As Filed With the Securities and Exchange Commission on September 5, 2000
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-SB/A
(AMENDMENT NO. 3)
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.
(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.)
12919 S.W. Freeway, Suite 170, Stafford, Texas 77477
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(Address of Principal Executive Offices) (Zip Code)
(281) 494-4734
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
None
-----------------------------------------
(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
---------------------------------------
(Title of Class)
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DEERBROOK PUBLISHING GROUP, INC.
FORM 10-SB/A
(AMENDMENT NO. 3)
TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS .......................................... 1
General ........................................................ 1
Risk Factors ................................................... 1
Art Industry Overview .......................................... 11
Strategy ....................................................... 11
Products and Services .......................................... 12
Customers ...................................................... 13
Marketing and Promotion ........................................ 14
Customer Service and Order Fulfillment ......................... 14
Infrastructure and Technology .................................. 15
Competition .................................................... 15
Intellectual Property .......................................... 15
Government Regulation .......................................... 15
Insurance ...................................................... 16
Employees ...................................................... 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ............................. 17
Selected Financial Data ........................................ 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 18
ITEM 3. DESCRIPTION OF PROPERTY .......................................... 20
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ... 21
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS ..... 22
ITEM 6. EXECUTIVE COMPENSATION ........................................... 23
1999 Incentive Stock Plan ...................................... 23
Directors' Compensation ........................................ 24
Employment Agreements .......................................... 24
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................... 24
ITEM 8. DESCRIPTION OF SECURITIES ........................................ 25
General ........................................................ 25
Common Stock ................................................... 25
Preferred Stock ................................................ 25
Warrants and Options ........................................... 25
Anti-Takeover Effects of Our Articles of Incorporation
and Bylaws .................................................... 26
Transfer Agent and Registrar ................................... 26
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS ................ 27
ITEM 2. LEGAL PROCEEDINGS ........................................... 27
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ............... 27
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES ..................... 28
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ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS ................... 31
PART F/S ................................................................. 31
PART III
ITEM 1. INDEX TO EXHIBITS ........................................... 32
ITEM 2. DESCRIPTION OF EXHIBITS ..................................... 32
SIGNATURES ............................................................... 33
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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 - RISK FACTORS."
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Deerbrook Publishing Group, Inc. is an Internet-based 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. In September 1999, we launched Artup.com, which is an Internet
portal site intended to serve as an e-commerce enabled Internet art destination
to bring together artists, collectors, galleries, and distributors. From August
1998 until December 31, 1999, we provided custom lithography, serigraphy,
etching, and monoprinting services to artists and publishers. We discontinued
those operations effective December 31, 1999, to concentrate our efforts on our
Internet-based initiatives.
We currently maintain our principal executive offices at 12919 S.W.
Freeway, Suite 170, Stafford, Texas 77477, and our telephone number is (281)
494-4734. All references to our business operations include the operations of
Deerbrook Publishing Group, Inc., our subsidiaries, operating divisions, and
predecessor entities. We have filed this registration statement on Form 10-SB in
order to become a reporting company under the Securities Exchange Act of 1934,
so that our stock will qualify for trading on the NASD OTC Bulletin Board.
Although we have become a reporting company under the Exchange Act, our stock
will not qualify for trading on the OTC Bulletin Board until the SEC staff
completes its review of our filings and we comply with the other requirements
for trading on the OTC Bulletin Board.
RISK FACTORS
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 31, 1999, we had outstanding short-term liabilities and capital lease
obligations totaling $880,630. 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, 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 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 $1,345,000 for the year ended September 30, 1999 and
$1,422,000 for the three months ended December 31, 1999. As of December 31,
1999, we had an accumulated deficit of approximately $3,055,000. Losses incurred
during fiscal 1999 and the first three months of fiscal 2000 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, and the first three
months of fiscal 2000 have been prepared assuming that we will continue as a
going concern.. The report by our independent public accountants on our
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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 and the first three months of fiscal 2000 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. From
August 1998 until December 31, 1999, we derived our revenue primarily from
providing printing and publishing services to artists and publishers. We
launched our Artup.com Web site in September 1999, but we have not had
sufficient capital to operate our Web site on a regular basis since January 1,
2000. We discontinued our printing and publishing operations effective December
31, 1999. Our future success will depend upon the success of our Artup.com Web
site, which has been operational only intermittently since 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 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 directors, particularly Mark L. Eaker, our President and Chief
Executive Officer. Our future success also will depend upon our ability to
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attract and retain qualified personnel. The loss of Mr. Eaker's services, 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 become competitive, we must
* 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 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
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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 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.
