common stock:
SHARES BENEFICIALLY
OWNED (1)(2)
--------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
------ -------
DIRECTORS AND EXECUTIVE OFFICERS
Mark L. Eaker (3)....................................... 1,404,667 15.8%
Keith M. Chesser........................................ 500,000 6.6%
Mike A. Santellanes..................................... 500,000 6.6%
Michael R. Raburn....................................... 500,000 6.6%
All directors and officers as
a group (four persons)(3)............................. 2,904,667 32.7%
NON-MANAGEMENT 5% STOCKHOLDER (4)
Cossack Fund LLC (5).................................... 444,067 5.8%
- ----------
(1) Except as indicated, and subject to community property laws when
applicable, the persons named in the table have sole voting and investing
power with respect to all shares of common stock shown as beneficially
owned by them. Except as otherwise indicated, each of such persons may be
reached through us at 4644 S. 36th Place, Phoenix, Arizona 85040.
(2) None of the identified persons hold stock options or warrants to acquire
our common stock.
(3) The number and percentage shown include 1,000,000 shares of common stock
issuable to Mr. Eaker pursuant to his employment agreement and 266,667
shares issuable to Mr. Eaker under his agreement to sell his shares of
Gregory Editions, Inc. to us. See Part I, Item 6, "Executive Compensation -
Employment Agreements" and Part I, Item 7, "Certain Relationships and
Related Transactions." In calculating the percentage of ownership, such
shares are deemed to be outstanding for the purpose of computing the
percentage of shares of common stock owned by Mr. Eaker and by all
directors and officers as a group, but are not deemed to be outstanding for
the purpose of computing the percentage of shares of common stock owned by
any other person.
(4) The information with respect to non-management ownership is derived from
information obtained from our transfer agent as of December 8, 1999. We
have been unable to independently verify the information presented.
(5) The address of Cossack Fund LLC is 7373 N. Scottsdale Road #162,
Scottsdale, Arizona 85253.
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ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The following table sets forth certain information regarding our directors,
executive officers, and certain key employees:
NAME AGE POSITION
- ---- --- --------
Mark L. Eaker 51 Chairman of the Board, President, and Chief
Executive Officer
Keith M. Chesser 55 Executive Vice President, Chief Financial Officer,
Secretary, and Director
Mike A. Santellanes 66 Treasurer and Director
Michael R. Raburn 48 Artistic Director
Mark L. Eaker has served as our Chairman of the Board, President, and Chief
Executive Officer since November 1999. Since 1995, Mr. Eaker has served as
President and director of Gregory Editions, Inc., a publisher and distributor of
fine art reproductions. Prior to joining Gregory Editions, from 1992 until 1995
Mr. Eaker served as President of Somerset House Publishing in Houston, Texas.
Keith M. Chesser has served as our Chief Financial Officer and Secretary
since November 1999 and as a director since October 1998. Mr. Chesser served as
our President from October 1998 until November 1999. Before joining our company,
Mr. Chesser was a Certified Public Accountant in both public and private
practice. From 1993 until 1994, Mr. Chesser served as the President of MACCS
Enterprises, Inc., an Arizona corporation that filed for reorganization under
Chapter 11 of the Bankruptcy Code in December 1994. His 25 years of management
and accounting experience includes serving as General Manager of Amarillo
Aircraft Sales and Service, Assistant Controller of UDC Homes, L.P., and Chief
Financial Officer of Empact Suicide Prevention Center.
Mike A. Santellanes has served as our Treasurer since November 1999 and as
a director since October 1998. Mr. Santellanes also served as our Vice President
from October 1998 until November 1999. Mr. Santellanes worked for Price
Waterhouse for 33 years, including 29 years with Price Waterhouse Interamerica.
Mr. Santellanes retired in June 1993 as the Senior Partner and Chairman of Price
Waterhouse Interamerica. Mr. Santellanes also served on the Board of Directors
of the Costa Rican subsidiaries of Phelps Dodge Corp., Gerber Products Co.,
Bristol-Meyers, Sterling Drug Co., Del Monte Corp., H.B. Fuller Co., and British
American Tobacco Co., and other companies. Since June 1993, Mr. Santellanes has
served as President and Financial Manager of a citrus plantation in Costa Rica.
Michael R. Raburn has served as our Artistic Director since November 1999.
Mr. Raburn also served as a director and as our Secretary and Treasurer from
October 1998 until November 1999. Before joining our company, Mr. Raburn founded
Cimarron Fine Arts Studio. Founded in 1979, Cimarron Fine Arts Studio provides
custom printing services for artists and publishers. Regarded as one of the
industry's leading Master Printmakers, Mr. Raburn has developed new and
innovative techniques, such as the Serilith(TM) and the Chromalith Replica(TM).
He is currently writing a series of articles for ART TRENDS magazine on the
subjects of prints and printmaking.
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ITEM 6. EXECUTIVE COMPENSATION.
The following table shows for the fiscal year ended September 30, 1999 the
cash compensation paid by us, as well as certain other compensation paid or
accrued by us, to our Chief Executive Officer. None of our executive officers
received aggregate compensation of more than $100,000 for fiscal 1999.
ANNUAL COMPENSATION
--------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS($) COMPENSATION ($)
- --------------------------- ---- ---------- -------- ----------------
Keith M. Chesser, President(1) 1999 $26,085 $10,000 $11,750(2)
- ----------
(1) Mr. Chesser served as our President from October 1998 until November 1999.
(2) Represents amounts paid to Mr. Chesser for services he provided to us as an
independent contractor.
We do not offer medical insurance or other benefits to our employees,
including executive officers and directors who also are our employees, with the
exception that we have agreed to provide medical insurance for Messrs. Eaker and
Chesser. See Part I, Item 6, "Executive Compensation - Employment Agreements."
1999 INCENTIVE STOCK PLAN
In November 1999, our board of directors adopted and our stockholders
approved the 1999 Incentive Stock Plan. The incentive plan provides for the
grant of incentive and nonqualified stock options to acquire common stock, the
direct grant of common stock, the grant of stock appreciation rights, or SARs,
and the grants of other stock-based awards to key personnel, directors,
consultants, independent contractors, and others providing valuable services to
us. We believe that the incentive plan represents an important factor in
attracting and retaining executive officers and other key employees, directors,
and consultants and may constitute a significant part of our compensation
program. The incentive plan provides these individuals with an opportunity to
acquire a proprietary interest in our company and thereby align their interests
with the interests of our other stockholders and to give these individuals an
additional incentive to use their best efforts for our long-term success.
We may issue up to a maximum of 2,000,000 shares of our common stock under
the incentive plan. The maximum number of shares of stock with respect to which
options or other awards may be granted to any individual employee (including
officers) during the term of the incentive plan may not exceed 50% of the shares
of common stock covered by the incentive plan. As of December 15, 1999, we have
not granted any options or other awards under the incentive plan.
The incentive plan will terminate in November 2009, and options may be
granted at any time during the life of the incentive plan. Once we become a
reporting company under the Exchange Act, the power to administer the incentive
plan with respect to our executive officers and directors and all persons who
own 10% or more of our issued and outstanding stock will rest exclusively with
the board of directors or a committee consisting of two or more non-employee
directors. The power to administer the incentive plan with respect to other
persons rests with the board of directors or a committee of the board of
directors. The plan administrator will determine when options become
exercisable, as well as the exercise prices of options. If an option is intended
to be an incentive stock option, the exercise price may not be less than 100%
(110% if the option is granted to a stockholder who at the time of the grant of
the option owns stock possessing more than 10% of the total combined voting
power of all classes of our stock) of the fair market value of the common stock
at the time of the grant.
The incentive plan is not intended to be the exclusive means by which we
may issue options or warrants to acquire our common stock, stock awards, or any
other type of award. To the extent permitted by applicable law, we may issue
additional options, warrants, or stock-based awards other than pursuant to the
incentive plan without stockholder approval.
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DIRECTORS' COMPENSATION
We currently do not compensate our directors for their services to us. We
may reimburse our directors for certain expenses in connection with attendance
at board and committee meetings.
EMPLOYMENT AGREEMENTS
We entered into a three-year employment agreement with Mark Eaker in
November 1999. The agreement provides for a base salary of $200,000 during the
first year, $275,000 during the second year, and $300,000 during the third year.
The agreement also requires us to issue 1,000,000 shares of our common stock to
Mr. Eaker. The agreement also provides for an annual bonus equal to 10% of our
pretax profit during each year of the agreement. Finally, the agreement provides
various additional benefits, such as a company car, salary continuation
insurance, and medical insurance. Because of our current financial condition, to
date Mr. Eaker has deferred payment of his salary under the agreement.
We entered into a three-year employment agreement with Keith Chesser in
November 1999. The agreement provides for a base salary of $150,000 during the
first year, $175,000 during the second year, and $200,000 during the third year.
The agreement also provides for Mr. Chesser to receive options to purchase
75,000 shares of our common stock during each year of the agreement, exercisable
at the average closing price of our common stock during the month prior to the
grant. Finally, the agreement provides various additional benefits, such as
salary continuation insurance and medical insurance. Because of current
financial condition, to date Mr. Chesser has deferred payment of 50% of his
salary under the agreement.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In November 1999, we executed a letter of intent with Mark Eaker to acquire
80% of the outstanding stock of Gregory Editions, Inc., a publisher and
distributor of fine art reproductions. The letter of intent provides for a total
purchase price of $3,300,000, consisting of $2,700,000 cash and 400,001 shares
of our common stock. The letter of intent requires us to pay a non-refundable
deposit of $750,000 cash and 266,667 shares of common stock no later than
December 15, 1999. We have not yet funded this obligation and Mr. Eaker has
extended the time for us to make this payment. The acquisition will be subject
to usual and customary conditions precedent to closing, including satisfactory
completion of due diligence reviews of the respective businesses and negotiation
and execution of a purchase agreement.
We lease printing equipment from Michael Raburn pursuant to an oral
agreement under which we pay $10,000 per month. We incurred expenses of $50,000
in fiscal 1999 under this agreement. We also conduct our operations in a
building leased by Michael Raburn. We have agreed to pay the lease obligations
for this building, although we are not a party to the lease and occupy the
building at the pleasure of Mr. Raburn. Finally, Mr. Raburn owns the rights to
the Serilith and Chromalith Replica printing processes. While Mr. Raburn has
granted us the right to use these processes, this agreement has not been reduced
to writing.
In August 1998, we agreed to issue an aggregate of 100,000 shares of common
stock to Mark Eaker as payment for consulting services rendered to us by Mr.
Eaker. We recorded a charge of $9,000 in fiscal 1998 in connection with this
transaction. We issued these shares to Mr. Eaker in January 1999.
In November 1999, Keith Chesser, Mike Santellanes, and Michael Raburn
returned an aggregate of 2,345,000 shares of common stock to our company.
Messrs. Chesser, Santellanes, and Raburn returned these shares in order to
attract additional management personnel, including Mark Eaker, and to pursue
additional acquisition opportunities while minimizing the dilution to our
existing stockholders. We did not pay Messrs. Chesser, Santellanes, and Raburn
any consideration for these shares.
27
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES.
GENERAL
Our authorized capital stock currently consists of 25,000,000 shares of
common stock, par value $.001 per share, and 10,000,000 shares of serial
preferred stock, par value $.001 per share. As of December 15, 1999, there were
7,623,224 shares of common stock issued and outstanding and no shares of serial
preferred stock issued and outstanding.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held by
them of record on our books in all matters submitted to be voted on by the
stockholders. The holders of common stock are entitled to receive such
dividends, if any, as may be declared by the board of directors from time to
time out of legally available funds. Upon our liquidation, dissolution, or
winding up, the holders of common stock will be entitled to share ratably in all
of our assets that are legally available for distribution, after payment of all
debts and other liabilities. The holders of common stock have no preemptive,
subscription, redemption, sinking fund, or conversion rights.
PREFERRED STOCK
Our board of directors is authorized, without further stockholder approval,
to issue up to an aggregate of 10,000,000 shares of preferred stock in one or
more series. The board also is able to fix or alter the designations,
preferences, rights, and any qualifications, limitations, or restrictions of the
shares of each series of preferred stock, including the following:
* dividend rates,
* redemption rights and prices,
* conversion rights and prices,
* voting rights and preferences, and
* preferences on liquidation or dissolution of our company.
There are no shares of preferred stock outstanding. We have no present
plans to issue any shares of preferred stock.
WARRANTS
In November 1999, we issued warrants to purchase 600,000 shares of our
common stock. Each warrant entitles the holder to purchase one share of our
common stock at a purchase price of $0.01. The warrants expire on October 29,
2004. The terms of the warrants provide that if our common stock is trading for
less than $10.00 per share but more than $5.00 per share on October 26, 2000, we
will be required to issue warrants to purchase an additional 300,000 shares of
common stock to the warrantholders. Alternatively, if our common stock is
trading for $5.00 or less per share on October 26, 2000, the terms of the
warrants provide that we will be required to issue warrants to purchase an
additional 600,000 shares of common stock to the warrantholders.
In August 1999, we issued a warrant to acquire 1,000,000 shares of our
common stock at a price of $0.05 per share pursuant to an employment agreement.
The warrant provided it was immediately exercisable for 500,000 shares. We
terminated the employment agreement in September 1999 and the former employee
has notified us that he wishes to exercise the warrant with respect to the
500,000 shares that were exercisable. We have disputed the former employee's
right to exercise the warrant and currently are in negotiations with him with
respect to the shares issuable upon exercise of the warrant.
28
<PAGE>
ANTI-TAKEOVER EFFECTS OF OUR ARTICLES OF INCORPORATION AND BYLAWS
Various provisions in our articles of incorporation and bylaws may delay,
defer or prevent a tender offer or takeover attempt that a stockholder might
consider to be in his or her best interest, including those attempts that might
result in a premium over the market price for the common stock.
TRANSFER AGENT AND REGISTRAR
Holladay Stock Transfer, Inc. in Scottsdale, Arizona, serves as the
transfer agent and registrar for our common stock.
29
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
Our common stock has been quoted in the National Quotation Bureau's "Pink
Sheets" under the symbol "ARTJ" since November 5, 1999. Our common stock was
previously listed on the Nasdaq OTC Bulletin Board under the symbol "ARTJE" from
October 11, 1999 until November 4, 1999, under the symbol "ARTJ" from September
24, 1999 until October 11, 1999, and under the symbol "DBPG" from October 19,
1998 until September 24, 1999. The following table sets forth the quarterly high
and low closing bid prices of our common stock for the periods indicated.
HIGH LOW
---- ---
1998:
Fourth Quarter......................................... $2.50 $0.48
1999:
First Quarter.......................................... $4.00 $0.31
Second Quarter......................................... 1.88 0.38
Third Quarter.......................................... 3.75 0.56
Fourth Quarter (Through December 15, 1999)............. 1.75 0.19
As of December 15, 1999, there were approximately 57 holders of record of
our common stock. The closing bid price of our common stock on the National
Quotation Bureau's "Pink Sheets" on December 15, 1999 was $0.34 per share.
Our policy is to retain earnings to provide funds for the operation and
expansion of our business. We have not paid cash dividends on our common stock
and do not anticipate that we will do so in the foreseeable future. The payment
of dividends in the future will depend on our growth, profitability, financial
condition, and other factors that our board of directors may deem relevant.
ITEM 2. LEGAL PROCEEDINGS.
Not applicable.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
As a result of the acquisition of Signature Editions in August 1998, the
former shareholders of Signature Editions owned more than 50% of the outstanding
voting power of our company immediately following the acquisition. Accordingly,
the acquisition has been accounted for as a reverse purchase under generally
accepted accounting principles, pursuant to which Signature Editions was
considered the acquiring company, even though our company was the controlling
legal entity. As a result, the historical financial statements of Signature
Editions prior to and after the acquisition are the historical financial
statements of our company. We therefore retained Mark Shelley, CPA, Signature
Editions' independent public accountant prior to the acquisition, to serve as
the independent public accountant for Signature Editions following the
acquisition. We also retained Mark Shelley, CPA to serve as the independent
public accountant for Interarts Incorporated. Accordingly, in May 1998, we
ceased our client-auditor relationship with Alvin H. Bender, C.P.A.
Bender's report on the financial statements of Biovid Corporation, which
are not included in this Report, for the four months ended April 30, 1998 and
the period March 31, 1997 through December 31, 1997, was prepared assuming
Biovid Corporation would continue as a going concern and raised substantial
doubt about its ability to continue as a going concern. In connection with this
audit, and subsequently to May 1998, there were no disagreements on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Bender, would have caused him to make reference to the subject
matter of the disagreement in connection with his report. Prior to retaining
Shelley, no discussions took place between our company and Shelley regarding the
application of accounting principles or
30
<PAGE>
the type of opinion that might be rendered on our financial statements since the
historical financial statements of Signature Editions, as audited by Shelley,
became the continuing historical financial statements of our company. We
authorized Bender to respond fully to inquiries from Shelley.
In anticipation of becoming a reporting company under the Exchange Act, we
determined that it was in our best interests that Semple & Cooper, LLP serve as
our independent public accountants. Accordingly, effective June 15, 1999, we
ceased our client-auditor relationship with Shelley and on September 7, 1999 we
retained Semple & Cooper as our independent public accountant. The change in
independent public accountants was approved by our board of directors.
Shelley's report on the financial statements of Signature Editions, Inc. as
of June 9, 1998 and Shelley's report on the financial statements of Interarts
Incorporated for the period from June 22, 1998 through September 30, 1998, which
are not included in this Report, did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. In connection with these audits, and
subsequently to September 7, 1999, there were no disagreements on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement, if not resolved to the satisfaction of
Shelley, would have caused him to make reference to the subject matter of the
disagreement in connection with his report. Prior to retaining Semple & Cooper,
no discussions took place between our company and Semple & Cooper regarding the
application of accounting principles or the type of opinion that might be
rendered on our financial statements. We have authorized Shelley to respond
fully to inquiries from Semple & Cooper.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
In April 1997, we sold an aggregate of 1,000,000 shares of common stock to
three individuals for a total purchase price of $2,000, or $0.002 per share. We
issued these shares pursuant to the exemption provided by Section 4(2) of the
Securities Act.
In May 1997, we sold an aggregate of 1,250,000 shares of common stock for a
total purchase price of $12,500, or $0.01 per share. We issued these shares
pursuant to the exemption provided by Rule 504 of Regulation D under the
Securities Act.
In August 1998, we issued an aggregate of 2,085,000 shares of common stock
to the stockholders of Signature Editions, Inc. in exchange for all of those
persons' shares of Signature Editions, Inc. We issued these shares pursuant to
the exemption provided by Section 4(2) of the Securities Act.
In January 1999, we issued an aggregate of 100,000 shares of common stock
to one person as payment for consulting services. We issued these shares
pursuant to the exemption provided by Rule 701 under the Securities Act.
In March 1999, we issued an aggregate of 1,926,000 shares of common stock
to the stockholders of Interarts Incorporated in exchange for all of those
persons' shares of Interarts Incorporated. We issued these shares pursuant to
the exemption provided by Section 4(2) of the Securities Act.
In April 1999, we sold an aggregate of 3,571,524 shares of common stock to
two purchasers for a total purchase price of $892,881, or $0.25 per share. We
issued these shares pursuant to the exemption provided by Rule 504 of Regulation
D under the Securities Act.
In May 1999, we issued an aggregate of 900,000 shares of common stock to
the stockholders of Cimarron Studio, Inc. in exchange for all of those persons'
shares of Cimarron Studio, Inc. We issued these shares pursuant to the exemption
provided by Section 4(2) of the Securities Act.
From July 1999 through September 1999, we issued an aggregate of 135,700
shares of common stock, valued at $33,925, or $0.25 per share, to nine of our
employees in exchange for their services. We issued these shares pursuant to the
exemption provided by Rule 701 under the Securities Act.