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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.
Although we believe that IIS has sufficient capacity to handle our
current and anticipated volume of traffic, unexpected 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. If traffic to our
Web site increases faster than we or IIS anticipate, the failure to upgrade our
Web site technology and network infrastructure within a reasonable period of
time could have a material adverse effect on our business, operating results,
and financial condition.
WE FACE INTENSE COMPETITION.
The fine art 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
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
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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.
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.
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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 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 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 our 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.
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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.
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
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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. 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. We currently do not maintain insurance to
protect us against these types of claims.
RIGHTS TO ACQUIRE SHARES OF COMMON STOCK WILL RESULT IN DILUTION TO OTHER
HOLDERS OF COMMON STOCK.
As of May 31, 2000, 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, in 1999 we issued warrants in
connection with an employment agreement and in the second quarter of fiscal 2000
we issued warrants and options to acquire an additional 300,000 shares of common
stock. 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.
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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 "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 9,490,547 shares of common stock
outstanding as of May 31, 2000, a total of 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
4,460,023 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.
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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
applicable securities laws. 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 elsewhere under this
Part 1, Item 1, "Description of Business - Risk Factors." The safe harbor with
respect to forward-looking statements that is provided by federal securities
laws will not apply to forward-looking statements in this Report.
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. We believe that key drivers of
growth in this market 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
1990s. In addition, the U.S. Census Bureau predicts that the number of
households will increase through 2010. 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.
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 also seek to
develop relationships with established as well as new and
emerging artists in order to expand our access to a broad range
of artistic works that appeal to consumers. We will 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
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business partners. We are developing our industry relationships
with various galleries, artists, and distributors to 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.
* PURSUE STRATEGIC ACQUISITIONS. We believe that significant
consolidation opportunities exist in the highly fragmented fine
art industry. In evaluating acquisition candidates, we will 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.
PRODUCTS AND SERVICES
ARTUP.COM
We intend to develop Artup.com as an Internet portal and an e-commerce
enabled Internet art destination that will 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 will provide an 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 will 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
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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 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.
Artup.com uses standard 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. 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
* 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
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. These were customers of our printing and publishing
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operations, which we discontinued as of December 31, 1999. We currently do not
anticipate that any one customer will represent 10% or more of our total revenue
in the future.
MARKETING AND PROMOTION
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 approximately 1,000 galleries
to target as potential users of our co-branding approach. As of May 31, 2000,
approximately 200 galleries have indicated an interest in co-branding with
Artup.com. The addition of even a small percentage of these galleries to our
network would significantly increase the number and variety of artwork available
through Artup.com. If we are able to obtain adequate financing, we anticipate
that we will be able to add approximately 100 galleries per month to our
network. We base this estimate on the responses of the 200 galleries that have
expressed an interest in co-branding with Artup.com. In order to add new
galleries at this rate, we would require approximately $36,000. We would use
these funds primarily to hire personnel to solicit galleries to join our
network. We anticipate raising these funds through debt financing from our
corporate officers or other interested investors.
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.
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. IIS's technology infrastructure is based on an
architecture designed to be secure, reliable, and expandable. IIS designed its
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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. IIS employs
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 plan to develop a comprehensive disaster
recovery plan to respond to system failures.
COMPETITION
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.
We believe that the experience of our senior management and directors
in the art and collectible industries will enable us to compete effectively in
those markets. Many of our existing or potential competitors in the
Internet-based market have greater market recognition and substantially greater
financial, marketing, production, distribution, and other resources than we
possess. We currently have an insignificant amount of revenue, name recognition,
and market share as compared with our competitors. 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 or made available to us by third parties, primarily IIS. We
currently do not have a long-term arrangement with IIS for its services. The
loss of our relationship with IIS or the inability to maintain our Web site or
related software or obtain upgrades to the software used in connection with our
Web site could result in delays in completing our Internet software enhancements
and developments until we identify, license, develop, and integrate a provider
of equivalent technology. Any such delays could have an adverse effect on our
Internet business.
As part of our confidentiality procedures, we generally enter into
agreements with our employees and consultants and limit access to and
distribution of our 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 information or they could copy or otherwise obtain
and use our 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.
GOVERNMENT REGULATION
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than 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
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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.
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.
INSURANCE
Because of our limited financial resources and the limited nature of
our operations, we currently do not have casualty or liability insurance
coverage for our business operations. We intend to obtain insurance coverage as
and when we have available cash resources for such purposes.
EMPLOYEES
As of May 31, 2000 we had 2 part-time employees. We intend to hire
additional employees as and when we obtain sufficient financing to expand our
operations.
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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 for the year ended September 30, 1999 and the period ended September 30,
1998 have been derived from the consolidated financial statements audited by
Semple & Cooper, L.L.P., independent public accountants. Data for the three
months ended December 31, 1998 and 1999 have been derived from our unaudited
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Report and, in our opinion, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the results of
operations for the periods presented. Results for the three months ended
December 31, 1999 are not necessarily indicative of the results to be expected
for the full year. This data should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Report.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
YEAR ENDED PERIOD ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS:
Revenue ............................................ $ 29,026 $ -- $ 1,123 $ 5,805
Cost and expenses:
Cost of revenue .................................. (20,219) -- (4,899) (3,174)
General and administrative expenses .............. (1,316,860) (287,287) (728,470) (7,247)
Interest income (expense) and other, net ........... (2,913) -- -- --
----------- ----------- ----------- -----------
Loss from continuing operations before
income taxes ...................................... (1,310,966) (287,287) (732,246) (4,616)
Income taxes ....................................... -- -- -- --
----------- ----------- ----------- -----------
Loss from continuing operations .................... (,1310,966) (287,287) (732,246) (4,616)
Loss from discontinued operations .................. (34,560) -- (371,462) --
----------- ----------- ----------- -----------
Net loss ........................................... $(1,345,526) $ (287,287) $(1,103,708) $ (4,616)
Basic loss per common share and common
share equivalent (1) ............................. $ (.21) $ (.10) $ (.17) $ (.01)
Basic weighted average number of common shares
and common share equivalents outstanding ......... 6,404,953 2,751,228 6,404,953 2,751,228
CONSOLIDATED BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash equivalents .......................... $ 36,066 $ 139
Working capital (deficit) .......................... (294,145) (470,647)
Total assets ....................................... 995,608 1,076,112
Long-term liabilities .............................. 95,507 90,894
Total stockholders' equity (deficit) ............... 406,090 (102,382)
</TABLE>
----------
(1) Diluted earnings per share have not been presented as they are antidilutive.
17
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
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."
Our financial statements reflect June 19, 1998 as our date of inception
because that was the date on which Signature Editions was incorporated. During
fiscal 1998, fiscal 1999, and the first three months of fiscal 2000, we derived
our revenue primarily from our printing and publishing operations. We
discontinued those operations effective December 31, 1999, to concentrate our
efforts on our Internet-based initiative. As a result, the results of those
operations are now recorded under "Loss from Discontinued Operations" in the
accompanying financial statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
AND DECEMBER 31, 1998
REVENUE. Revenue for the quarter ended December 31, 1999 totaled $1,123
as compared with $5,805 in the quarter ended December 31, 1998. The decrease in
revenue is attributable mainly to our management's focus on efforts to raise
capital to finance our Internet operations.