31
<PAGE>
In November 1999, we sold an aggregate of 600,000 warrants to purchase our
common stock to seven accredited investors for a total purchase price of
$450,000, or $0.75 per warrant. Each warrant entitles the warrantholder to
purchase one share of our common stock at a purchase price of $0.01. The
warrants expire on October 29, 2004. The warrants provide that for each 100,000
warrants we issued, the warrantholder will be entitled to receive an additional
50,000 warrants at no additional cost if our common stock is trading for less
than $10.00 per share but more than $5.00 per share on October 26, 2000. The
warrants also provide that for each 100,000 warrants we issued, the
warrantholder will be entitled to receive an additional 100,000 warrants at no
additional cost if our common stock is trading for less than $5.00 per share on
October 26, 2000. We issued these shares pursuant to the exemption provided by
Rule 505 of Regulation D under the Securities Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our articles of incorporation and bylaws provide that no director or
officer of our company shall be personally liable to us or our stockholders for
any breach of fiduciary duty by such person as a director or officer, except
that a director or officer shall be liable, to the extent provided by applicable
law, (a) for acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law, or (b) for the payment of dividends in violation of
restrictions imposed by Section 78.300 of the Nevada General Corporation Law, or
GCL. The effect of these provisions in our articles of incorporation and bylaws
is to eliminate the rights of our company and our stockholders, either directly
or through stockholders' derivative suits brought on behalf of our company, to
recover monetary damages from a director or officer for breach of the fiduciary
duty of care as a director or officer except in those instances provided under
the Nevada GCL.
In addition, our bylaws require us to indemnify and advance expenses to any
person who incurs liability or expense by reason of such person acting as a
director or officer of our company, to the fullest extent allowed by the Nevada
GCL. This indemnification is mandatory with respect to directors in all
circumstances in which indemnification is permitted by the Nevada GCL, subject
to the requirements of the Nevada GCL. In addition, we may, in our sole
discretion, indemnify and advance expenses, to the fullest extent allowed by the
Nevada GCL, to any person who incurs liability or expense by reason of such
person acting as an officer, employee or agent of our company, except where
indemnification is mandatory pursuant to the Nevada GCL, in which case we are
required to indemnify such person to the fullest extent required by the Nevada
GCL.
Sections 78.7502 and 78.751 of the Nevada GCL provide that we may indemnify
our directors and officers against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the director or officer in connection with an action, suit or proceeding in
which the director or officer has been made or is threatened to be made a party,
if the director or officer acted in good faith and in a manner which the
director or officer reasonably believed to be in or not opposed to our best
interests, and, with respect to any criminal proceeding, had no reason to
believe the director's or officer's conduct was unlawful. Any such
indemnification may be made by us only as ordered by a court or as authorized by
our stockholders or board of directors in a specific case upon a determination
made in accordance with the Nevada GCL that such indemnification is proper in
the circumstances. Indemnification may not be made under the Nevada GCL for any
claim, issue or matter as to which the director or officer has been adjudged by
a court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to us for amounts paid in settlement to us, unless and only to the
extent that the court in which the action or suit was brought or other court of
competent jurisdiction determines that in view of all the circumstances of the
case, the director or officer is fairly and reasonably entitled to indemnity for
such expenses as the court deems proper. To the extent that a director or
officer of our company has been successful on the merits or otherwise in defense
of any action, suit or proceeding or in defense of any claim, issue or defense
of any action, suit or proceeding or in defense of any claim, issue or matter
therein, the Nevada GCL requires us to indemnify the director or officer must be
indemnified under the Nevada GCL by us against expenses, including attorneys'
fees, actually and reasonably incurred by the director or officer in connection
with the defense.
PART F/S
The Financial Statements required by this Part F/S are set forth in pages
F-1 through F-32 of this Report. No supplementary financial information is
required.
32
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
2.1 Articles of Merger merging Artup.com Network, Inc., a Colorado
corporation, with and into the Registrant
3.1 Articles of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1 Specimen of Common Stock Certificate*
4.2 Specimen of Certificate for Common Stock Purchase Warrants
10.1 Master Consulting Services Agreement dated as of July 28, 1999 between
the Registrant and Integrated Information Systems, Inc.
10.2 Equipment Lease dated September 15, 1999 between the Registrant and
Copelco Capital, Inc.
10.3 Employment Agreement between the Registrant and Mark L. Eaker*
10.4 Employment Agreement between the Registrant and Keith M. Chesser*
10.5 1999 Incentive Stock Plan
16.1 Letter on change in certifying accountant from Alvin H. Bender, C.P.A.*
16.2 Letter on change in certifying accountant from Mark Shelley, CPA
21 List of Subsidiaries
23 Consent of Semple & Cooper, LLP
27.1 Financial Data Schedule for the Fiscal Year Ended September 30, 1999 and
the Period Ended September 30, 1998
- ----------
* To be filed by amendment.
ITEM 2. DESCRIPTION OF EXHIBITS.
The information required by this Item is contained in Part III, Item 1,
"Index to Exhibits."
33
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Deerbrook Publishing Group, Inc.
(Registrant)
Date: 12/17/99 By: /s/ Mark L. Eaker
------------- ------------------------------------
(Signature)
Name: Mark L. Eaker
Title: President and Chief Executive
Officer
34
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
Independent Auditors' Report.................................................. F-2
Consolidated Balance Sheets as of September 30, 1999 and 1998................. F-3
Consolidated Statements of Operations for the Year Ended September 30, 1999
and for the Period from the Date of Inception
(June 9, 1998) through September 30, 1998................................. F-5
Consolidated Statements of Stockholders' Equity for the Year Ended
September 30, 1999 and for the Period from the Date of Inception
(June 9, 1998) through September 30, 1998................................. F-6
Consolidated Statements of Cash Flows for the Year Ended September 30, 1999
and for the Period from the Date of Inception
(June 9, 1998) through September 30, 1998................................. F-7
Notes to Consolidated Financial Statements.................................... F-9
Pro Forma Condensed Consolidated Statements of Operations (Unaudited)......... F-20
INTERARTS INCORPORATED
Independent Auditors' Report.................................................. F-22
Statement of Operations for the Period October 1, 1998 through January 28,
1999 and for the Period from the Date of Inception
(June 22, 1998) through September 30, 1998................................ F-23
Statement of Stockholders' Equity for the Period from the Date of
Inception (June 22, 1998) through January 28, 1999........................ F-24
Statement of Cash Flows for the Period October 1, 1998 through January 28,
1999 and for the Period from the Date of Inception
(June 22, 1998) through September 30, 1998................................ F-25
Notes to Financial Statements................................................. F-27
CIMARRON STUDIO, INC.
Independent Auditors' Report.................................................. F-28
Statement of Operations for the Period from the Date of Inception
(May 1, 1999) through September 6, 1999................................... F-29
Statement of Stockholders' Equity for the Period from the Date of
Inception (May 1, 1999) through September 6, 1999......................... F-30
Statement of Cash Flows for the Period from the Date of Inception
(May 1, 1999) through September 6, 1999................................... F-31
Notes to Financial Statements................................................. F-32
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors
Deerbrook Publishing Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Deerbrook
Publishing Group, Inc. and Subsidiaries as of September 30, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended September 30, 1999, and for the period from the date of
inception June 9, 1998 through September 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated 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 consolidated
financial statement presentation. We believe that our audits of the consolidated
financial statements provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Deerbrook Publishing Group, Inc.
and Subsidiaries as of September 30, 1999 and 1998, and the results of its
operations, changes in stockholders' equity, and cash flows for the year ended
September 30, 1999, and for the period from the date of inception (June 9, 1999)
through September 30, 1998, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the consolidated financial statements, the Company has incurred significant
losses and at September 30, 1999, the Company had a deficiency in working
capital. These conditions raise substantial doubt as to the ability of the
Company to continue as a going concern. Management's plans in regard to these
matters are discussed in Note 10. These consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Semple & Cooper, L.L.P.
Certified Public Accountants
Phoenix, Arizona
November 10, 1999
F-2
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
ASSETS
1999 1998
-------- --------
Current Assets:
Cash and cash equivalents (Note 1) $ 27,832 $ --
Accounts receivable
- trade, net (Note 1) 41,666 --
- related entity (Note 6) -- 8,544
Prepaid expenses and other assets (Note 4) 143,900 --
Inventory (Note 1) 202,739 118,935
-------- --------
Total Current Assets 416,137 127,479
Property and Equipment, net
(Notes 1, 2 and 3) 121,153 969
Goodwill (Note 1) 458,318 --
-------- --------
Total Assets $995,608 $128,448
======== ========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-3
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
----------- -----------
Current Liabilities:
Obligation under capital lease --
current portion (Notes 1 and 3) $ 17,142 $ --
Notes payable -- related parties (Note 6) 30,000 20,000
Accounts payable 243,504 --
Accrued payroll (Note 4) 127,399 --
Other liabilities (Note 6) 53,466 --
----------- -----------
Total Current Liabilities 471,511 20,000
Long-Term Liabilities:
Obligation under capital lease --
non-current (Notes 1 and 3) 95,507 --
----------- -----------
Total Liabilities 567,018 20,000
----------- -----------
Commitments and Contingencies: (Note 4) -- --
Stockholders' Equity (Note 7)
Preferred stock, $.001 par value, 10,000,000
shares authorized; no shares issued and
outstanding -- --
Common stock, $.001 par value, 25,000,000
shares authorized; issued and outstanding
9,968,224 and 3,435,000 at September 30,
1999 and 1998, respectively 9,968 3,435
Additional paid--in capital 1,710,913 392,300
Accumulated deficit (1,292,291) (287,287)
----------- -----------
Total Stockholders' Equity 428,590 108,448
----------- -----------
Total Liabilities and Stockholders' Equity $ 995,608 $ 128,448
=========== ===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-4
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND
FOR THE PERIOD FROM THE DATE OF INCEPTION
(JUNE 9, 1998) THROUGH SEPTEMBER 30, 1998
1999 1998
----------- -----------
Revenues $ 57,692 $ --
Cost of Revenues 49,303 --
----------- -----------
Gross Profit 8,389 --
General, Administrative and Product
Development Expenses 1,010,480 287,287
----------- -----------
Operating Loss (1,002,091) (287,287)
----------- -----------
Other Income (Expense)
Miscellaneous income 260 --
Interest expense (3,173) --
----------- -----------
Total Other Income (Expense) (2,913) --
----------- -----------
Net Loss before Provision for Income Taxes (1,005,004) (287,287)
Provision for Income Taxes -- --
----------- -----------
Net Loss $(1,005,004) $ (287,287)
=========== ===========
Basic (Loss) Per Share $ (.16) $ (.10)
=========== ===========
Weighted Average Number of Shares Outstanding 6,404,953 2,751,228
=========== ===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND
FOR THE PERIOD FROM THE DATE OF INCEPTION
(JUNE 9, 1998) THROUGH SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Additional Total Stock-
Common Stock Paid-in Accumulated holders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance, June 9, 1998 -- $ -- $ -- $ -- $ --
Issuance of common stock for
inventory, cash and consulting
services 2,085,000 2,085 382,525 -- 384,610
Merger with Signature Editions 1,250,000 1,250 875 -- 2,125
Issuance of common stock for
consulting services 100,000 100 8,900 -- 9,000
Net loss, period ended
September 30, 1998 -- -- -- (287,287) (287,287)
----------- ------- ---------- ----------- -----------
Balance, September 30, 1998 3,435,000 3,435 392,300 (287,287) 108,448
Purchase of Interarts, Inc. 1,926,000 1,926 171,414 -- 173,340
Sale of common stock (Note 7) 3,571,524 3,571 889,310 -- 892,881
Issuance of common stock for services 135,700 136 33,789 -- 33,925
Purchase of Cimarron Studio, Inc. 900,000 900 224,100 -- 225,000
Net loss, year ended
September 30, 1999 -- -- -- (1,005,004) (1,005,004)
----------- ------- ---------- ----------- -----------
Balance, September 30, 1999 9,968,224 $ 9,968 $1,710,913 $(1,292,291) $ 428,590
=========== ======= ========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-6
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND
FOR THE PERIOD FROM THE DATE OF INCEPTION
(JUNE 9, 1998) THROUGH SEPTEMBER 30, 1998
1999 1998
----------- -----------
Cash flows from operating activities:
Net loss $(1,005,004) $ (287,287)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 1,220 --
Common stock issued for services
and inventory 33,925 351,610
Net assets acquired in acquisitions (62,213) --
Changes in operating assets and liabilities:
Accounts receivable
- trade (21,666) --
- related entities 8,544 (8,544)
Prepaid expenses and other assets (143,900) 125
Inventory (83,804) (118,935)
Accounts payable 243,504 --
Accrued payroll 127,399 --
Other liabilities 53,466 --
----------- -----------
Net cash used by operating activities (848,529) (63,031)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (26,520) (969)
----------- -----------
Net cash used by investing activities (26,520) (969)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 892,881 42,000
Proceeds from notes payable - related
parties 35,000 20,000
Repayment of notes payable - related
parties (25,000) --
----------- -----------
Net cash provided by financing activities 902,881 62,000
----------- -----------
Net increase (decrease) in cash and cash
equivalents 27,832 (2,000)
Cash and cash equivalents, beginning of period -- 2,000
----------- -----------
Cash and cash equivalents, end of period $ 27,832 $ --
=========== ===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-7
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND
FOR THE PERIOD FROM THE DATE OF INCEPTION
(JUNE 9, 1998) THROUGH SEPTEMBER 30, 1998
1999 1998
-------- --------
Supplemental Information
Cash paid for:
Interest $ 2,053 $ --
Income taxes -- --
Non-cash Investing and Financing:
Issuance of 2,085,000 shares of common
stock in exchange for inventory valued
at $92,610 and consulting services valued
at $250,000 -- 342,610
Issuance of 100,000 shares of common stock
for consulting services -- 9,000
Issuance of 135,700 shares of common stock
for services 33,925 --
Assets acquired through capital lease obligation 112,649 --
Excess of purchase price of subsidiaries over
fair value of net asset acquired 458,318 --
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-8
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES:
Operations:
Deerbrook Publishing Group, Inc. (the Company), formerly known as Artup.com
Network, Inc. and Biovid Corporation, was incorporated under the laws of the
State of Colorado on March 31, 1997.
The general business purpose of the Company is to publish and distribute fine
art. The Company publishes and distributes original artwork in the form of
oil paintings, original lithographs, serigraphs and posters. The distribution
network consists of retail galleries, interior designers, print sales
representatives and the national trade show circuit. The Company also
maintains a Web site where it markets fine art worldwide.
Name Change:
On October 26 1998, the Company amended its Articles of Incorporation,
changing its name to Deerbrook Publishing Group, Inc. Subsequent thereto, on
September 10, 1999, the Company amended its Articles of Incorporation,
changing its name to Artup.com Network, Inc. In December 1999 the Company
effected a name change and a change of domicile by merging with a Nevada
corporation named Deerbrook Publishing Group, Inc. The effect of this
transaction has been reflected in the financial statements as of September
30, 1999.
Acquisition of Subsidiaries:
Effective August 5, 1998, the Company acquired one hundred percent (100%) of
the outstanding common stock of Signature Editions, Inc. (a Nevada
Corporation) in exchange for one share of the common stock of the Company for
every two common shares held by the stockholders of Signature Editions, Inc.
Giving effect to the issuance of the shares, the Signature Editions, Inc.
stockholders obtained approximately 65% of the outstanding shares of
Deerbrook Publishing Group, Inc. common stock. The transaction was accounted
for as a recapitalization of Signature Editions, Inc. and a purchase of
Deerbrook Publishing Group, Inc. by Signature Editions, Inc. as Signature
Editions, Inc.'s stockholders are the controlling stockholders of the
company. The accompanying financial statements of Deerbrook Publishing Group,
Inc. include the accounts of Signature Editions, Inc. for all periods
presented, and the accounts of Deerbrook Publishing Group, Inc. from the
effective date of the merger.
Effective January 28, 1999, the Company acquired 100% of the outstanding
common stock of Interarts Incorporated (a Nevada corporation) in exchange for
one share of the common stock of the Company for each one common share held
by the stockholders of Interarts Incorporated. The business combination was
accounted for as a purchase.
F-9
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES: (Continued)
Acquisition of Subsidiaries: (Continued)
Effective September 6, 1999, the Company acquired 100% of the outstanding
common stock of Cimarron Studio, Inc. (a Nevada corporation) in exchange for
one share of the common stock of the Company for each one common share held
by the stockholders of Cimarron Studio, Inc. The business combination was
accounted for as a purchase.
Principles of Consolidation:
The consolidated balance sheet at September 30, 1999 includes the accounts of
the Company and its wholly-owned subsidiaries, Signature Editions, Inc.,
Interarts Incorporated, and Cimarron Studio, Inc.
The consolidated balance sheet at September 30, 1998 includes the accounts of
the Company and its wholly-owned subsidiary, Signature Editions, Inc.
The consolidated statements of operations and cash flows for the year ended
September 30, 1999 include the accounts of the Company and Signature
Editions, Inc. for the entire period, the accounts for Interarts Incorporated
from the date of acquisition (January 28, 1999) through September 30, 1999,
and the accounts for Cimarron Studio, Inc. from the date of acquisition
(September 6, 1999) through September 30, 1999.
The consolidated statements of operations and cash flows for the period from
the date of inception (June 9, 1998) through September 30, 1998, include the
accounts of Signature Editions, Inc. for the entire period and the accounts
of Deerbrook Publishing Group, Inc. from the date of acquisition (August 5,
1998) through September 30, 1998.
Intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates:
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results may vary from the estimates that were assumed in
preparing the financial statements.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with a maturity
of three (3) months or less to be cash and cash equivalents.
F-10
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES: (Continued)
Accounts Receivable:
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense as a
percentage of accounts receivable based on a review of the individual
accounts outstanding, and the Company's prior history of uncollectible
accounts receivable. At September 30, 1999 and 1998, no allowance has been
provided for uncollectible accounts receivable as, in the opinion of
management, all accounts receivable outstanding at September 30, 1999 and
1998 are considered fully collectible.
Inventory:
Inventory, consisting primarily of finished artwork, is stated at the lower
of cost or market. The Company periodically reviews its inventory and makes
provisions for damaged or obsolete inventory, if necessary. No provision for
damaged or obsolete inventory has been included in the accompanying financial
statements.
Property and Equipment:
Property and equipment are stated at cost, less accumulated depreciation, and
are depreciated over their estimated useful lives, as follows:
Computer and office equipment 5 years
Furniture 5 years
Depreciation is computed under the straight-line method for financial
statement purposes and under accelerated methods for income tax purposes.
Repairs and maintenance expenses are charged to operations as incurred.
Betterments or renewals are capitalized as incurred.
The Company is the lessee of computer equipment under a capital lease
agreement expiring in October 2004. The assets and liabilities under the
capital lease agreement are recorded at the lower of the present value of the
minimum lease payments or the fair value of the assets. The assets are
depreciated over their estimated useful lives. Depreciation of the assets
under the capital lease agreement is included in depreciation expense, as
noted above.
F-11
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES: (Continued)
Advertising Expense:
The Company recognizes advertising expense in accordance with Statement of
Position ("SOP") 93-7, "Reporting on Advertising Costs." As such, the Company
expenses the costs of producing advertisements at the time production occurs,
and expenses the cost of communicating advertising in the period in which the
advertising space or airtime is used. Internet advertising expenses are
recognized based on the terms of the individual agreements, but generally
over the greater of the ratio of the number of impressions delivered over the
total number of contracted impressions, or a straight-line basis over the
term of the contract. Advertising expense totaled approximately $62,000 for
the year ended September 30, 1999 and $0 for the period from the date of
inception (June 9, 1998) through September 30, 1998.
Product Development Costs:
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's Web site. Product
development costs are expensed as incurred.
Goodwill:
Goodwill represents the excess of the purchase price over the fair value of
Interarts Incorporated's and Cimarron Studio, Inc.'s net assets acquired.
Goodwill is being amortized ratably over 15-20 years. The carrying value of
goodwill will be reviewed periodically by the Company and impairments, if
any, will be recognized when expected future operating cash flows derived
from goodwill are less than its carrying value.
Net Loss Per Share:
The computation of basic net loss per share is based on the weighted average
number of common shares outstanding during the period. Diluted loss per share
amounts have not been presented as they are anti-dilutive.
Income Taxes:
The Company accounts for deferred income taxes on an accrual basis under the
liability method in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". (See Note 5).
F-12
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES: (Continued)
New Accounting Announcements:
During the year ended September 30, 1999, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
This pronouncement provides a different method of calculating earnings per
share than was required by APB No. 15, Earnings per Share. The adoption of
SFAS No. 128 did not have a material effect on the Company's financial
position.
During the year ended September 30, 1999, the Company adopted Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" (SFAS No. 129). The pronouncement reinstates various
securities disclosure requirements previously in effect under APB No. 15,
Earnings per Share, which was superseded by SFAS No. 128. The adoption of
SFAS No. 129 did not have a material effect on the Company's financial
position or results of operations.
Fair Value of Financial Instruments:
Accounts receivable, accounts and loans payable, and accrued liabilities are
substantially current or bear reasonable interest rates. As a result, the
carrying values of these financial instruments approximate fair value.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at September 30, 1999 and
1998:
1999 1998
-------- --------
Furniture and fixtures $ 5,090 $ --
Computer and office equipment 117,283 969
-------- --------
122,373 969
Less: accumulated depreciation 1,220 --
-------- --------
Net Book Value $121,153 $ 969
======== ========
Depreciation expense charged to operations was $1,220 for the year ended
September 30, 1999 and was $0 for the period from the date of inception (June
9, 1998) through September 30, 1998.
F-13
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. OBLIGATION UNDER CAPITAL LEASE:
The Company leases computer equipment with an approximate value of $112,000,
under a capital lease agreement expiring October 2004, at a rate of
approximately $2,500 per month. The computer equipment is included in
property and equipment and is being depreciated over the life of the lease.
Future minimum lease payments due under the capital lease at September 30,
1999, are as follows:
Year Ended Amount
---------- ------
2000 $ 29,664
2001 29,664
2002 29,664
2003 29,664
2004 29,664
Subsequent 2,456
---------
Total minimum lease payments 150,776
Less: amount representing interest (38,127)
---------
Present value of net minimum lease payments 112,649
Less: current maturities of capital lease
obligation (17,142)
---------
$ 95,507
=========
4. COMMITMENTS AND CONTINGENCIES:
Operating Lease:
During the year ended September 30, 1999, the Company entered into a rental
agreement for office equipment for a term of 60 months, expiring June 2004.
The agreement provides for rental payments of $182 per month. Future minimum
rental commitments on the above lease are as follows:
`
Year Ended Amount
---------- ------
2000 $ 2,184
2001 2,184
2002 2,184
2003 2,184
2004 1,638
-------
$10,374
=======
Lease expense charged to operations for the year ended September 30, 1999 was
$364.
F-14
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES: (Continued)
Advertising:
During 1999, the Company entered into a one year marketing agreement with
America Online, Inc. ("AOL"). Under the terms of the agreement, the Company
will be provided with a specific number of advertising impressions. In
consideration, the Company has committed to pay $145,620 over the one year
term of the agreement. The Company is recognizing these fees as advertising
expenses over the greater of the ratio of the number of impressions delivered
over the total number of contracted impressions, or a straight-line basis
over the term of the contract. At September 30, 1999, the Company had paid
$35,000 to AOL, which was recognized as prepaid advertising, as the
impressions will not be displayed until subsequent to September 30, 1999.
During 1999, the Company entered into two one year marketing agreements with
Go2Net, Inc. ("Go2Net"). Under the terms of the agreements, the Company will
be provided with a specific number of advertising impressions. In
consideration, the Company has committed to pay $172,800 over the one year
terms of the agreements. The Company is recognizing these fees as advertising
expenses over the greater of the ratio of the number of impressions delivered
over the total number of contracted impressions, or a straight-line basis
over the terms of the contracts. At September 30, 1999, the Company had paid
$58,800 to Go2Net, which was recognized as prepaid advertising, as the
impressions had not been displayed as of September 30, 1999.
In July 1999 the Company entered into a one year marketing agreement with
Lycos. Under the terms of the agreement the Company will be provided with a
specific number of advertising impressions. In consideration, the Company has
committed to pay approximately $39,000 over the one year term of the
agreement. The Company is recognizing these fees as advertising expenses over
the greater of the ratio of impressions delivered over the total number of
contracted impressions. As of September 30, 1999, no advertising expense had
been recognized as the impressions will not be displayed until subsequent to
September 30, 1999.
In addition, the Company has entered into a contract with Integrated
Information Systems, Inc. (IIS) to develop an interactive Web site to be used
to sell the Company's fine art worldwide. As of September 30, 1999, the
Company has incurred $425,893 in expenses pursuant to this contract. The
contract is cancellable at the discretion of the Company or IIS.
F-15
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES: (Continued)
Contingency:
During the year ended September 30, 1999, the Company had entered into an
employment agreement with an individual that provided for an employment term
of three years and included warrants to purchase up to 1,000,000 shares of
the Company's common stock at an exercise price of $.05 per share. As of
September 30, 1999, the agreement has been terminated. The Company is
currently in negotiation with the individual covered by the employment
agreement and as of the financial statement date, $100,000 has been accrued
in relation to the warrant agreement as the individual has made demand for
the exercise of 500,000 warrants (Note 7).
5. PROVISION FOR INCOME TAXES:
Deferred income taxes will be determined using the liability method for the
temporary differences between the financial reporting basis and income tax
basis of the Company's assets and liabilities. Deferred income taxes will be
measured based on the tax rates expected to be in effect when the temporary
differences are included in the Company's consolidated tax return. Deferred
tax assets and liabilities are recognized based on anticipated future tax
consequences attributable to differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases.
At September 30, 1999, deferred tax assets consist of the following:
1999 1998
--------- --------
Net operating loss carryforwards $ 196,000 $ 43,000
Less: valuation allowance (196,000) (43,000)
--------- --------
$ -- $ --
========= ========
At September 30, 1999 and 1998, the Company had federal net operating loss
carryforwards in the approximate amounts of $1,300,000 and $290,000,
respectively, available to offset future taxable income through 2018. The
Company established valuation allowances equal to the full amount of the
deferred tax assets due to the uncertainty of the utilization of the
operating losses in future periods.
F-16
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS:
Notes Payable - Related Parties:
As of September 30, 1999 and 1998, notes payable - related parties consist of
12% interest demand notes with balances of $30,000 and $20,000, respectively.
Accounts Receivable - Related Entity:
As of September 30, 1998, the Company has accounts receivable of $8,544, due
from Interarts Incorporated for expenses that were paid directly by the
Company on behalf of the related entity.
Accounts Payable - Related Entity:
At September 30, 1999, the Company has an account payable of $38,818 due to a
company owned by a stockholder, which is included in other liabilities on the
balance sheet.
Commitments:
The Company occupies office space and production facilities in Phoenix,
Arizona which is leased by a stockholder. During the year ended September 30,
1999, the Company made monthly rental payments in the approximate amount of
$6,200 plus taxes and common area maintenance charges on behalf of the
lessee, totalling approximately $8,600 for the year.
During the year ended September 30, 1999, the Company leased printing
equipment from a stockholder. Rent expense for the printing equipment was
$10,000 for the year ended September 30, 1999.
7. EQUITY:
Stock:
In December 1999 upon merging with Deerbrook Publishing Group, Inc (A Nevada
Corporation) the Company had authorized 25,000,000 shares of common stock
with a par value of $.001 in addition to 10,000,000 shares of preferred stock
with a par value of $.001. Prior to the merger, the Company had authorized
50,000,000 shares of common stock with a par value of $.001 and no preferred
stock authorized.
Private Offering:
The Company issued 3,571,524 shares of common stock at $.25 per share through
a private offering completed in April 1999. The proceeds in the amount of
$892,881 were used primarily to fund the operations of the Company's internet
division, which included $274,735 of the proceeds to contract the development
of the Company's Web site.
F-17
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EQUITY: (Continued)
Warrants:
During the year ended September 30, 1999, the Company entered into an
employment agreement which provided for an aggregate of 1,000,000 warrants,
exercisable at $.05 per share of which 500,000 were cancelled as of September
30, 1999 due to the termination of the aforementioned employment agreement.
The individual has made a demand to exercise 500,000 warrants as of September
30, 1999. The Company is currently in negotiations with the individual
covered under the warrant agreement regarding his demand to exercise same
(Note 4).
8. CONCENTRATIONS:
Major Customers:
For the year ended September 30, 1999, the Company had two major customers.
One customer represented approximately 20% of sales and the other customer
represented approximately 17% of sales. At September 30, 1999, the amount due
from the two customers included in accounts receivable was $21,666.
9. YEAR 2000 ISSUE: (Unaudited)
As with other companies, the Company could be adversely affected if the
computer systems it, its suppliers or its customers use do not properly
process and calculate date-related information and data from the period
surrounding and including January 1, 2000. This is commonly known as the
"Year 2000" issue. Additionally, this issue could impact non-computer systems
and devices such as production equipment and telephone systems. At this time,
because of complexities involved in the issue, management cannot provide
assurances that the Year 2000 issue will not have an impact on the Company's
operations.
10. GOING CONCERN:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has experienced significant losses
and negative cash flows from operations for the year ended September 30,
1999, and for the period from the date of inception (June 9, 1998) through
September 30, 1998, which have resulted in a deficiency in working capital of
approximately $55,000 and an accumulated deficit of approximately $1,300,000
as of September 30, 1999.
F-18
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. GOING CONCERN: (Continued)
There can be no assurance that the Company will be able to continue as a
going concern in view of its financial condition. The Company's continued
existence will depend upon its ability to obtain sufficient additional
capital in a timely manner to fund its operations and to further develop its
long-term business plan. Any inability to obtain additional financing will
have a material adverse effect on the Company, including possibly requiring
the Company to significantly reduce or cease its operations.
These factors raise substantial doubt about the ability of the Company to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
11. SUBSEQUENT EVENTS:
In November 1999, the Company sold 600,000 warrants at a price of $0.75 per
warrant, pursuant to Rule 505 of Regulation D under the Securities Act. The
warrants are exercisable on a basis of one warrant for one share of common
stock, with an exercise price of $.01 per share. The warrants provide that
for each 100,000 warrants issued, the warrant holder will be entitled to
receive an additional 50,000 warrants at no additional cost if the common
stock is trading for less than $10.00 per share but more than $5.00 per share
on October 26, 2000. The warrants also provide that for each 100,000 warrants
issued, the warrant holder will be entitled to receive an additional 100,000
warrants at no additional cost if the common stock is trading for $5.00 or
less per share on October 26, 2000.
On November 12, 1999, three (3) stockholders agreed to return an aggregate of
2,345,000 shares of common stock, of which 1,000,000 shares are to be issued
to an officer of the Company. In addition, the Company authorized 266,000
shares of restricted common stock to be issued to that officer. These
transactions have not been included in the financial statements as of
September 30, 1999.
In November 1999 the Company executed a Letter of Intent to purchase 80% of
the outstanding common stock of Gregory Editions, Inc. The purchase price
will be $3,300,000 payable in cash and stock.
In November 1999 the Company adopted a Stock Option Plan providing for the
granting of both qualified incentive stock options and non-qualified stock
options. The Company has reserved 2,000,000 shares of its common stock for
issuance under the Plan. Granting of the options is at the discretion of the
Board of Directors and may be awarded to employees, directors, and
independent contractors.
F-19
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
The following represents unaudited pro forma condensed consolidated
statements of operations for the year ended September 30, 1999 assuming the
acquisition of Interarts Incorporated was consummated as of October 1, 1998,
and the acquisition of Cimarron Studio, Inc. was consummated as of its date
of inception, May 1, 1999.
<TABLE>
<CAPTION>
Deerbrook
Publishing
Group Pro Forma
Inc. and Interarts Cimarron Pro Forma Consolidated
Subsidiaries Incorporated(1) Studio, Inc.(2) Adjustments Amounts
------------ --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 57,692 $ -- $ 32,334 $ 90,026
Cost of Revenues 49,303 -- 19,250 68,553
----------- --------- ----------- -----------
Gross Profit 8,389 -- 13,084 21,473
General and
Administrative Expenses 1,010,480 -- 176,079 $15,000(4) 1,201,559
----------- --------- ----------- -----------
Operating Loss (1,002,091) -- (162,995) (1,180,086)
Other Income (Expense) (2,913) -- -- (2,913)
----------- --------- ----------- -----------
Net Loss before Income
Taxes (1,005,004) -- (162,995) (1,182,999)
Benefit (Provision) for
Income Taxes -- -- -- --
----------- --------- ----------- -----------
Net Loss $(1,005,004) $ -- $ (162,995) $(1,182,999)
=========== ========= =========== ===========
Earnings (Loss) per
Share - Basic $ (.16) $ (.16)
=========== ===========
Weighted Average Number
of Shares Outstanding
(3) - Basic 6,404,953 7,410,142
=========== ===========
</TABLE>
- ----------
(1) Represents activity for the period from October 1, 1998 through January 28,
1999, the date of acquisition.
(2) Represents activity for the period from the date of inception (May 1, 1999)
through September 6, 1999, the date of acquisition.
(3) Restated to comply with FAS 128, and include stock issued/sold in the
acquisitions.
(4) Record amortization of goodwill.
F-20
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Continued)
The following represents unaudited pro forma condensed consolidated
statements of operations for the period from the date of inception (June 6,
1998) through September 30, 1998 assuming the acquisition of Interarts
Incorporated was consummated as of its date of incorporation, June 22, 1998.
<TABLE>
<CAPTION>
Deerbrook
Publishing
Group Pro Forma
Inc. and Interarts Pro Forma Consolidated
Subsidiaries Incorporated(1) Adjustments Amounts
------------ --------------- ----------- -------
<S> <C> <C> <C>
Revenues $ -- $ -- $ --
Cost of Revenues -- -- --
----------- --------- ----------
Gross Profit -- -- --
General and Administrative
Expenses 287,287 489,733 $ 2,300(3) 779,320
----------- --------- ----------
Operating Loss (287,287) (489,733) (779,320)
Other Income (Expense) -- -- --
----------- --------- ----------
Net Loss before Income
Taxes (287,287) (489,733) (779,320)
Benefit (Provision) for
Income Taxes -- -- --
----------- --------- ----------
Net Loss $ (287,287) $(489,733) $ (779,320)
========= ==========
Basic Loss per Share $ (.10) $ (.17)
========== ==========
Weighted Average Number
of Shares Outstanding
(2) - Basic 2,751,228 4,457,596
========== ==========
</TABLE>
- ----------
(1) Represents activity for the period from the date of incorporation (June 22,
1998) through September 30, 1998.
(2) Restated to comply with FAS 128, and include stock issued/sold in the
acquisitions.
(3) Record amortization of goodwill.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors
Interarts Incorporated
(A Development Stage Company)
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of Interarts Incorporated (A Development Stage Company) for the
period October 1, 1998 through January 28, 1999 and for the period from the date
of inception (June 22, 1998) through September 30, 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit of the financial statements provides a reasonable
basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the results of operations, changes in stockholders' equity, and cash
flows of Interarts Incorporated (A Development Stage Company) for the period
October 1, 1998 through January 28, 1999 and for the period from the date of
inception (June 22, 1998) through September 30, 1998, in conformity with
generally accepted accounting principles.
/s/ Semple & Cooper, L.L.P.
Certified Public Accountants
Phoenix, Arizona
November 10, 1999
F-22
<PAGE>
INTERARTS INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD OCTOBER 1, 1998 THROUGH JANUARY 28, 1999 AND
FOR THE PERIOD FROM THE DATE OF INCEPTION
(JUNE 22, 1998) THROUGH SEPTEMBER 30, 1998
1999 1998
---------- -----------
Revenues $ -- $ --
Cost Revenues -- --
---------- -----------
Gross Profit -- --
General and Administrative Expenses -- (489,733)
---------- -----------
Net Loss $ -- $ (489,733)
========== ===========
Basic Loss Per Share $ -- $ (.25)
========== ===========
Weighted Average Number of Shares Outstanding 1,926,000 1,926,000
========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-23
<PAGE>
INTERARTS INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM THE DATE OF INCEPTION
(JUNE 22, 1998) THROUGH JANUARY 28, 1999
<TABLE>
<CAPTION>
Total
Additional Stock-
Common Stock Paid--in Accumulated holders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance, June 22, 1998 -- $ -- $ -- $ -- $ --
Issuance of common stock for inventory,
cash and consulting services 1,926,000 1,926 479,574 -- 481,500
Net loss, period ended September 30, 1998 -- -- -- -- (489,733)
---------- ------ -------- --------- ---------
Balance, September 30, 1998 1,926,000 1,926 479,574 (489,733) (8,233)
Net loss, period ended January 28, 1999 -- -- -- -- --
---------- ------ -------- --------- ---------
Balance, January 28, 1999 1,926,000 $1,926 $479,574 $(489,733) $ (8,233)
========== ====== ======== ========= =========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-24
<PAGE>
INTERARTS INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD OCTOBER 1, 1998 THROUGH JANUARY 28, 1999 AND
FOR THE PERIOD FROM THE DATE OF INCEPTION
(JUNE 22, 1998) THROUGH SEPTEMBER 30, 1998
1999 1998
-------- ---------
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Net Loss $ -- $(489,733)
Adjustments to reconcile net loss to net
cash used by operating activities:
Common stock issued for services -- 432,500
Changes in Assets and Liabilities:
Inventory -- (32,240)
Due to related entities -- 40,784
-------- ---------
Net cash used by operating activities -- (48,689)
-------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 49,000
-------- ---------
Net cash provided by financing activities -- 49,000
-------- ---------
Net increase in cash and cash equivalents -- 311
Cash and cash equivalents, beginning of period -- --
-------- ---------
Cash and cash equivalents, end of period $ -- $ 311
======== =========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-25
<PAGE>
INTERARTS INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE PERIOD OCTOBER 1, 1998 THROUGH JANUARY 28, 1999 AND
FOR THE PERIOD FROM THE DATE OF INCEPTION
(JUNE 22, 1998) THROUGH SEPTEMBER 30, 1998
1999 1998
------ ------
Supplemental Information
Non-cash Investing and Financing:
Issuance of 1,730,000 shares of common stock
in exchange for consulting services $ -- $432,500
The Accompanying Notes are an Integral Part
of the Financial Statements
F-26
<PAGE>
INTERARTS INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES:
Operations:
Interarts Incorporated is a corporation which was duly formed and organized
under the laws of the State of Nevada on June 22, 1998. The Company's
principal business purpose is to promote and develop a fine art printing
business on an international basis.
The Company is in the development stage and as of January 28, 1999, sold 100%
of its common stock to Deerbrook Publishing Group, Inc.
Use of Estimates:
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results may vary from the estimates that were assumed in
preparing the financial statements.
Net Loss Per Share:
The computation of basic net loss per share is based on the weighted average
number of common shares outstanding during the period. Diluted loss per share
amounts have not been presented as they are anti-dilutive.
Year 2000 Issue:
As with other companies, Interarts Incorporated could be adversely affected
if the computer systems we, our suppliers or customers use do not properly
process and calculate date-related information and data from the period
surrounding and including January 1, 2000. This is commonly known as the
"Year 2000" issue. Additionally, this issue could impact non-computer systems
and devices such as production equipment and elevators. At this time, because
of the complexities involved in the issue, management cannot provide
assurances that the Year 2000 issue will not have an impact on the Company's
operations.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors
Cimarron Studio, Inc.
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of Cimarron Studio, Inc. for the period from the date of
inception (May 1, 1999) through September 6, 1999. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit of the financial statements provides a reasonable
basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the results of operations, changes in stockholders' equity, and cash
flows of Cimarron Studio, Inc. for the period from the date of inception (May 1,
1999) through September 6, 1999, in conformity with generally accepted
accounting principles.
/s/ Semple & Cooper, L.L.P.
Certified Public Accountants
Phoenix, Arizona
November 10, 1999
F-28
<PAGE>
CIMARRON STUDIO, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM THE DATE OF INCEPTION
(MAY 1, 1999) THROUGH SEPTEMBER 6, 1999
Revenues $ 32,334
Cost of Revenues 19,250
---------
Gross Profit 13,084
General and Administrative Expenses 176,079
---------
Net Loss $(162,995)
=========
Basic (Loss) Per Share $ (.18)
=========
Weighted Average Number of Shares Outstanding 900,000
=========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-29
<PAGE>
CIMARRON STUDIO, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM THE DATE OF INCEPTION
(MAY 1, 1999) THROUGH SEPTEMBER 6, 1999
<TABLE>
<CAPTION>
Total
Additional Stock-
Common Stock Paid-in Accumulated holders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance, May 1, 1999 -- $ -- $ -- $ -- $ --
Issuance of common stock for inventory,
cash and consulting services 900,000 900 110,350 -- 111,250
Net loss, period ended Septemer 6, 1999 -- -- -- (162,995) (162,995)
------- ---- -------- --------- ---------
Balance, Septemer 6, 1999 900,000 $900 $110,350 $(162,995) $ (51,745)
======= ==== ======== ========= =========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-30
<PAGE>
CIMARRON STUDIO, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM THE DATE OF INCEPTION
(MAY 1, 1999) THROUGH SEPTEMBER 6, 1999
Cash flows from operating activities:
Net Loss $(162,995)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Common stock issued for services and inventory 91,250
Changes in Assets and Liabilities:
Inventory (42,500)
Due to related entities 96,166
---------
Net cash used by operating activities (18,079)
---------
Cash flows from investing activities:
Purchase of property and equipment (2,235)
---------
Net cash used by investing activities (2,235)
---------
Cash flows from financing activities:
Proceeds from issuance of common stock 20,000
---------
Net cash provided by financing activities 20,000
---------
Net decrease in cash and cash equivalents (314)
Cash and cash equivalents, beginning of period --
---------
Cash and cash equivalents, end of period $ (314)
=========
Supplemental Information
Non-Cash Investing and Financing:
Issuance of 820,000 shares of common stock in exchange
for inventory valued and consulting services $ 91,250
The Accompanying Notes are an Integral Part
of the Financial Statements
F-31
<PAGE>
CIMARRON STUDIO, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES:
Operations:
Cimarron Studio, Inc. is a corporation which was duly formed and organized
under the laws of the State of Nevada on May 1, 1999. The Company's principal
business purpose is to promote and develop a fine art printing business on an
international basis. On September 6, 1999, the Company was acquired by
Deerbrook Publishing Group, Inc.
Use of Estimates:
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results may vary from the estimates that were assumed in
preparing the financial statements.
Net Loss Per Share:
The computation of basic net loss per share is based on the weighted average
number of common shares outstanding during the period. Diluted loss per share
amounts have not been presented as they are anti-dilutive.
2. RELATED PARTY TRANSACTIONS:
Commitments:
The Company occupies office space and production facilities in Phoenix,
Arizona which is leased by a stockholder. During the period ended September
6, 1999, the Company made monthly rental payments in the approximate amount
of $6,200 plus taxes and common area maintenance charges on behalf of the
lessee, totaling approximately $24,800 for the period.
During the period ended September 6, 1999, the Company leased printing
equipment from a stockholder. Rent expense for the printing equipment was
$40,000 for the period ended September 6, 1999.
Year 2000 Issue:
As with other companies, Cimarron Studio, Inc. could be adversely affected if
the computer systems we, our suppliers or customers use do not properly
process and calculate date-related information and data from the period
surrounding and including January 1, 2000. This is commonly known as the
"Year 2000" issue. Additionally, this issue could impact non-computer systems
and devices such as production equipment and elevators. At this time, because
of the complexities involved in the issue, management cannot provide
assurances that the Year 2000 issue will not have an impact on the Company's
operations.
F-32
ARTICLES OF MERGER
MERGING
ARTUP.COM NETWORK, INC.,
A COLORADO CORPORATION
WITH AND INTO
DEERBROOK PUBLISHING GROUP, INC.,
A NEVADA CORPORATION
Pursuant to Section 7-111-105 of the Colorado Business Corporation Act and
Section 92A.200 of the Nevada General Corporation Law, DEERBROOK PUBLISHING
GROUP, INC., a Nevada corporation, hereby submits the following Articles of
Merger pursuant to which ARTUP.COM NETWORK, INC., a Colorado corporation, shall
merge with and into DEERBROOK PUBLISHING GROUP, INC., a Nevada corporation (the
"Merger").
ARTICLE 1. The name and jurisdiction of the constituent corporations to the
Merger are as follows:
Artup.com Network, Inc., a Colorado corporation ("Artup.com")
Deerbrook Publishing Group, Inc., a Nevada corporation ("Deerbrook")
ARTICLE 2. Artup.com shall merge with and into Deerbrook, with Deerbrook as
the corporation surviving the Merger pursuant to a Merger Agreement and Plan of
Merger which has been adopted by resolutions of the Board of Directors of both
Artup.com and Deerbrook (the "Plan of Merger"). The merger shall be effective as
of the filing of these Articles of Merger.
ARTICLE 3. The Merger Agreement and Plan of Merger was submitted to the
shareholders of Artup.com.
The designation, number of outstanding shares and number of votes
entitled to be cast by each voting group entitled to vote separately on the
Merger Agreement and Plan of Merger are as follows:
Designation of Number of Shares Shares Entitled
Name of Corporation Class or Series Outstanding to Vote
------------------- --------------- ---------------- ---------------
Artup.com Common 9,968,244 9,968,244
Deerbrook Common -0- -0-
The total number of votes cast for and against the Merger Agreement and
Plan of Merger by the holders of the Common Stock of Artup.com (the only class
of stock of the respective corporations issued, outstanding, and entitled to
vote) is sufficient for approval by all voting groups and is as follows:
<PAGE>
Shares Voted Shares
Name of Corporation Shares Voted For Against Abstained
------------------- ---------------- ------------ ---------
Artup.com 6,138,213 -0- -0-
Deerbrook N/A N/A N/A
ARTICLE 4. A complete executed Plan of Merger is attached hereto as EXHIBIT
A.
IN WITNESS WHEREOF, the parties hereto have executed these Articles of
Merger as of the 8th day of December, 1999.
Artup.com Network, Inc.,
a Colorado corporation
By: /s/ Mark L. Eaker
------------------------------------
Name: Mark L. Eaker
Its: President and Chief Executive
Officer
By: /s/ Keith M. Chesser
------------------------------------
Name: Keith M. Chesser
Its: Secretary
Deerbrook Publishing Group Inc.,
a Nevada corporation
By: /s/ Mark L. Eaker
------------------------------------
Name: Mark L. Eaker
Its: President and Chief Executive
Officer
By: /s/ Keith M. Chesser
------------------------------------
Name: Keith M. Chesser
Its: Secretary
<PAGE>
EXHIBIT A
PLAN OF MERGER
MERGING
ARTUP.COM NETWORK, INC.
WITH AND INTO
DEERBROOK PUBLISHING GROUP, INC.
A. SURVIVING CORPORATION. Artup.com Network, Inc., a Colorado corporation
("Artup.com"), shall be merged (the "Merger") with and into Deerbrook Publishing
Group, Inc., a Nevada corporation ("Deerbrook"). Deerbrook shall be the
corporation surviving the Merger with a principal address of 4644 South 36th
Place, Phoenix, Arizona 85040.
B. RIGHTS AND OBLIGATIONS. The Merger shall be effective as of the filing
of these Articles of Merger (the "Effective Date"), and as of the Effective
Date, Deerbrook shall possess and be subject to all the rights, privileges,
powers, franchises, property (real, personal and mixed), restrictions,
disabilities, duties and debts of Artup.com and Deerbrook.
C. OFFICERS. The officers of Deerbrook immediately prior to the Effective
Date shall be the officers of Deerbrook as of and after the Effective Date, and
each of them shall hold office until their respective successor is elected and
qualified, or until their earlier resignation or removal.
D. DIRECTORS. The directors of Deerbrook immediately prior to the Effective
Date shall be the directors of Deerbrook, and each of them shall hold office
until their respective successor is elected and qualified, or until their
earlier resignation or removal.
E. BYLAWS. The Bylaws of Deerbrook that are in effect immediately prior to
the Effective Date shall be the Bylaws of Deerbrook as of and after the
Effective Date.
F. ARTICLES OF INCORPORATION. The Articles of Incorporation of Deerbrook
that are in effect immediately prior to the Effective Date shall be the Articles
of Incorporation of Deerbrook as of and after the Effective Date.
G. EXCHANGE OF SHARES. As of the Effective Date, all issued and outstanding
shares of Artup.com shall become issued and outstanding shares of Deerbrook at a
rate of one (1) share of Deerbrook for each share of Artup.com issued and
outstanding; provided, however, no fractional shares of Deerbrook shall be
issued and therefore all fractional shares of Deerbrook after the conversion
shall be rounded to the nearest whole number. No further action of the
shareholders of Artup.com is required to effect the conversion.
H. ABANDONMENT. This Merger Agreement and Plan of Merger may be abandoned
at any time prior to the Effective Date by action of the Board of Directors of
either Artup.com or Deerbrook.
This Plan of Merger was adopted and approved by the Board of Directors of
Artup.com by Unanimous Written Consent in Lieu of a Special Meeting of the Board
of
<PAGE>
Directors of Artup.com, dated as of December 8, 1999, and by the Board of
Directors of Deerbrook by Unanimous Written Consent in Lieu of a Special Meeting
of the Board of Directors of Deerbrook, dated as of December 8, 1999.
IN WITNESS WHEREOF, the parties hereto have executed this Plan of Merger as
of the 8th day of December, 1999.
Artup.com Network, Inc.,
a Colorado corporation
By: /s/ Mark L. Eaker
------------------------------------
Name: Mark L. Eaker
Its: President and Chief Executive
Officer
By: /s/ Keith M. Chesser
------------------------------------
Name: Keith M. Chesser
Its: Secretary
Deerbrook Publishing Group Inc.,
a Nevada corporation
By: /s/ Mark L. Eaker
------------------------------------
Name: Mark L. Eaker
Its: President and Chief Executive
Officer
By: /s/ Keith M. Chesser
------------------------------------
Name: Keith M. Chesser
Its: Secretary
ARTICLES OF INCORPORATION
OF
DEERBROOK PUBLISHING GROUP, INC.
ARTICLE 1. The name of the corporation shall be DEERBROOK PUBLISHING GROUP,
INC. (the "Corporation").
ARTICLE 2. The Corporation's principal office in the State of Nevada is
located at 202 South Minnesota Avenue, Carson City, Nevada 89703. The name and
street address of its resident agent is Capitol Document Services, Inc., 202
South Minnesota Avenue, Carson City, Nevada 89703.
ARTICLE 3. The purpose for which the Corporation is organized is the
transaction of any and all lawful business for which corporations may be
incorporated under the Nevada General Corporation Law, as it may be amended from
time to time (the "General Corporation Law").
ARTICLE 4. The Corporation shall be authorized to issue two classes of
shares of capital stock, to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares of Common Stock and Preferred
Stock that the Corporation shall have authority to issue is thirty-five million
(35,000,000) of which twenty-five million (25,000,000) shares shall be Common
Stock and ten million (10,000,000) shall be Preferred Stock. The par value of
the shares of Common Stock is One Tenth of One Cent ($0.001) per share. The par
value of the shares of Preferred Stock is One Tenth of One Cent ($0.001) per
share.
The shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby authorized, by filing a
certificate pursuant to the applicable law of the State of Nevada, to establish
from time to time the number of shares to be included in each series, and to fix
the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations, or restrictions thereof, including,
but not limited to, the fixing or alteration of the dividend rights, dividend
rate, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices, and the
liquidation preferences of any wholly unissued series of shares of Preferred
Stock, or any of them; and to increase or decrease the number of shares of any
series subsequent to the issue of the shares of that series, but not below the
number of shares of that series then outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status they had prior to the adoption of the resolution originally
fixing the number of shares of that series.
ARTICLE 5. The governing board of the Corporation shall be known as
directors, and the number of directors may be increased or decreased from time
to time as set forth in the bylaws of the Corporation. The initial board of
directors shall consist of three (3) members. The names and addresses of the
persons who are to serve as members of the initial board of directors until
their successors are elected and qualified or until their earlier resignation or
removal are:
<PAGE>
Name Address
---- -------
Mark L. Eaker 4644 South 36th Place
Phoenix, Arizona 85040
Keith M. Chesser 6815 South McClintock, #2213
Tempe, Arizona 85283
Michael A. Santellanes 190 West Calle de Caballos
Tempe, Arizona 85284
ARTICLE 6. The personal liability of any director of the Corporation to the
Corporation or its stockholders for damages for breach of fiduciary duties as a
director is hereby eliminated to the fullest extent allowed by the General
Corporation Law.
ARTICLE 7. The names and positions of the persons who are to serve as the
initial officers of the Corporation, until their successors are duly elected and
qualified or until their earlier resignation or removal are:
Name Office
---- ------
Mark L. Eaker President and Chief Executive Officer
Keith M. Chesser Executive Vice President, Chief
Financial Officer and Secretary
Michael A. Santellanes Treasurer
ARTICLE 7. Keith M. Chesser, 6815 South McClintock, #2213, Tempe, Arizona
85283 is the sole Incorporator of the Corporation.
THE UNDERSIGNED, being the sole incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law, does
make and file these articles of incorporation, hereby declaring and certifying
that the facts herein stated are true, and accordingly has hereunto set his hand
this 2nd day of December, 1999.
/s/ Keith M. Chesser
---------------------------------------
Keith M. Chesser, Incorporator
The foregoing instrument was executed by Keith M. Chesser in the presence
of a notary public in and for the State of Arizona this 2nd day of December,
1999.
/s/ Jamie Sue Pratt
---------------------------------------
Notary Public
<PAGE>
CERTIFICATE OF ACCEPTANCE OF APPOINTMENT OF RESIDENT AGENT
DEERBROOK PUBLISHING GROUP, INC.
Capitol Document Services, Inc. hereby accepts appointment as Resident
Agent for the above named corporation. Capitol Document Services, Inc.
By: /s/ Lee Ann Brooks
-----------------------------------
Its: /s/ Corporate Paralegal
-----------------------------------
DEC. 3, 1999
- -------------------
Date
================================================================================
BYLAWS
OF
DEERBROOK PUBLISHING GROUP, INC.
A NEVADA CORPORATION
ADOPTED AS OF DECEMBER 8, 1999
================================================================================
<PAGE>
DEERBROOK PUBLISHING GROUP, INC.
BYLAWS
TABLE OF CONTENTS
Page
ARTICLE I
OFFICES
Section 1. Principal Office..................................................1
Section 2. Other Offices.....................................................1
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings.................................................1
Section 2. Annual Meetings...................................................1
Section 3. Special Meetings..................................................1
Section 4. Notice of Meetings................................................1
Section 5. Purpose of Meetings...............................................2
Section 6. Quorum............................................................2
Section 7. Record Date.......................................................2
Section 8. Voting............................................................2
Section 9. Consent of Stockholders in Lieu of Meeting........................3
ARTICLE III
DIRECTORS
Section 1. Powers............................................................3
Section 2. Number and Term of Office.........................................3
Section 3. Place of Meetings.................................................3
Section 4. Annual Organizational Meeting.....................................3
Section 5. Regular Meetings..................................................4
Section 6. Special Meetings..................................................4
Section 7. Quorum............................................................4
Section 8. Committees........................................................4
Section 9. Action of Directors in Lieu of Meeting............................4
Section 10. Compensation......................................................4
-i-
<PAGE>
Page
ARTICLE IV
NOTICES
Section 1. Notice, What Constitutes..........................................5
Section 2. Waiver of Notice..................................................5
ARTICLE V
OFFICERS
Section 1. Number and Qualifications.........................................5
Section 2. Compensation......................................................5
Section 3. Term of Office....................................................6
Section 4. Subordinate Officers, Committees and Agents.......................6
Section 5. The President.....................................................6
Section 6. The Vice President................................................6
Section 7. The Secretary.....................................................6
Section 8. The Treasurer.....................................................6
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Issuance..........................................................7
Section 2. Transfer Agent and Registrar......................................7
Section 3. Lost Certificates.................................................7
Section 4. Transfer of Stock.................................................7
Section 5. Registered Stockholders...........................................8
ARTICLE VII
GENERAL PROVISIONS
Section 1 Indemnification...................................................8
Section 2. Directors's and Officers Liability................................8
Section 3. Dividends.........................................................8
Section 4. Reserves..........................................................8
Section 5. Checks............................................................9
Section 6. Fiscal Year.......................................................9
Section 7. Seal..............................................................9
Section 8. Amendments........................................................9
-ii-
<PAGE>
BYLAWS
OF
DEERBROOK PUBLISHING GROUP, INC.
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. The principal office shall be in the City and
County of Carson City, State of Nevada.
SECTION 2. OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Nevada.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of the stockholders shall be held at
such time and place within or without the State of Nevada as shall be designated
from time to time by the board of directors.
SECTION 2. ANNUAL MEETINGS. Annual meetings of stockholders, commencing
with the year 2000, shall be held on the second Friday in February of each
calendar year, if not a legal holiday, and if a legal holiday, then on the next
secular day following, at 11:00 a.m., at which the stockholders shall elect by a
plurality vote, a board of directors, and transact such other business as may
properly be brought before the meeting.
SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the articles
of incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the board of
directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the Corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
SECTION 4. NOTICE OF MEETINGS. Notices of meetings shall be in writing and
signed by the president or a vice president, or the secretary, or an assistant
secretary, or by such other person or persons as the directors shall designate.
Such notice shall state the purpose or purposes for which the meeting is called
and the time and place where it is to be held, which may be within or without
the State of Nevada. A copy of such notice shall be either delivered personally
or shall be mailed, postage prepaid, to each stockholder of record entitled to
vote at such meeting not less than ten (10) nor more than sixty (60) days before
such meeting. If mailed, it shall be directed to a stockholder at his address as
it appears upon the records of the Corporation and upon such mailing of any such
notice, the service thereof shall be complete, and the time of the notice shall
begin to run from the date upon which such notice is deposited in the mail for
transmission to
1
<PAGE>
such stockholder. In the event of the transfer of stock after delivery or
mailing of the notice of, and before the holding of, the meeting, it shall not
be necessary to deliver or mail notice of the meeting to the transferee.
SECTION 5. PURPOSE OF MEETINGS. Business transacted at any special meeting
of stockholders shall be limited to the purposes stated in the notice.
SECTION 6. QUORUM. Stockholders holding at least a majority of the voting
power, present in person or represented by proxy, shall constitute a quorum at
all meetings of the stockholders for the transaction of business except as
otherwise provided by statute or by the articles of incorporation. If, however,
such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted which might have been
transacted at the meeting as originally notified.
SECTION 7. RECORD DATE. The board of directors may prescribe a period not
exceeding sixty (60) days before any meeting of the stockholders during which no
transfer of stock on the books of the Corporation may be made, or may fix a day
not more than sixty (60) days before the holding of any such meeting as the day
as of which stockholders entitled to notice of and to vote at such meetings must
be determined. Only stockholders of record on that day are entitled to notice or
to vote at such meeting.
SECTION 8. VOTING.
(a) An act of stockholders who hold at least a majority of the voting
power and are present at a meeting at which a quorum is present is the act of
the stockholders unless the statutes or articles of incorporation provide for
different proportions.
(b) Except as hereinafter provided, every stockholder of record of the
Corporation shall be entitled at each meeting of stockholders to one vote for
each share of stock standing in his name on the books of the Corporation.
(c) At any meeting of the stockholders, any stockholder may designate
another person or persons to act as a proxy or proxies as provided by law. If
any stockholder designates two or more persons to act as proxies, a majority of
those persons present at the meeting, or, if only one shall be present, then
that one shall have and may exercise all of the powers conferred by such
stockholder upon all of the persons so designated unless the stockholder shall
otherwise provide. No such proxy shall be valid after the expiration of six (6)
months from the date of its creation, unless it is coupled with an interest, or
unless the stockholder specifies in it the length of time for which it is to
continue in force, which may not exceed seven (7) years from the date of its
creation. Subject to the above, any proxy properly created is not revoked and
continues in full force and effect until another instrument or transmission
revoking it or a properly created proxy bearing a later date is filed with or
transmitted to the secretary of the Corporation or another person or persons
appointed by the Corporation to count the votes of stockholders and determine
the validity of proxies and ballots.
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SECTION 9. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. At any time that any
shares of the Corporation's capital stock are registered under the Securities
Exchange Act of 1934, as amended, no action that is required or permitted to be
taken by the stockholders of the Corporation at any annual or special meeting of
stockholders may be effected by written consent of stockholders in lieu of a
meeting of stockholders, unless the action to be effected by written consent of
stockholders and the taking of such action by such written consent have
expressly been approved in advance by the board of directors.
ARTICLE III
DIRECTORS
SECTION 1. POWERS. The business of the Corporation shall be managed by its
board of directors which may exercise all such powers of the Corporation and do
all such lawful acts and things as are not by statute, by the articles of
incorporation, or by these bylaws directed or required to be exercised or done
by the stockholders.
SECTION 2. NUMBER AND TERM OF OFFICE.
(a) The number of directors shall be not less than one (1) nor more
than nine (9). The number of directors may be increased or decreased from time
to time by resolution of the board of directors, but no decrease in the number
shall change the term of any director in office at the time thereof. The
directors shall be elected at the annual meeting of the stockholders, and except
as provided in Section 2(b) of this article, each director elected shall hold
office until his successor is elected and qualified. Directors need not be
stockholders.
(b) Vacancies, including those caused by an increase in the number of
directors, may be filled by a majority of the remaining directors though less
than a quorum. When one or more directors shall give notice of his or their
resignation to the board of directors, effective at a future date, the board of
directors shall have power to fill such vacancy or vacancies to take effect when
such resignation or resignations shall become effective, each director so
appointed to hold office during the remainder of the term of office of the
resigning director or directors.
(c) Any director may be removed from office by the vote of
stockholders representing not less than two-thirds (2/3) of the voting power of
the issued and outstanding stock entitled to voting power, except that (i) if
the articles of incorporation provide for the election of directors by
cumulative voting, no director may be removed from office under the provisions
of this section except upon the vote of stockholders owning sufficient shares to
have prevented his election to office in the first instance, and (ii) if the
articles of incorporation require the occurrence of a larger percentage of stock
entitled to voting power in order to remove a director.
SECTION 3. PLACE OF MEETINGS. The board of directors of the Corporation may
hold meetings, both regular and special, either within or without the State of
Nevada.
SECTION 4. ANNUAL ORGANIZATIONAL MEETING. The first meeting of each newly
elected board of directors shall be held within thirty (30) days after the
adjournment of the annual meetings of stockholders. No notice of such meeting
shall be necessary to be given to the newly
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elected directors in order to legally constitute the meeting, provided a quorum
shall be present. In the event such meeting is not held, the meeting may be held
at such time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the board of directors, or as shall be
specified in a written waiver signed by all of the directors.
SECTION 5. REGULAR MEETINGS. Meetings of the board of directors may be held
without notice at such time and place as shall from time to time be determined
by the board of directors.
SECTION 6. SPECIAL MEETINGS. Special meetings of the board of directors may
be called by the president or secretary on the written request of two directors.
Written notice of special meetings of the board of directors shall be given to
each director by telephone or in writing at least twenty-four (24) hours (in the
case of notice by telephone) or forty-eight (48) hours (in the case of notice by
telegram) or three (3) days (in the case of notice by mail) before the time at
which the meeting is to be held. Every such notice shall state the date, time
and place of the meeting, but need not describe the purpose of the meeting
unless required by the articles of incorporation, these bylaws or provided by
law.
SECTION 7. QUORUM. A majority of the board of directors, at a meeting duly
assembled, shall be necessary to constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which a quorum is present shall be the act of the board of directors, except as
may be otherwise specifically provided by statute or by the articles of
incorporation.
SECTION 8. COMMITTEES.
(a) The board of directors may, by resolution passed by a majority of
the whole board of directors, designate one or more committees, each committee
to consist of one or more of the directors of the Corporation, which, to the
extent provided in the resolution, shall have and may exercise the powers of the
board of directors in the management of the business and affairs of the
Corporation, and may have power to authorize the seal of the Corporation to be
affixed to all papers which may require it. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the board of directors. The board of directors may appoint natural
persons who are not directors to serve on committees.
(b) The committees shall keep regular minutes of their proceedings and
report the same to the board of directors when required.
SECTION 9. ACTION OF DIRECTORS IN LIEU OF MEETING. Any action required or
permitted to be taken at any meeting of the board of directors or of any
committee thereof may be taken without a meeting if, before or after the action,
a written consent thereto is signed by all the members of the board of directors
or of the committee, as the case may be, and the written consent is filed with
the minutes of proceedings of the board of directors or committee.
SECTION 10. COMPENSATION. The directors may be paid their expenses, if any,
of attendance at each meeting of the board of directors and may be paid a fixed
sum for attendance at each meeting of the board of directors or a stated salary
as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation
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therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
ARTICLE IV
NOTICES
SECTION 1. NOTICE, WHAT CONSTITUTES. Notices to directors and stockholders
shall be in writing and delivered personally or mailed to the directors or
stockholders at their addresses appearing on the books of the Corporation.
Notice by mail shall be deemed to be given at the time when the same shall be
mailed. Notice to directors may also be given by telegram, facsimile or
telephone.
SECTION 2. WAIVER OF NOTICE.
(a) Whenever all parties entitled to vote at a meeting, whether of
directors or stockholders, consent, either by a writing on the records of the
meeting or filed with the secretary, or by presence at such meeting and oral
consent entered on the minutes, or by taking part in the deliberations at such
meeting without objection, the doings of such meetings shall be as valid as if
had at a meeting regularly called and noticed, and at such meeting any business
may be transacted which is not excepted from the written consent or to the
consideration of which no objection for want of notice is made at the time, and
if any meeting be irregular for want of notice or of such consent, provided a
quorum was present at such meeting, the proceedings of said meeting may be
ratified and approved and rendered likewise valid and the irregularity or defect
therein waived by a writing signed by all parties having the right to vote at
such meetings; and such consent or approval of stockholders may be by proxy or
attorney, but all such proxies and powers of attorney must be in writing.
(b) Whenever any notice whatever is required to be given under the
provisions of the statutes, the articles of incorporation or these bylaws, a
waiver thereof in writing, signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
SECTION 1. NUMBER AND QUALIFICATIONS. The officers of the Corporation shall
be chosen by the board of directors at its first meeting and thereafter after
each annual meeting of stockholders. The officers to be elected shall include a
president, a secretary and a treasurer. Any person may hold two or more offices.
The board of directors may also appoint vice presidents and additional officers
or assistant officers as it shall deem necessary.
SECTION 2. COMPENSATION. The salaries of all officers and agents of the
Corporation shall be fixed by the board of directors.
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SECTION 3. TERM OF OFFICE. The officers of the Corporation shall hold
office until their successors are chosen and qualify. Any officer elected or
appointed by the board of directors may be removed at any time by the
affirmative vote of a majority of the board of directors. Any vacancy occurring
in any office of the Corporation by death, resignation, removal or otherwise
shall be filled by the board of directors.
SECTION 4. SUBORDINATE OFFICERS, COMMITTEES AND AGENTS. The board of
directors may elect any other officers and appoint any committees, employees or
other agents as it desires who shall hold their offices for the terms and shall
exercise the powers and perform the duties as shall be determined from time to
time by the board of directors to be required by the business of the
Corporation. The directors may delegate to any officer or committee the power to
elect subordinate officers and retain or appoint employees or other agents.
SECTION 5. THE PRESIDENT. The president shall be the chief executive
officer of the Corporation, shall preside at all meetings of the stockholders
and the board of directors, shall have general and active management of the
business of the Corporation, and shall see that all orders and resolutions of
the board of directors are carried into effect. He shall execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the board of directors to some other officer or agent of
the Corporation.
SECTION 6. THE VICE PRESIDENT. If appointed, the vice president shall, in
the absence or disability of the president, perform the duties and exercise the
powers of the president and shall perform such other duties as the board of
directors may from time to time prescribe.
SECTION 7. THE SECRETARY. The secretary shall attend all meetings of the
board of directors and all meetings of the stockholders and record all the
proceedings of the meetings of the Corporation and of the board of directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the board of
directors, and shall perform such other duties as may be prescribed by the board
of directors or president, under whose supervision he shall be. He shall keep in
safe custody the seal of the Corporation and, when authorized by the board of
directors, affix the same to any instrument requiring it and, when so affixed,
it shall be attested by his signature or by the signature of the treasurer or an
assistant secretary.
SECTION 8. THE TREASURER. The treasurer shall have the custody of the
corporate funds and securities and shall keep in full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the board of
directors. He shall disburse the funds of the Corporation as may be ordered by
the board of directors taking proper vouchers for such disbursements, and shall
render to the president and the board of directors, at the regular meetings of
the board of directors, or when the board of directors so requires, an account
of all his transactions as treasurer and of the financial condition of the
Corporation. If required by the board of directors, he shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the board of directors for the
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faithful performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
ARTICLE VI
CERTIFICATES OF STOCK
SECTION 1. ISSUANCE. Every stockholder shall be entitled to have a
certificate, signed by the president or a vice president and the treasurer or an
assistant treasurer, or the secretary or an assistant secretary of the
Corporation, certifying the number of shares owned by him in the Corporation.
When the Corporation is authorized to issue shares of more than one class or
more than one series of any class, there shall be set forth upon the face or
back of the certificate, or the certificate shall have a statement that the
Corporation will furnish to any stockholder upon request and without charge, a
full or summary statement of the voting powers, designations, preferences,
limitations, restrictions and relative rights of the various classes of stock or
series thereof. If any officer or officers who shall have signed, or whose
facsimile signature or signatures shall have been used on, any such certificate
or certificates shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates shall have been delivered by the Corporation, such certificate or
certificates may nevertheless be adopted by the Corporation and be issued and
delivered as though the person or persons who signed such certificate or
certificates, or whose facsimile signature or signatures shall have been used
thereon, had not ceased to be the officer or officers of such Corporation.
SECTION 2. TRANSFER AGENT AND REGISTRAR. Whenever any certificate is
countersigned or otherwise by a transfer agent or transfer clerk, and by a
registrar, then a facsimile of the signatures of the officers or agents of the
Corporation may be printed or lithographed upon such certificate in lieu of the
actual signatures.
SECTION 3. LOST CERTIFICATES. The board of directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost or destroyed. When authorizing such issuance
of a new certificate or certificates, the board of directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require and/or
give the Corporation a bond in such sum as it may direct as indemnity against
any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost or destroyed.
SECTION 4. TRANSFER OF STOCK. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a
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new certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
SECTION 5. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Nevada.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. INDEMNIFICATION. The Corporation, to the maximum extent
permitted by the Nevada General Corporation Law, as amended from time to time,
shall indemnify any member of the board of directors, officer, or agent, or any
former member of the board of directors, officer, or agent of the Corporation,
who was or is a party or is threatened to be made a party to any contemplated,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by or in the right of the
Corporation) by reason of the fact that he or she is or was an authorized
representative of the Corporation, against expenses (including, without
limitation, attorneys' and witness fees and court costs), judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit, or proceeding if he or she acted in good
faith, or failed to act, and in a manner he or she reasonably believed to be in,
or not opposed to, the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The termination of any action, suit, or proceeding, by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person
acted, or failed to act, in good faith and in a manner which he or she
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal proceeding, that he or she did
not have reasonable cause to believe that his or her conduct was unlawful.
SECTION 2. DIRECTORS' AND OFFICERS' LIABILITY. The personal liability of
any director or officer of the Corporation to the Corporation or its
stockholders for damages for breach of fiduciary duties as a director is hereby
eliminated to the fullest extent allowed by the Nevada General Corporation Law,
as it may be amended from time to time.
SECTION 3. DIVIDENDS. Dividends upon the capital stock of the Corporation,
subject to the provisions of the articles of incorporation, if any, may be
declared by the board of directors at any regular or special meeting pursuant to
law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the articles of incorporation.
SECTION 4. RESERVES. Before payment of any dividend, there may be set aside
out of any funds of the Corporation available for dividends such sum or sums as
the directors from time to
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time, in their absolute discretion, think proper as a reserve or reserves to
meet contingencies, or for equalizing dividends, or for repairing or maintaining
any property of the Corporation, or for such other purpose as the directors
shall think conducive to the interest of the Corporation, and the directors may
modify or abolish any such reserves in the manner in which it was created.
SECTION 5. CHECKS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
SECTION 6. FISCAL YEAR. The fiscal year of the Corporation shall be fixed
by resolution of the board of directors.
SECTION 7. SEAL. The Corporation may have a corporate seal in the form of a
circle containing the name of the Corporation, the year of incorporation and
such other details as may be approved by the board of directors. Nothing in
these bylaws shall require the impression of a corporate seal to establish the
validity of any document executed on behalf of the Corporation.
SECTION 8. AMENDMENTS. These bylaws may be altered or repealed at any
regular meeting of the stockholders or of the board of directors or at any
special meeting of the stockholders or of the board of directors if notice of
such alteration or repeal be contained in the notice of such special meeting.
9
NO. W ARTUP.COM NETWORK, INC. WARRANTS
______ Incorporated Under the Laws of the State of Colorado ______
CERTIFICATE FOR COMMON STOCK PURCHASE WARRANTS
THIS CERTIFIES THAT FOR VALUE RECEIVED
Or registered assigns (the "Warrant Holder"), is the registered owner of the
above indicated number of Common Stock Purchase Warrants (the "Warrants")
expiring October 29, 2004 (the "Expiration Date). One (1) Warrant entitles the
Warrant Holder to purchase one (1) share of common stock, $0.001 par value
("Share"), from Artup.com Network, Inc., a Colorado corporation (the "Company"),
at a purchase price of $0.01 (the "Exercise Price"), commencing on October 29,
1999, and terminating on the Expiration Date (the "Exercise Period"), upon
surrender of this Warrant Certificate with the exercise form hereon duly
completed and executed with payment of the Exercise Price at the Office of
Holladay Stock Transfer, Inc. (the "Warrant Agent"), but only subject to the
conditions set forth herein and in a Private Placement Memorandum dated as of
October 26, 1999 (the "Memorandum"); provided, however, if the price at which
the Company's common stock is trading on October 26, 2000 is less than $10 per
share but more than $5 per share, the Company shall issue to each Warrant Holder
who purchases a unit of 100,000 Warrants, 50,000 additional warrants at no
additional cost for the Warrants to the Warrant Holder, and if the price at
which the Company's stock is trading on October 26, 2000 is $5 or less per
share, the Company shall issue to each Warrant Holder that purchases a unit of
100,000 Warrants, 100,000 additional Warrants at no additional cost for the
Warrants to the Warrant Holder.
The Exercise Price, the number of shares purchasable upon exercise of each
Warrant, the number of Warrants outstanding and the Expiration Date are subject
to adjustments upon the occurrence of certain events. The Warrant Holder may
exercise all or any number of Warrants. Reference is hereby made to the
provisions on the reverse side of this Warrant Certificate and to the provisions
of the Memorandum, all of which are incorporated by reference in and made a part
of this Warrant Certificate and shall for all purposes have the same effect as
though fully set forth at this place.
Upon presentment for transfer of this Warrant Certificate at the office of
the Warrant Agent, a new Warrant Certificate or Warrant Certificates of like
tenor and evidencing in the aggregate a like number of Warrants, subject to any
adjustments made in accordance with the provisions of the Memorandum, shall be
issued to the transferee in exchange for this Warrant Certificate, subject to
the limitations provided in the Memorandum, upon payment of $10.00 per Warrant
Certificate and any tax or governmental charge imposed in connection with such
transfer.
The Warrant Holder of the Warrants evidenced by this Warrant Certificate
may exercise all or any whole number of such Warrants during the period and in
the manner stated hereon. The Exercise price shall be payable in lawful money of
the United States of America and in case or by certified or bank cashier's check
or bank draft payable to the order of the Company. If upon exercise of any
Warrants evidenced by this Warrant Certificate the number of Warrants exercised
shall be less than the total number of Warrants so evidenced, there shall be
issued to the Warrant Holder a new Warrant Certificate evidencing the number of
Warrants not so exercised.
Subject to the following paragraph, no Warrant may be exercised after 5:00
p.m. Mountain Time on the Expiration Date and any Warrant not exercised by such
time shall become void, unless extended by the Company.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, The Company has caused this Warrant to be signed by its
President and by its Secretary, each by a facsimile of his/her signature, and
has caused a facsimile of its corporate seal to be imprinted hereon.
Dated: October 29, 1999
ARTUP.COM NETWORK, INC.
President Secretary
COUNTERSIGNED:
HOLLADAY STOCK TRANSFER, INC.
2939 N. 67th Place
Scottsdale, Arizona 85251
<PAGE>
ARTUP.COM NETWORK, INC.
Holladay Stock Transfer, Inc.
Transfer Fee: $10.00 Per Certificate
The following abbreviations, when used in the inscription on the face of this
instrument, shall be construed as though they were written out in full according
to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - _____ Custodian for _____
TEN ENT - as tenants by the (Cust.) (Minor)
entireties under Uniform Gifts to Minors Act of
JT TEN - as joint tenants with right of ____________________________________
Survivorship and not as tenants (State)
in common
Additional Abbreviations may also be used though not in the above list.
FORM OF ASSIGNMENT
(To be Executed by the Registered Holder if He Desires to Assign Warrants
Evidenced by the Within Warrant Certificate)
FOR VALUE RECEIVED _________________________________________ hereby sells,
assigns and transfers unto ______________________________________ Warrants,
evidenced by the within Warrant Certificate and does hereby irrevocably
constitute and appoint ____________________________________ Attorney to transfer
the said Warrants evidenced by the within Warrant Certificate on the books of
the Company, with full power of substitution.
Dated:_______________________ Signature ______________________________
Signature Guaranteed: ________________________________________
NOTICE: The above signature must correspond with the name as written upon the
face of the within Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever.
FORM OF ELECTION TO PURCHASE
(To be Executed by the Holder if He Desires to Exercise Warrants
Evidenced by the Within Warrant Certificate)
To: ARTUP.COM NETWORK, INC.
The undersigned hereby irrevocably elects to exercise ____________________
Warrants, evidenced by the within Warrant Certificate for, and to purchase
thereunder, _____________________ full shares of Common Stock issuable upon
exercise of said Warrants and delivery of $_____________ and any applicable
taxes.
The undersigned requests that certificates for such shares be issued in the
name of;
________________________________________________________________________________
________________________________________________________________________________
(Please print name and address)
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFICATION NUMBER ________________________________________
If said number of Warrants shall not be all the Warrants evidenced by the within
Warrant Certificate, the undersigned requests that a new Warrant Certificate
evidencing the Warrants not so exercised be issued in the name of and delivered
to:
________________________________________________________________________________
________________________________________________________________________________
Dated:_______________________ Signature ______________________________
Signature Guaranteed: ________________________________________
NOTICE: The above signature must correspond with the name as written upon the
face of the within Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever, of if signed by
any other person the Form of Assignment hereon must be duly executed
and if the certificate representing the shares or any Warrant
Certificate representing Warrants not exercised is to be registered in
the name other than that in which the within Warrant Certificate is
registered, the signature of the holder hereof must be guaranteed.
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER, THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (Banks, Stockbrokers, Savings and Loan
Associations and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15.
MASTER CONSULTING SERVICES AGREEMENT
This Master Consulting Services Agreement (this "Agreement" which term shall
also include all Work Orders) is made this 28 day of July, 1999 between
INTEGRATED INFORMATION SYSTEMS, INC. ("IIS") located at 1560 W. Fountainhead
Parkway, Suite 200, Tempe, Arizona 85282 and ArtUp.com, a wholly owned
subsidiary of DEERBROOK PUBLISHING, INC. ("Client") located at 4644 South 36th
Place, Phoenix, AZ 85040. This Agreement sets forth the terms and conditions
under which IIS will provide services and/or materials to Client.
ARTICLE I DEFINITIONS.
The following terms shall have the following meanings in this Agreement and all
attached Work Orders:
1. "Project" shall mean the totality of services and materials IIS
provides to Client pursuant to a Work Order.
2. "Scope of Work" shall mean the specific services to be rendered by IIS
to Client in furtherance of a Project as defined in a Work Order.
3. "Work Order(s)" shall mean the document(s) that: (i) is numbered for
identification; (ii) details the Scope of Work to be performed by IIS
including all applicable deliverables or other materials to be
provided; and (iii) specifies the applicable hourly rate or fixed
price for performing the Scope of Work. A new Work Order will be
required for each new Project. Each Work Order shall be effective,
incorporated into, and form a part of this Agreement when executed by
IIS and Client.
ARTICLE II STAFFING.
1. IIS agrees to furnish consultants qualified to render services in
accordance with the Scope of Work set forth in a Work Order. IIS will
use reasonable efforts to ensure the continuity of its consultants
assigned to a Project but shall have discretion to replace or change
members of its staff working on a Project provided that replacement
personnel do not result in added cost to Client or delay in a Project.
ARTICLE III FEES.
1. IIS will bill Client at the rate(s) or in the amount specified in the
applicable Work Order for services and materials rendered by IIS.
2. Client shall be invoiced for expenses incurred by IIS in rendering
services to Client including travel, meals, hotels, car rentals,
special insurance required by Client, mileage, and other applicable
expenses. Any individual expense in excess of $300.00 shall require
the prior approval of Client. IIS's fees do not include any taxes,
duties, tariffs or other governmental charges or expenses imposed in
connection with this Agreement and such taxes shall be billed to
Client.
3. IIS's standard hours of operation are Monday through Friday (excluding
all holidays) 8:30 am. to 5:30 p.m. For Work Orders performed on an
hourly basis, services rendered by IIS on holidays or during
non-standard hours of operation shall be billed at one and one-half
the rates set forth in the applicable Work Order. Work during
nonstandard hours is subject to the prior approval of Client.
ARTICLE IV BILLING AND PAYMENT FOR SERVICES.
1. IIS shall send a written invoice to Client for services rendered and
materials provided every two weeks. Invoices are due upon receipt.
Invoices not paid in full within thirty (30) days of the invoice date
shall accrue interest at the rate of one and one-half percent (1.5%)
per month until paid in full except as to those invoices (or portions
of invoices) under dispute as set forth in subparagraph 2 below. Any
amount outstanding for more than forty-five (45) days after the date
of invoice shall constitute a material breach of this Agreement by
Client.
2. If Client has objection to a charge set forth in an invoice, Client
shall send written notice of its objection to IIS, and the reasons
therefor, within twenty (20) days of the date of the invoice being
objected to. Upon receipt of an objection, IIS shall undertake to
provide Client with back-up documentation to support its charge for
the services
<PAGE>
and/or materials in dispute. If Client does not object to an invoice
in writing within twenty (20) days of the invoice date, Client shall
have accepted the charges set forth therein. Any disputed amounts
shall not affect payment of non-disputed charges and expenses.
ARTICLE V TERMINATION.
1. Client shall have the right to terminate this Agreement and/or any
Work Order upon fifteen (15) days' prior written notice to IIS. Client
agrees to pay IIS for services performed up to the effective date of
termination. Notice of termination of any Work Order shall not be
considered notice of termination of this Agreement unless specifically
stated in the notice.
2. IIS shall have the right to terminate this Agreement and/or any Work
Order upon fifteen (15) days' prior written notice to Client provided
that IIS shall provide all services and materials to Client that
Client has paid for prior to IIS's notice of termination.
3. IIS shall have the right to terminate this Agreement and/or suspend
its services upon three (3) days' prior written notice to Client if
any IIS invoices remain unpaid thirty (30) days after the invoice
date.
4. Either party shall have the right to terminate this Agreement upon a
material breach by the other party.
ARTICLE VI NON-SOLICITATION.
1. IIS has invested significant resources in the hiring, education,
development, and training of its employees. Accordingly, Client agrees
that during the term of this Agreement, and for a period of twelve
(12) months following the termination of this Agreement, Client will
not directly or indirectly: (i) hire or employ any of IIS's employees,
consultants, or staff; (ii) hire or employ any former employee of IIS
unless such former employee has not been employed by IIS for at least
six (6) months; (iii) make an offer to or solicit any of IIS's
employees to terminate their employment with IIS; (iv) solicit or
receive any services from any of IIS's employees excluding the
services such employees are rendering to Client in connection with
this Agreement; or (v) use, solicit, or receive the services of any
former IIS employee if such employee leaves the employment of IIS and
thereafter becomes employed by any third party that is rendering
services to Client.
2. The parties agree that a breach of this provision will result in
damages to IIS that are difficult to ascertain with certainty.
Accordingly, in the event of a breach of this provision, IIS shall
have the right to:
(a) Apply for a temporary restraining order, temporary injunction,
permanent injunction, or other provisional remedy (collectively
"Provisional Remedy") in any court or forum of its choosing. If
IIS does choose to commence an action in court, the parties waive
their right to a trial by jury;
(b) Receive fixed monetary damages for violation of this
non-solicitation provision in the amount of three (3) times the
annual salary IIS was paying to such employee(s) before a
violation of this provision was discovered by IIS;
(c) Collect all costs and damages associated with a violation of this
provision within two (2) weeks of a court's or arbitrator's
finding/order that Client violated this non-solicitation
provision (the "Finding"). The damages will be due even if there
exists in such suit (or other action) issues that were not
resolved by the Finding. Such damages shall be provable by
affidavit of an IIS officer or employee with pertinent knowledge.
A Finding can be made following: (i) any evidentiary hearing;
(ii) any motion to dismiss; (iii) any hearing in connection with
IIS's application for a Provisional Remedy; (iv) any motion for
summary judgment; (v) a trial, arbitration, or other similar
dispositive hearing; or (vi) at any other time after suit is
initiated by IIS.
ARTICLE VII CONFIDENTIALITY.
1. The parties agree to retain in confidence all information transmitted
to it by the other party pursuant to this Agreement that the
disclosing party identifies as being proprietary and/or confidential
or that, by the nature of the circumstances surrounding the
disclosure, ought in good faith to be treated as proprietary and/or
confidential ("Confidential Information"). Confidential Information
includes, but is not limited to: business plans and designs; customer,
vendor, and partner lists; this Agreement and all Work Orders
(including IIS rates); technical, financial and business information
and models; proposed business deals, reports , plans, and market
projections; and
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<PAGE>
software programs, data, source code, and other technical information.
The parties will not make use of such Confidential Information except
under the terms and during the existence of this Agreement. Neither
party will disclose to any third person any Confidential Information
without the express consent of the other party.
2. Confidential Information does not include information that is: (a)
aleady in the possession of the receiving party or is known by the
receiving party at the time of receiving the same without breach of
any duty owed to the disclosing party; (b) publicly known through no
wrongful act of the receiving party; (c) rightfully received from a
third party, provided the receiving party complies with any
restrictions imposed by any such third party; or (d) disclosed by the
receiving party pursuant to a requirement of a court order,
governmental agency or other applicable law or regulation or disclosed
in connection with any dispute resolution under this Agreement.
ARTICLE VIII LIMITATIONS.
1. IIS makes no warranties with respect to products provided or services
rendered pursuant to this Agreement and disclaims all warranties,
express or implied, including, without limitation, warranties of
merchantability, fitness for a particular purpose, title, and
non-infringement.
2. IIS shall not be liable for any incidental, special, punitive,
indirect, or consequential damages, lost or inaccurate data, business
interruption, or lost profits under any contract, tort (including
negligence), strict liability, breach of warranty, or other legal or
equitable theory, even if the remedies provided for in this Agreement
fail of their essential purpose and even if IIS has been advised of
the possibility or probability of such damages. IIS's liability to
Client shall not exceed the amount actually paid by Client to IIS
pursuant to the applicable Work Order giving rise to the dispute.
ARTICLE IX NOTICE.
1. Any notice or other communication required under this Agreement shall
be deemed sufficiently made on the date of delivery if delivered in
person or by overnight commercial courier service with tracking
capabilities with costs prepaid, or five (5) days after the date of
mailing if sent by certified first class U.S. mail, return receipt
requested and postage prepaid, at the address of the parties set forth
below or such other address as may be given from time to time under
the terms of this notice provision:
IIS: Integrated Information Systems, Inc.
Attention: Scott Sommer
1560 West Fountainhead Parkway, Suite 200
Tempe, Arizona 85282-1839
Client: Deerbrook Publishing
Attention: Mr. Tom Suhadolnik
4644 South 36th Place
Phoenix, AZ 85040
ARTICLE X INDEMNIFICATION.
1. IIS agrees to defend Client against, and pay the amount of any adverse
final judgment (or settlement to which IIS consents) resulting from
third party claim(s) that the computer code or materials (other than a
commercial/off-the-shelf product or pre-existing work of Client)
developed by IIS and provided to Client pursuant to the terms of this
Agreement ("Developments") infringe any United States copyright;
provided that IIS is notified promptly in writing of the claim, has
the opportunity to assume sole control over its defense or settlement,
and Client provides reasonable assistance in the defense of the same.
2. In the event IIS or Client receives information concerning a copyright
infringement claim related to the Developments, IIS may, at its
expense, either: (i) procure for Client the right to continue to use
the alleged infringing Developments; or (ii) replace or modify the
Developments to make them non-infringing, in which case Client shall
thereupon cease use or distribution of the alleged infringing
Developments.
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<PAGE>
3. IIS shall have no liability for any infringement claim based on
Client's: (i) specifications, directions, or requirements provided to
IIS for such Developments; (ii) manufacture, marketing, distribution,
or use of any Developments after written notice that Client should
cease such activity due to such a claim; (iii) combination of any
Developments with a software or hardware product, program, or data not
supplied by IIS; or (iv) adaptation, enhancement, or modification of
any Developments not performed by IIS.
4. Client agrees to defend IIS against, and pay the amount of any adverse
final judgment (or settlement to which Client consents) in connection
with any claims arising under Section 3 above, or claims arising out
of the distribution, marketing, or use of the Developments; provided
that Client is notified promptly in writing of any such claim, and has
the opportunity to assume sole control over its defense or settlement,
and IIS provides reasonable assistance in the defense of the same.
5. Client shall indemnify and hold IIS harmless from and against any and
all claims or causes of action against IIS to the extent such claim or
action is based on a claim that an IIS employee or consultant
performing services at the offices or premises of Client was subject
to any physical injury, mental injury, discriminatory conduct,
harassment, or any other actionable activity by Client, an employee or
consultant of Client, or any third party on Client's premises. Client
shall pay the costs and damages, including attorneys' fees, in respect
of such claim provided the Client is given notice in writing of such
claim. Client shall control the defense of such action.
6. This Article XI shall survive any termination of a Work Order or this
Agreement.
ARTICLE XI MISCELLANEOUS PROVISIONS.
1. Entire Agreement. This Agreement is a complete and exclusive statement
of all the terms and conditions of the agreement among the parties
with respect to the subject matter hereof. This Agreement supersedes
and terminates any previously existing negotiations, understandings,
and agreements that may exist between the parties. This Agreement
shall not be varied, supplemented, qualified or interpreted by any
prior course of dealing between the parties hereto or by any usage of
trade.
2. Headings. Headings and captions in this Agreement are for convenience
only and are not to be used to interpret this Agreement.
3. Severability. If any provision of this Agreement is found to be
illegal or unenforceable, then, notwithstanding such finding, this
Agreement shall remain in full force and effect and such provision
shall be deemed stricken or modified to the minimum extent necessary
to make it enforceable; provided, however, that the intent of the
parties when entering into this Agreement is maintained.
4. Assignment. This Agreement and any rights or obligations hereunder
shall not be assigned by contract or operation of law without the
prior written agreement of both parties except in such case where all
or substantially all of the assets or stock of a party to this
Agreement is sold to a third party and such third party agrees in
writing to be bound by the terms and conditions of this Agreement.
Upon prior consent of Client, IIS may use subcontractors to perform
services for Client in connection with a Project.
5. Amendment and Waiver. Except as otherwise expressly provided herein,
this Agreement may only be amended or modified in a writing signed by
both parties. The failure of either party to enforce its rights under
this Agreement at any time for any period shall not be construed as a
waiver of such rights and shall not be deemed a waiver of any right of
either party to insist upon the strict performance of this Agreement.
6. Independent Contractor. IIS shall act as an independent contractor and
shall be responsible for all social security, unemployment, workers'
compensation, and other withholding taxes for all of its employees.
7. Force Majeure. Except for Client's obligation to pay for
services/materials rendered by IIS, if either party is prevented from
complying, either totally or in part, with any of the terms or
provisions of this Agreement by reason of fire, flood, storm, strike,
lockout, or other labor trouble, riot, war, rebellion, accident or
other acts of God, then upon written notice to the other party, the
requirements of this Agreement, or the affected provisions hereof to
the extent affected, shall be suspended during the period of such
disability. During such period, the party not prevented from complying
may seek to have its needs (which would otherwise be met hereunder)
met by
4
<PAGE>
others without liability hereunder. The party prevented from complying
shall make all reasonable efforts to remove such disability within
thirty (30) days of giving such notice.
8. Compliance with Laws. IIS and Client shall comply with all applicable
laws and regulations with respect to this Agreement. Client
acknowledges that the services provided by IIS and the related
software and other materials are subject to United States export
control laws and regulations and Client confirms that it will not
export or reexport them, directly or indirectly, either to: (i) any
countries that are subject to U.S. export restrictions (currently
including, but not necessarily limited to, Cuba, Iran, Iraq, Libya,
North Korea, Syria, and Sudan), or to any national of any such
country; or (ii) any end-user whom Client knows or has reason to know
will utilize them in the design, development, or production of
nuclear, chemical, or biological weapons; or (iii) any end-user who
has been prohibited from participating in U.S. export transactions by
any federal agency of the U.S. government.
9. Governing Law. This Agreement shall be construed pursuant to the laws
of the State of Arizona. Unless waived by IIS, the exclusive
jurisdiction and venue of any action related to this Agreement,
including the enforcement of any arbitration award, shall be the
Maricopa County Superior Court, Arizona and the parties submit to the
jurisdiction and venue of such court for the purpose of any such
action.
10. Arbitration. Any dispute, claimed breach, or controversy arising out
of or in relation to this Agreement shall be settled by binding
arbitration in Phoenix, Arizona in accordance with the then-prevailing
Commercial Arbitration Rules of the American Arbitration Association
by a single arbitrator mutually agreed upon by both parties, and
applying Arizona state law without regard to the conflicts of law
provisions thereof, or if applicable, U.S. federal law. The
arbitration award shall be final and binding upon the parties.
Notwithstanding the foregoing, either party shall have the right to
seek and obtain appropriate equitable and Provisional Remedies
exclusively in Maricopa County Superior Court, Arizona.
11. Remedies. The rights and remedies of a party set forth herein with
respect to the failure of the other to comply with the terms of this
Agreement (including, without limitation, rights of termination of
this Agreement) are not exclusive, the exercise thereof shall not
constitute an election of remedies, and the aggrieved party shall in
all events be entitled to seek whatever additional remedies may be
available in law or in equity.
12. Attorneys' Fees. The prevailing party in any action that arises out of
this Agreement shall be entitled to recover costs and expenses
including, without limitation, reasonable attorneys' fees.
13. U.S. Government Restricted Rights. Any Developments that Client
licenses or acquires under this Agreement for or on behalf of the
United States of America, its agencies and/or instrumentalities, are
provided to Client with Restricted Rights. Use, duplication, or
disclosure by the Government is subject to restrictions as set forth
in subparagraph (c)(l)(ii) of The Rights in Technical Data and
Computer Software clause at DFARS 252.227-7013 or subparagraphs (c)(1)
and (2) of the Commercial Computer clause at 48 CFR 52.227-19, as
applicable. Contractor/manufacturer is IIS, Inc. 1560 W. Fountainhead
Parkway, Tempe, AZ 85282-1839.
14. Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original and all of
which together shall constitute one instrument.
15. Successors and Assigns. Upon mutual consent, the provisions of this
Agreement shall inure to the benefit of, and be binding upon, the
parties and their respective successors and assigns and transferees by
operation of law, whether or not any such person or entity shall have
become a party to this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement:
/s/ Scott A. Sommer /s/ Tom Suhadolnik
------------------------------------ ----------------------------
Integrated Information Systems, Inc. Deerbrook Publishing
By: Scott A. Sommer By: Tom Suhadolnik
5
<PAGE>
WORK ORDER #001
IN CONNECTION WITH THE MASTER CONSULTING SERVICES AGREEMENT
PROJECT NAME: ARTUP.COM WEB INITIATIVE DEVELOPMENT -- PHASE 1
This Work Order is made pursuant to the Master Consulting Services Agreement
(the "Agreement") effective on July 20, 1999 between Integrated Information
Systems, Inc. ("IIS") and ArtUp.com, a wholly owned subsidiary of Deerbrook
Publishing, Inc. ("Client") and is incorporated therein by reference.
Capitalized terms not otherwise defined have the meanings provided in the
Agreement.
1. SERVICES. IIS shall perform the Scope of Work identified below for Client.
Any dates provided are estimates only.
In order to meet an extremely aggressive time frame for phase 1, IIS will
provide Time-and-Materials consulting and coding services to build an
ArtUp.Com web-site infrastructure.
IIS anticipates performing some or all of the following services for Client
relating to Site Server Commerce Edition Development & Integration for
Client's web initiative.
* Provide consulting for the Site Server Architecture.
* Project Management.
* Provide consulting for infrastructure services.
* General web consulting (i.e. interface design, graphic design, etc.)
* Overall marketing strategies as appropriate to the e-Commerce
initiative
* Provide development services for the following:
1. A common "site Look and Feel metaphor" (primary priority)
2. Deerbrook co-brand e-Commerce PUBLIC site (primary priority)
3. ArtUp.Com e-Commerce Catalog (base E-commerce site) also referred
to as the "PUBLIC" site (primary priority)
4. ArtUp.Com e-Commerce PRIVATE site (primary priority)
5. Provide a common auction (secondary priority)
A formal project effort will be initiated after August 16, 1999, to expand
the basic functionality of the system to meet all of the client's
requirements. The full IIS life cycle design and development process, with
defined documents and project plans, will be followed for all successive
phases of this project.
2. RATES.
The hourly rates shown below shall be applicable to this Work Order only
for the Scope of Work set forth above.
All services performed by IIS in connection with the Scope of Work shall be
performed by IIS at an hourly rate of $165.00 per hour.
IIS invoices shall be directed to Client's representative for payment at
the address shown below.
Thomas P. Suhadolnik
ArtUp.com c/o Deerbrook Publishing, Inc.
4644 South 36th Place
Phoenix, AZ 85040
Work Order #001 -- Page 1
<PAGE>
3. COMMENCEMENT DATE. Services under this Work Order will begin on or about 20
August 1999 and will continue until the Scope of Work is finished by IIS.
THEREFORE, the parties have executed this Work Order in duplicate
originals.
INTEGRATED INFORMATION SYSTEMS, Inc. CLIENT
1560 W. Fountainhead Pkwy. #200 ArtUp.com, a wholly owned subsidiary
Tempe, Arizona 85282-1839 of Deerbrook Publishing, Inc.
4644 South 36th Place
Phoenix, Arizona 85040
By: /s/ Scott A. Sommer By: /s/ T. Suhadolnik
--------------------------------- ---------------------------------
Signature Signature
Scott A Sommer T. Suhadolnik
- ------------------------------------ ------------------------------------
Name (Print) Name (Print)
V.P. Business Development President, ArtUp.com
- ------------------------------------ ------------------------------------
Title Title
28-July-99 7/29/99
- ------------------------------------ ------------------------------------
Effective Date Date
Work Order #001 -- Page 2
SUPPLIER AGREEMENT NO.
TEXAS SCREEN PROCESS SUPPLY CO., INC.
TERM AND RENT
INITIAL TERM
61 MONTHS
EQUIPMENT MONTHLY RENTAL PAYMENT
DESCRIPTION QUANTITY MODEL NO. EQUIPMENT $2,471.96
See Attached Schedule A Yield 11.93% (Plus Applicable Tax)
SECURITY DEPOSIT
EQUIPMENT LOCATION, IF OTHER THAN BILLING $0.00
ADDRESS OF LESSEE (Check Must Accompany Lease)
- --------------------------------------------------------------------------------
LESSEE
Deerbrook Publishing Group, Inc.
LESSEE (FULL LEGAL NAME)
4644 S. 36th Place
BILLING ADDRESS
Phoenix AZ 85040
CITY STATE ZIP
PHONE NO. (602) 453-3283 DATED 9-15-99
THIS AGREEMENT IS NOT CANCELABLE
BY /s/ Keith M. Chesser, President
----------------------------------------
AUTHORIZED SIGNATURE TITLE
PRINT NAME Keith M. Chesser
-------------------------------
THE TERMS AND CONDITIONS PRINTED ON THE REVERSE SIDE ARE MADE A PART HEREOF
- --------------------------------------------------------------------------------
TERMS AND CONDITIONS
The words YOU and YOUR mean the Lessee. The words WE, US, and OUR refer to the
Lessor indicated on reverse.
1. RENTAL ("AGREEMENT"): We agree to rent to you and you agree to rent from us
the equipment listed above ("Equipment"). You promise to pay us the rental
payment according to the payment schedule shown above. The parties intend this
Agreement to be a finance lease under Article 2A of the Uniform Commercial Code.
2. TERM AND RENT: The initial term shall commence on the day that any of the
Equipment is delivered to you ("the Commencement Date"). If the Commence Date is
other than the first of the month, you agree to pay an additional charge
covering the number of days between the Commencement Date and the first day of
the following month (pro rated on a 30 day month). The installments of rent
shall be payable in advance, at the time and in the amounts provided above,
commencing on the Commencement Date and subsequent payments shall be due on the
same date of each successive period thereafter until all rent and any additional
rent or expenses chargeable under this Agreement shall have been paid in full.
Lessee obligation to pay the rent and other obligations hereunder shall be
absolute and unconditional and are not subject to any abatement, set-off,
defense or counter-claim for any reason whatsoever.
3. NO WARRANTIES: We are renting the Equipment to you "AS IS". WE MAKE NO
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY, OR
FITNESS FOR A PARTICULAR PURPOSE IN CONNECTION WITH THIS AGREEMENT. We transfer
to you for the term of this Agreement any warranties made by manufacturer or
supplier to us. NEITHER SUPPLIER NOR ANY AGENT OF SUPPLIER IS AN AGENT OF LESSOR
OR IS AUTHORIZED TO WAIVE OR MODIFY ANY TERM OR CONDITION OF THIS AGREEMENT.
GUARANTY
To induce Lessor to enter into the within Agreement, the undersigned (jointly
and severally, if more than one) unconditionally guarantees to Lessor the prompt
payment when due of all Lessee's obligations to Lessor under the Agreement
including without limitation every rental installment, the accelerated balance
of rents, administrative charges, collection charges and interest. Lessor shall
not be required to proceed against Lessee or Equipment or to enforce any of its
other remedies before proceeding against the undersigned. The undersigned agrees
to pay all reasonable attorney's fees, court costs and other expenses incurred
by Lessor by reason of any default by Lessee. The undersigned waives notice of
acceptance hereof and all the other notices or demands of any kind to which the
undersigned may be entitled except demand for payment. The undersigned consents
to any extensions of time or modification of amount of payment granted to Lessee
and the release and/or compromise of any obligations of Lessee or any other
obligors and/or guarantors without in any way releasing the undersigned's
obligations hereunder. This is a continuing Guaranty and shall not be discharged
or affected by your administrators, representatives, successors and assigns.
Guarantor waives any right of subrogation, indemnity, reimbursement and
contribution by Lessee. This Guaranty shall continue to be effective or
reinstated, as applicable. If at any time payment of any part of the obligations
under the Agreement is rescinded or otherwise required to be returned by Lessor
upon the insolvency, bankruptcy or reorganization of Lessee or upon the
appointment of a receiver, trustee or similar officer for Lessee or its assets,
all as though such payment to Lessor had not been made, regardless of whether
Lessor contested the order requiring the return of such payment. This Guaranty
may be enforced by or for the benefit of any assignee or successor of Lessor.
Nothing shall discharge or satisfy the undersigned's liability except the full
performance and payment of all the Lessee's obligations to Lessor, with
interest. THE UNDERSIGNED CONSENTS TO THE PERSONAL JURISDICTION OF THE COURTS
OF THE STATE OF NEW JERSEY WITH RESPECT TO ANY ACTION ARISING OUT OF ANY LEASE
GUARANTY SETTLEMENT AGREEMENT, PROMISSORY NOTE OR OTHER ACCOMMODATION OR
AGREEMENT WITH LESSOR. THIS MEANS THAT ANY LEGAL ACTION FILED AGAINST THE LESSEE
AND/OR GUARANTORS MAY BE FILED IN NEW JERSEY AND THAT LESSEE AND/OR ANY OTHER
GUARANTORS MAY BE REQUIRED TO DEFEND AND LITIGATE ANY SUCH ACTION IN NEW JERSEY.
Lessee and all Guarantors agree that service of process by certified mail,
return receipt requested, shall be deemed the equivalent of personal service in
such action. Any legal action concerning this Agreement shall be governed by and
construed according to the laws of the State of New Jersey.
INDIVIDUALLY
X _______________________________________ X _________________________________
WITNESS SIGNATURE DATE GUARANTOR SIGNATURE DATE
________________________________________ _________________________________
PRINT NAME PRINT NAME
INDIVIDUALLY
X _______________________________________ X _________________________________
WITNESS SIGNATURE DATE GUARANTOR SIGNATURE DATE
_______________________________________ _________________________________
PRINT NAME PRINT NAME
LEASE ORIGINAL
<PAGE>
TERMS AND CONDITIONS
4. OWNERSHIP, REDELIVERY AND RENEWAL: We are the owner of the Equipment and have
title to the Equipment. To protect our rights in the Equipment, in the event
this Agreement is determined to be a security agreement, you hereby grant to us
a security interest in the Equipment and all proceeds, products, rents or
profits therefrom. In states where permissible, you hereby authorize us to cause
this Agreement or any statement or other instrument in respect to this Agreement
showing our interest in the Equipment, including Uniform Commercial Code
Financing Statements, to be filed or recorded and refiled and re-recorded and
grant us the right to execute your name thereto. You agree to execute and
deliver any statement or instrument requested by us for such purpose. You agree
to pay or reimburse us for any searches, filings, recordings, stamp fees or
taxes related to the filing or recording of any such instrument or statement. No
more than one hundred eighty (180) days but not less than ninety (90) days prior
to the expiration of the initial term or any renewal term of this Agreement you
shall give us written notice of your intention to either return the Equipment to
us or purchase the Equipment, as provided below. Provided you have given such
timely notice, you shall return the Equipment, freight and insurance prepaid, to
us in good repair condition and working order, ordinary wear and tear excepted,
in a manner and to a location designated by us or remit the purchase option. If
you fail to so notify us, or having notified us, you fail to return the
Equipment as provided herein, or fail to remit the purchase option, this
Agreement shall renew for additional terms of twelve (12) months each at a
periodic rent equal to 100% of the rent provided herein.
5. OPTION TO PURCHASE: We hereby grant to you, provided you are not in default
hereunder, the option to purchase, "AS IS" without express or implied
warranties, all (not part) of the Equipment at the expiration of the term of
this Agreement for its then fair market value plus all applicable taxes.
6. MAINTENANCE, RISK OF LOSS AND INSURANCE: You are responsible for installing
and keeping the Equipment in good working order. Except for ordinary wear and
tear, you are responsible for protecting the Equipment from damage and loss of
any kind. If the Equipment is damaged or lost, you agree to continue to pay
rent. You agree during the term of this Agreement, to keep the Equipment fully
insured against damage and loss, naming us as the loss payee, to obtain a
general public liability insurance policy from a company acceptable to us,
including as an additional insured on the policy. You agree to provide us
certificates or other evidence of insurance. If you do not, you agree that we
have the right but not the obligation to obtain such insurance, in which event
you agree to pay us for all costs thereof.
7. INDEMNITY: We are not responsible for any losses or injuries caused by the
installation or use of the Equipment. You agree to reimburse us for and to
defend us against any claims for losses or injuries (including attorney's fees
and costs) caused by the Equipment.
8. TAXES AND FEES: You agree to pay when due or reimburse us for all taxes,
fees, fines and penalties relating to use or ownership of the Equipment or to
this Agreement, now or hereafter imposed, levied or assessed by any state,
federal or local government or agency. You agree to pay us a fee of $67.50 to
reimburse us for the expense of preparing financing statements and for other
documentation costs.
EQUIPMENT LOCATED IN VARIOUS STATES is subject to sales tax laws which
require that tax be paid up front. If you choose to pay this tax up front, you
may include, with your security deposit, your check for the current percent of
tax applied to the cost of Equipment. If you do not include payment up front,
you authorize us to advance the tax and increase your monthly payment by an
amount equal to the current tax percentage applied to the monthly rental shown
above.
9. LOCATION OF EQUIPMENT: You will keep and use the Equipment only at your
address shown above. You agree that the Equipment will not be removed from that
address unless you get our written permission in advance to move it.
10. DEFAULT AND REMEDIES: If you (a) fail to pay rent or any other payment
hereunder when due; or (b) fail to perform any of the other terms, covenants or
conditions of this Agreement after ten (10) days written notice; or (c) become
insolvent or make an assignment for the benefit of creditors; or (d) a receiver,
trustee, conservator or liquidator is appointed with or without your consent,
you shall be in default under the Agreement and, we may, to the extent permitted
by applicable law, exercise any one or more of the following remedies: (i)
declare due, sue for and receive from you the sum of all rental payments and
other amounts then due and owing under this Agreement or any schedule thereto,
plus the present value of (x) the sum of the rental payments for the unexpired
term of this Agreement or any schedule hereto discounted at the rate of 6% per
annum and (y) the anticipated value of the equipment at the end of the initial
term or applicable renewal term of the Agreement (but in no event less than 15%
of the original cost of the Equipment) discounted at the rate of 6% per annum
and upon recovery of the same in full, the Equipment shall become your property;
(ii) to similarly accelerate the balances due under any other agreements between
us; (iii) to take immediate possession of the Equipment, and to lease or sell
the Equipment or any portion thereof, upon such terms as we may elect, and to
apply the net proceeds, less reasonable selling and administrative expenses, on
account of your obligations hereunder; (iv) charge you interest on all monies
due us from and after the date of default at the rate of one and one third
percent (1-1/3%) per month until paid but in no event more than the maximum rate
permitted by law; (v) require you to return all Equipment at your expense to a
place reasonably designated by us; (vi) to charge you for all the expenses
incurred in connection with the enforcement of any of our remedies including all
costs of collection, reasonable attorney's fees and court costs. Whenever any
payment is not made by you when due hereunder, you agree to pay us, not later
than one month thereafter, as an administrative charge to offset our collection
expenses, an amount calculated at the rate of ten cents per one dollar for each
such delayed payment, or $15 whichever is higher, but only to the extent
permitted by law. Such an amount shall be payable in addition to all amounts
payable by you as a result of the exercise of any of the remedies provided
herein. All our remedies are cumulative, are in addition to any other remedies
provided for by law and may, to the extent permitted by law, be exercised either
concurrently or separately. Exercise of any one remedy shall not be deemed an
election of such remedy or to preclude the exercise of any other remedy. No
failure on our part to exercise any right or remedy and no delay in exercising
any right or remedy shall operate as a waiver of any right or remedy or to
modify the terms of this Agreement. A waiver of default shall not be construed
as a waiver of any other or subsequent default. We shall retain the sum set
forth above as a security deposit for your performance of your obligations
hereunder. Upon lawful termination of this Agreement, provided you are not in
default, the Security Deposit shall be returned to you. No interest shall be
paid upon said Security Deposit. In the event of default we may apply said
Security Deposit to cure any default.
11. ASSIGNMENT: YOU HAVE NO RIGHT TO SELL, TRANSFER, ASSIGN THIS AGREEMENT OR
SUBLEASE THE EQUIPMENT. We may sell, assign or transfer this Agreement, without
notice. You agree that if we sell, assign or transfer this Agreement, the new
owner will have the same rights and benefits that we have now and will not have
to perform any of our obligations. You agree that the right of the new owner
will not be subject to any claims, defenses, or set offs that you may have
against us. In the event of a sale, assignment or transfer, we agree to remain
responsible for our obligations hereunder.
12. CONSENT TO JURISDICTION AND GOVERNING LAW: YOU CONSENT TO THE PERSONAL
JURISDICTION OF THE COURTS OF THE STATE OF NEW JERSEY WITH RESPECT TO ANY ACTION
ARISING OUT OF THIS AGREEMENT OR THE EQUIPMENT. THIS MEANS THAT ANY LEGAL ACTION
FILED AGAINST YOU MAY BE FILED IN NEW JERSEY AND THAT YOU MAY BE REQUIRED TO
DEFEND AND LITIGATE ANY SUCH ACTION IN NEW JERSEY. You agree that service of
process by certified mail, return receipt requested, shall be deemed the
equivalent of personal service in any such action. However, nothing in this
paragraph shall be construed to limit the jurisdictions in which suit may be
filed by any party to this Agreement or the means of obtaining service of
process in any such suit. This Agreement shall be governed by and construed
according to the laws of the State of New Jersey. TO THE EXTENT PERMITTED BY
LAW, YOU WAIVE TRIAL BY JURY IN ANY ACTION HEREUNDER. YOU HEREBY WAIVE ANY AND
ALL RIGHTS AND REMEDIES GRANTED YOU BY SECTION 2A-508 THROUGH 2A-522 OF THE
UNIFORM COMMERCIAL CODE.
13. CUSTOMER P.O.: You agree that any Purchase Order issued to us covering the
rental of this Equipment, is issued for purposes of authorization and your
internal use only, and none of its terms and conditions shall modify the terms
of this Agreement.
14. ENTIRE AGREEMENT: This Agreement contains the entire arrangement between you
and us and no modifications of this Agreement shall be effective unless in
writing and signed by the parties.
ACCEPTED BY:
COPELCO CAPITAL INC., LESSOR
ONE INTERNATIONAL BLVD. - MAHWAH, NJ 07430-0631
BY ________________________________________________
TITLE DATE
<PAGE>
SCHEDULE A TO LEASE AGREEMENT NUMBER ________ DATED _________
Quantity Equipment Description
- -------- ---------------------
1 SYSTEM 600 36" AUTOTYPE ASPECT SYSTEM W/ STAND, TAKE UP REEL
2 TEKOI PHASER 840 1OPPM 32MB
1 APPLE VOSG3MT450/1M/128/9GBU2, INT MDM 56K, PCI ADPTER, 15" .28
1280X1024 MONITOR, ADOBE GRAPHIC STUDIO. QUARK EXPRESS V4.O,
INTERNAL ZIP DRIVE, JAZ 2GB EXTERNAL, 120MB SUPRDSK., SCSI-2 TO
SCSI-2 CABLE, MASK PRO2.0, ULTIMATE REZ
1 APPLE YOSG3MT 450/1M/128/9GB U2, 256MB MEM 18GB HD, ULTIMATE REZ,
21IN 22MM 1800X 144, ANT MDM 56K, SCSI PCI ADPTR, ADOBE GRAPHIC
STUDIO, QUARK EXPRESS V 4.0, INTERNAL ZIP DRIVE, JAZ 2GB
EXTERNAL, 256MB UPGRADE, OMNIPAGE, 21" MONITOR, 30GB EIDE ATPI
ECHO SW, SMART UPS, 120MB SUPRDSK, JAZ MC 1GB 3PACK, UNIFORM 8.0
2 EPSON 636 PERFECT SCAN
1 15" .28 1280X1024 MONITOR
1 HP LASERJET 4050N PRINTER
1 U SHAPED STEELCASE MOCKUP SYSTEM
1 21IN 22MM 1800X 144 MONITOR
SIGNED /s/ Keith M Chesser, President
------------------------------------------
DATE: 9-15-99
------------------------------------------
<PAGE>
BUYOUT OPTION
We welcome the opportunity to work with you and your company to meet your
leasing needs for the equipment you have selected. We feel that we offer service
unmatched in the industry and we thank you for the opportunity.
We have purchased the equipment that you desire and are able to offer it to
you now on a lease basis. We are the Vendor in the transaction. You and your
company are the Lessee in the transaction. The company whose name appears on the
accompanying lease documents will be the Lessor in this transaction. You need to
be aware of this and acknowledge this if asked during the telephone verbal
delivery and acceptance procedure.
You may purchase the equipment for a cash purchase price of $112,848.67 or
you can lease it by completing the documents that accompany this letter. You are
aware that the total of the lease payments and potential cost to buy out the
equipment at the end of the lease is significantly higher than the cash purchase
price. You verify, by signing and dating this letter and by executing the lease
documents that accompany this letter, that you have weighed this difference in
price and have elected to lease the equipment.
The lease is non-cancellable and has a ONE DOLLAR BUYOUT buyout of the
equipment at the end of the lease term, assuming that all obligations have been
fulfilled.
Please sign below and return this letter with your executed lease documents.
Please call upon us if you feel that we may be of assistance to you in the
future. We are ready to answer any questions that you might have and welcome the
chance to be of service. Thank you for your business.
ACKNOWLEDGED: /s/ Keith M Chesser, President
------------------------------------------
DATE: 9-15-99
------------------------------------------
<PAGE>
Equipment Delivery and
Acceptance Receipt
- --------------------------------------------------------------------------------
The undersigned does hereby acknowledge the complete and satisfactory delivery
and installation of the Equipment leased from Copelco Capital, Inc. The
undersigned does further acknowledge that Lessor has made no warranties
expressed or implied regarding the equipment; that our obligations to Lessor or
its assignees as set forth in the aforementioned lease are free of any and all
claims, counter claims, defenses, or set-offs.
Deerbrook Publishing Group, Inc.
------------------------------------
(Full Legal Name of Lessee)
By /s/ Keith M Chesser, President
----------------------------------
(Authorized Signature) (Title)
Keith M Chesser
----------------------------------
(Print Name of Signer)
9-15-99
----------------------------------
Date
DEERBROOK PUBLISHING GROUP, INC.
(F/K/A ARTUP.COM NETWORK, INC.)
1999 INCENTIVE STOCK PLAN
ADOPTED BY THE BOARD OF DIRECTORS AS OF OCTOBER 20, 1999
APPROVED BY THE SHAREHOLDERS AS OF NOVEMBER 12, 1999
1. PURPOSE. The purpose of this 1999 Incentive Stock Plan (the "Plan") is
to attract, retain and motivate employees, directors and independent contractors
by providing them with the opportunity to acquire a proprietary interest in
ARTUP.COM NETWORK, INC., a Colorado corporation (the "Company") and to link
their interests and efforts to the long-term interests of the Company's
shareholders.
2. PLAN ADMINISTRATION
2.1 IN GENERAL. The Plan shall be administered by the Company's Board
of Directors (the "Board"). Except for the power to amend the Plan as provided
in SECTION 12, the Board, in its sole discretion, may delegate all of any
portion of its authority and duties under the Plan to one or more committees
appointed by the Board and consisting of at least one member of the Board, under
such conditions and limitations as the Board may from time to time establish.
The Board and/or any committee that has been delegated the authority to
administer the Plan shall be referred to as the "Plan Administrator". Except as
otherwise explicitly set forth in the Plan, the Plan Administrator shall have
the authority, in its discretion, to determine all matters relating to awards
(as described in SECTION 5) under the Plan, including the selection of the
individuals to be granted awards, the type of awards, the number of shares of
the Company's common stock ("Common Stock") subject to an award, vesting
conditions, and any and all other terms, conditions, restrictions and
limitations, if any, of an award. All decisions made by the Plan Administrator
pursuant to the Plan and related orders and resolutions shall be final and
conclusive.
2.2 RULE 16B-3 AND CODE SECTION 162(M). Notwithstanding any provision
of this Plan to the contrary, on and after the date that shares of Common Stock
first become registered under the Securities Exchange Act of 1934, as amended
(the "1934 Act"), only the Board or a committee composed of two or more
"Non-Employee Directors" may make determinations regarding grants of awards to
officers, directors and 10% shareholders of the Company. For purposes of this
Plan, the term "Non-Employee Directors" shall have the meaning set forth in Rule
16b-3 promulgated under the 1934 Act. The Plan Administrator shall have the
authority and discretion to determine the extent to which awards will conform to
the requirements of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), and to take such action, establish such procedures, and
impose such restrictions as the Plan Administrator determines to be necessary or
appropriate to conform to such requirements.
2.3 OTHER PLANS. The Plan Administrator shall also have authority to
grant awards as an alternative to or as the form of payment for grants or rights
earned or due under other compensation plans or arrangements of the Company,
including the plan of any entity acquired by the Company.
3. ELIGIBILITY. Any employee of the Company shall be eligible to receive
any award under the Plan. Directors who are not employees, proposed directors,
proposed employees and independent contractors shall be eligible to receive
awards other than Incentive Stock Options (as defined in SECTION 5.2). For
purposes of this SECTION 3, the "Company," with respect to all awards under the
Plan other than Incentive Stock Options, includes any entity that is directly or
indirectly controlled by the Company or any entity in which the Company has a
significant equity interest, as determined by the Plan Administrator. With
respect to Incentive Stock Options, the "Company" includes any parent or
subsidiary of the Company as defined in Section 424 of the Code.
4. SHARES SUBJECT TO THE PLAN
4.1 NUMBER AND SOURCE. The shares offered under the Plan shall be
shares of Common Stock and may be unissued shares or shares now held or
subsequently acquired by the Company as treasury shares, as the Plan
Administrator may from time to time determine. Subject to adjustment as provided
in SECTION 4.3, the aggregate number of shares that may be issued under the Plan
shall not exceed 2,000,000 shares. The aggregate number of shares that may be
covered by awards granted to any one individual in any year shall not exceed 50%
of the total number of shares that may be issued under the Plan.
<PAGE>
4.2 SHARES AVAILABLE. Any shares subject to an award granted under the
Plan that is forfeited, terminated or canceled, or any shares that do not vest,
shall again be available for the granting of awards under the Plan. If a stock
appreciation right is settled in cash, the shares covered by such award shall
remain available for the granting of other awards. The payment of cash dividends
and dividend equivalents paid in cash in conjunction with outstanding awards
shall not be counted against the shares available for issuance.
4.3 ADJUSTMENT OF SHARES AVAILABLE. The aggregate number and type of
shares available for awards under the Plan, the maximum number and type of
shares that may be subject to awards to any individual under the Plan, the
number and type of shares covered by each outstanding award, and the exercise
price per share (but not the total price) for stock options, stock appreciation
rights or similar awards outstanding under the Plan shall all be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from any split-up, combination or exchange of shares,
consolidation, spin-off or recapitalization of shares or any like capital
adjustment or the payment of any stock dividend.
4.4 TRANSFER OF CONTROL. In the event of a Transfer of Control of the
Company (as defined below), the surviving, continuing, successor or purchasing
corporation or parent corporation thereof, as the case may be (the "Acquiring
Corporation"), shall either assume the Company's rights and obligations under
outstanding awards or substitute for outstanding awards substantially equivalent
awards for the Acquiring Corporation's stock. In the event the Acquiring
Corporation elects not to assume or substitute for such outstanding awards in
connection with the Transfer of Control, the Board may, in its discretion,
provide that any unexercisable and/or unvested portion of the outstanding awards
shall be immediately exercisable and vested in full on or before the date of the
Transfer of Control. The exercise and/or vesting of any award that is
permissible solely by reason of this SECTION 4.4 shall be conditioned upon the
consummation of the Transfer of Control. Any awards that are neither (i) assumed
or substituted for by the Acquiring Corporation in connection with the Transfer
of Control nor (ii) exercised on or before the date of the Transfer of Control
shall terminate and cease to be outstanding effective as of the date of the
Transfer of Control. Unless otherwise determined by the Board, a "Transfer of
Control" shall be deemed to have occurred in the event of any of the following:
(a) the direct or indirect sale or exchange by the shareholders of the Company
of all or substantially all of the stock of the Company if the shareholders of
the Company before such sale or exchange do not retain, directly or indirectly,
at least a majority of the beneficial interest in the voting stock of the
Company after such sale or exchange; (b) a merger or consolidation if the
shareholders of the Company before such merger or consolidation do not retain,
directly or indirectly, at least a majority of the beneficial interest in the
voting stock of the Company after such merger or consolidation (regardless of
whether the Company is the surviving corporation); (c) the sale, exchange or
transfer of all or substantially all of the assets of the Company; or (d) a
liquidation or dissolution of the Company.
5. AWARDS
5.1 TYPES OF AWARDS. Awards granted under this Plan may include, but
are not limited to, Incentive Stock Options or Nonqualified Stock Options (as
defined in SECTION 5.2), stock appreciation rights or restricted stock awards.
Such awards may be granted either alone, in addition to, or in tandem with any
other type of award granted under the Plan.
5.2 STOCK OPTIONS. The Plan Administrator may grant stock options,
designated as "Incentive Stock Options," which comply with the provisions of
Section 422 of the Code or any successor statutory provision, or "Nonqualified
Stock Options" that do not comply with the provisions of Section 422 of the Code
or any successor statutory provision. The price for which shares may be
purchased upon exercise of a particular option shall be determined by the Plan
Administrator; provided, however, that the exercise price of an Incentive Stock
Option shall not be less than 100% of the Fair Market Value (as determined under
SECTION 5.7) of such shares on the date such option is granted (110% of the Fair
Market Value if options are intended to be Incentive Stock Options and are
granted to a shareholder who at the time the option is granted owns or is deemed
to own stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of any parent or subsidiary of the Company).
The Plan Administrator shall set the term of each stock option, but no Incentive
Stock Option shall be exercisable more than 10 years after the date such option
is granted and, to the extent the aggregate Fair Market Value (determined as of
the date the option is granted) of Common Stock with respect to which Incentive
Stock Options granted to a particular individual become exercisable for the
first time during any calendar year (under the Plan and all other stock option
plans of the Company) exceeds $100,000 (or such corresponding amount as may be
set by the Code), such options shall be treated as Nonqualified Stock Options.
An optionholder
2
<PAGE>
and the Plan Administrator can agree at any time to convert an Incentive Stock
Option to a Nonqualified Stock Option.
5.3 STOCK APPRECIATION RIGHTS. The Plan Administrator may grant stock
appreciation rights, either in tandem with a stock option granted under the Plan
or with respect to a number of shares for which an option is not granted. A
stock appreciation right shall entitle the holder to receive, with respect to
each share of stock as to which the right is exercised, payment in an amount
equal to the excess of the share's Fair Market Value on the date the right is
exercised over its Fair Market Value on the date the right was granted. Such
payment may be made in cash or in shares of Common Stock valued at Fair Market
Value as of the date of the surrender, or partly in cash and partly in shares of
Common Stock, as determined by the Plan Administrator in its sole discretion.
The Plan Administrator may establish a maximum appreciation value payable for
stock appreciation rights.
5.4 RESTRICTED STOCK AWARDS. The Plan Administrator may grant
restricted stock awards under the Plan in Common Stock or denominated in units
of Common Stock. The Plan Administrator, in its discretion, may make such awards
subject to conditions and restrictions, as set forth in the instrument
evidencing the award, which may be based on continuous service with the Company
or the attainment of certain performance goals related to profits, profit
growth, profit-related return ratios, cash flow, or shareholder returns, where
such goals may be stated in absolute terms or relative to comparison companies
or indices to be achieved during a period of time. The Plan Administrator may
choose, at the time of granting a restricted stock award or at any time
thereafter up to the time of payment of the award, to include as part of such
award an entitlement to receive dividends or dividend equivalents, subject to
such terms as the Plan Administrator may establish. All dividends or dividend
equivalents that are not paid currently may, in the Plan Administrator's sole
discretion, accrue interest and be paid to the participant if, when, and to the
extent such award is paid.
5.5 PAYMENT; DEFERRAL. Awards granted under the Plan may be settled
through cash payments, the delivery of Common Stock (valued at Fair Market
Value), or the granting of awards or combinations thereof as the Plan
Administrator shall determine. Any award settlement, including payment
deferrals, may be subject to such conditions, restrictions and contingencies as
the Plan Administrator shall determine. The Plan Administrator may permit or
require the deferral of any award payment, subject to such rules and procedures
as it may establish, which may include provisions for the payment or crediting
of interest, or dividend equivalents, including converting such credits to
deferred stock unit equivalents.
5.6 INDIVIDUAL AWARD AGREEMENTS. Stock Options shall, and other awards
may, be evidenced by agreements between the Company and the recipient in such
form and content as the Plan Administrator from time to time approves, which
agreements shall substantially comply with and be subject to the terms of the
Plan. Such individual agreements may contain such provisions or conditions as
the Plan Administrator deems necessary or appropriate to effectuate the sense
and purpose of the Plan and may be amended from time to time in accordance with
the terms thereof.
5.7 DETERMINATION OF FAIR MARKET VALUE OF COMMON STOCK. The "Fair
Market Value" of a share of Common Stock on any relevant date shall be
determined in accordance with the following provisions:
(a) If the Common Stock is not at the time listed or admitted to
trading on any stock exchange, then the Fair Market Value shall be the closing
selling price per share for Common Stock on the date in question on the stock
exchange determined by the Board to be the primary market for the Common Stock,
as such price is officially quoted in the composite tape of transactions on such
exchange. If there is no reported sale of Common Stock on such exchange on the
date in question, then the Fair Market Value shall be the closing selling price
on the exchange on the last preceding date for which such quotation exists.
(b) If the Common Stock is not at the time listed or admitted to
trading on any stock exchange but is traded on the over-the-counter market, the
Fair Market Value shall be the mean between the highest bid and lowest asked
prices (or, if such information is available, the closing selling price) per
share of Common Stock on the date in question on the over-the-counter market, as
such prices are reported by the National Association of Securities Dealers
through its Nasdaq system or any successor system. If there are no reported bid
and asked prices (or closing selling prices) for the Common Stock on the date in
question, then the mean between the highest bid price and lowest asked price (or
the closing selling price) on the last preceding date for which such quotations
exist shall be determinative of the Fair Market Value.
3
<PAGE>
(c) If the Common Stock at the time is neither listed nor admitted to
trading on any stock exchange nor traded on the over-the-counter market, then
the Fair Market Value shall be determined by the Board after taking into account
such factors as the Board shall deem appropriate, including, at the discretion
of the Board, one or more independent professional appraisals.
6. AWARD EXERCISE
6.1 PRECONDITION TO STOCK ISSUANCE. No shares shall be delivered
pursuant to the exercise of any stock option or stock appreciation right, in
whole or in part, until qualified for delivery under such securities laws and
regulations as may be deemed by the Plan Administrator to be applicable thereto
and until, in the case of the exercise of an option, payment in full of the
option price thereof (in cash or stock as provided in SECTION 6.3) is received
by the Company. No holder of an option or stock appreciation right, or any legal
representative, legatee or distributee shall be or be deemed to be a holder of
any shares subject to such option or right unless and until such option or right
is exercised, the exercise price is paid, and such shares are issued.
6.2 NO FRACTIONAL SHARES. No stock option may at any time be exercised
with respect to a fractional share. No fractional share shall be issued with
respect to a stock appreciation right; however, a fractional stock appreciation
right may be exercised for cash.
6.3 FORM OF PAYMENT. An optionee may exercise a stock option using as
the form of payment (a) cash or cash equivalent, (b) stock-for-stock payment (as
described below), (c) cashless exercises, (d) any combination of the above, or
(e) such other means as the Plan Administrator may approve. Any optionee who
owns Common Stock may use such shares as a form of payment to exercise stock
options granted under the Plan. The Plan Administrator, in its discretion, may
restrict or rescind this right by notice to optionees. A stock option may be
exercised in such manner only by tendering (actually or by attestation) to the
Company whole shares of Common Stock having a Fair Market Value equal to or less
than the exercise price. If an option is exercised by surrender of shares having
a Fair Market Value less than the exercise price, the optionholder must pay the
difference in cash.
7. TRANSFERABILITY. Any Incentive Stock Option granted under the Plan
shall, during the recipient's lifetime, be exercisable only by such recipient,
and shall not be assignable or transferable by such recipient other than by will
or the laws of descent and distribution. Except as specifically allowed by the
Plan Administrator, any other award under the Plan and any of the rights and
privileges conferred thereby shall not be assignable or transferable by the
recipient other than by will or the laws of descent and distribution and such
award shall be exercisable during the recipient's lifetime only by the
recipient.
8. REPURCHASE RIGHTS. The Plan Administrator may, in its sole discretion
and at any time, as a condition to the receipt of an award or the issuance of
Common Stock subject to an award, require an award recipient to enter into an
agreement under which the Company (or its assigns) has the right to reacquire
shares of Common Stock acquired pursuant to an award. Any repurchase right of
the Company shall be exercisable by the Company (or its assignees) upon such
terms and conditions as the Plan Administrator may specify in the agreement
evidencing such right.
9. WITHHOLDING TAXES; OTHER DEDUCTIONS. The Company shall have the right
to deduct from any settlement of an award granted under the Plan, including the
delivery or vesting of shares, (a) an amount of cash or shares of Common Stock
having a value sufficient to cover withholding as required by law for any
federal, state or local taxes, and (b) any amounts due from the recipient of
such award to the Company or to any parent or subsidiary of the Company or to
take such other action as may be necessary to satisfy any such withholding or
other obligations, including withholding from any other cash amounts due or to
become due from the Company to such recipient an amount equal to such taxes or
obligations. The Plan Administrator may, in its discretion, permit the holder of
an award, at the time the award vests or is exercised, to satisfy his or her tax
liability with respect to an award by tendering (actually or by attestation) to
the Company whole shares of Common Stock previously acquired by such individual
(other than pursuant to the transaction triggering the taxes) having a Fair
Market Value up to or equal to (but not in excess of) all or any portion of the
applicable tax liability incurred in connection with such vesting or exercise.
4
<PAGE>
10. TERMINATION OF SERVICES. The terms and conditions under which an award
may be exercised following termination of a recipient's employment, directorship
or independent contractor relationship with the Company shall be determined by
the Plan Administrator; provided, however, that Incentive Stock Options shall
not be exercisable at any time after the earliest of the date that is (a) three
months after termination of employment, unless due to death or Disability (as
defined in Section 22(e)(3) of the Code); (b) one year after termination of
employment due to Disability; or (c) ten years after the date of grant (five
years if granted to a shareholder who at the time the option is granted owns or
is deemed to own stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of any parent or subsidiary of
the Company).
11. TERM OF THE PLAN. The Plan shall become effective as of the date of
adoption by the Board, and shall remain in full force and effect through the
date that is ten years thereafter, unless sooner terminated by the Board. After
the Plan is terminated, no future awards may be granted, but awards previously
granted shall remain outstanding in accordance with their applicable terms and
conditions and the Plan's terms and conditions.
12. PLAN AMENDMENT; BIFURCATION. The Board may amend, suspend or terminate
the Plan at any time; provided that no such amendment shall be made without the
approval of the Company's shareholders (a) that would increase the number of
shares available for issuance under the Plan (other than in accordance with
SECTION 4.3), or (b) if such approval is required (i) to comply with Section 422
of the Code with respect to Incentive Stock Options, or (ii) for purposes of
Section 162(m) of the Code. Notwithstanding any provision of this Plan to the
contrary, the Board, in its sole discretion, may bifurcate the Plan so as to
restrict, limit or condition the use of any provision of the Plan to
participants who are officers or directors subject to Section 16 of the 1934 Act
without so restricting, limiting or conditioning the Plan with respect to other
participants.
13. PLAN NOT EXCLUSIVE. This Plan is not intended to be the exclusive
means by which the Company may issue awards to acquire its Common Stock.
14. GOVERNING LAW. The Plan shall be governed by, and all questions
arising hereunder shall be determined in accordance with, the laws of the State
of Arizona.
15. APPROVAL BY SHAREHOLDERS. This Plan shall be submitted to the
shareholders of the Company for their approval at a regular or special meeting
to be held within 12 months after the adoption of this Plan by the Board.
Shareholder approval shall be evidenced by the affirmative vote of the holders
of a majority of the shares of the Company's Common Stock present in person or
by proxy and voting at the meeting. If the shareholders decline to approve this
Plan at such meeting or if this Plan is not approved by the shareholders within
12 months after its adoption by the Board, this Plan (and all awards granted
hereunder) shall automatically terminate to the same extent and with the same
effect as though this Plan had never been adopted. If this Plan is approved by
shareholders, all awards granted under the Plan to persons who are "Affiliates"
of the Company (as defined under the Securities Act of 1933, as amended) shall
be deemed acquired on the date such approval is obtained.
5
Mark Shelley, CPA
110 S. Mesa Drive, #1
Mesa, Arizona 85210
(602) 833-4054
(602) 969-7056
December 12, 1999
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
I was previously the independent auditor for Signature Editions, Inc. and
Interarts Incorporated. I reported on the financial statements of Signature
Editions, Inc. as of June 9, 1998 and Interarts Incorporated for the period June
22, 1998 through September 30, 1998. I have read the statement by the company
included under Part II, Item 3 of its Form 10-SB regarding a change in auditors
and I have no disagreement with that statement.
Sincerely,
/s/ Mark Shelley
Mark Shelley
LIST OF SUBSIDIARIES
Name State of Incorporation
---- ----------------------
Signature Editions, Inc. Nevada
Cimarron Studio, Inc. Nevada
Interarts Incorporated Nevada
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report, dated November 10, 1999, on the consolidated
financial statements of Deerbrook Publishing Group, Inc. and Subsidiaries,
included in this Form 10-SB.
/s/ Semple & Cooper, LLP
Semple & Cooper, LLP
Phoenix, Arizona
December 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1999
<PERIOD-START> JUN-06-1998 OCT-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1999
<EXCHANGE-RATE> 1 1
<CASH> 0 27,832
<SECURITIES> 0 0
<RECEIVABLES> 0 41,666
<ALLOWANCES> 0 0
<INVENTORY> 118,935 202,739
<CURRENT-ASSETS> 127,479 416,137
<PP&E> 969 122,373
<DEPRECIATION> 0 1,220
<TOTAL-ASSETS> 128,448 995,608
<CURRENT-LIABILITIES> 20,000 471,511
<BONDS> 0 0
0 0
0 0
<COMMON> 3,435 9,968
<OTHER-SE> 392,300 1,710,913
<TOTAL-LIABILITY-AND-EQUITY> 128,448 995,608
<SALES> 0 57,692
<TOTAL-REVENUES> 0 57,692
<CGS> 0 49,303
<TOTAL-COSTS> 287,287 1,010,480
<OTHER-EXPENSES> 0 2,913
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (287,287) (1,005,004)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (287,287) (1,005,004)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (287,287) (1,005,004)
<EPS-BASIC> (.10) (.16)
<EPS-DILUTED> 0 0
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