COST OF GOODS SOLD; GROSS PROFIT (LOSS). Cost of goods sold totaled
$4,899 during the quarter ended December 31, 1999, as compared with $3,174 in
the quarter ended December 31, 1998. As a result, we recorded a gross loss of
$3,776 in the quarter ended December 31, 1999 as compared with gross profit of
$2,631 in the quarter ended December 31, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $728,470 in the quarter ended December 31, 1999 from
$7,247 in the quarter ended December 31, 1998. The increase is attributable
primarily to costs incurred to develop our Web site and for salaries.
INCOME TAXES. As of December 31, 1999, we had a net operating loss
carryforward balance of approximately $3,000,000 from losses incurred in 1999
and 1998.
LOSS FROM DISCONTINUED OPERATIONS. We recorded a loss of $371,462
related to our printing and publishing operations in the quarter ended December
31, 1999. We did not record any gain or loss related to these operations for the
quarter ended December 31, 1998.
NET LOSS. Net loss for the quarter ended December 31, 1999 increased to
$1,103,708 over net loss of $4,616 for the quarter ended December 31, 1998. This
increase is primarily the result of increased general and administrative
expenses and losses from discontinued operations during the quarter ended
December 31, 1999.
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 $29,026.
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.
COST OF GOODS SOLD; GROSS PROFIT. Cost of goods sold totaled $20,219
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 $8,807, or approximately 30% of revenue, in fiscal 1999.
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $1,316,860 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 salaries.
INTEREST EXPENSE. 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.
PROVISION FOR INCOME TAXES. As of September 30, 1999, we had a net
operating loss carryforward balance of approximately $1,600,000 from losses
incurred in 1999 and 1998.
LOSS FROM DISCONTINUED OPERATIONS. We recorded a loss of $34,560
related to our printing and publishing operations in the year ended September
30, 1999. We did not record any gain or loss related to these operations in the
period from the date of inception (June 9, 1998) through September 30, 1998.
NET LOSS. Net loss for fiscal 1999 increased to $1,345,526 over net
loss of $287,287 for the period from the date of inception (June 9, 1998)
through September 30, 1998. This increase is primarily the result of increased
general and administrative expenses and losses associated with our discontinued
printing and publishing operations in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital decreased to a negative position of $470,647 at
December 31, 1999 from a negative position of $294,145 at September 30, 1999.
Current assets increased to $412,189 at December 31, 1999 from $199,866 at
September 30, 1999, primarily due to decreases in accounts receivable and
prepaid expenses and an increase in a deposit related to an acquisition. Current
liabilities increased to $789,736 at December 31, 1999 from $494,011 at
September 30, 1999, primarily due to increases in accounts payable and accrued
payroll.
Our operating activities used net cash of $840,295 during the year
ended September 30, 1999 and $167,827 in the quarter ended December 31, 1999 and
the major element contributing to net operating cash flow was cash paid for
product development costs and for salaries.
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 $351,947, 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
that it was immediately exercisable for 500,000 shares. We terminated the
employment agreement in September 1999 and the former employee notified us that
he wished to exercise the warrant with respect to the 500,000 shares that were
exercisable. We disputed the former employee's right to exercise the warrant and
in January 2000 we agreed to issue the former employee 350,000 in settlement of
the warrant.
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<PAGE>
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 entered into an employment agreement with Mark L.
Eaker to serve as our Chief Executive Officer. We recorded an expense of
$350,000 in the quarter ended December 31, 1999, to reflect our obligation to
issue Mr. Eaker 1,000,000 shares of common stock under the employment agreement.
We issued those shares to Mr. Eaker in January 2000.
In November 1999, we also 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 provided for a
total purchase price of $3,300,000, consisting of $2,700,000 cash and 400,000
shares of our common stock. We paid Mr. Eaker a non-refundable deposit of
$225,000 in cash and 266,000 shares of common stock in connection with the
letter of intent. Because our company was unable to fulfill its obligations in
order to consummate the transaction, the letter of intent expired and Mr. Eaker
retained the non-refundable deposit. In addition, as of May 31, 2000, Mr. Eaker
has personally paid expenses totaling approximately $50,000 on behalf of our
company. Except for the 1,000,000 shares of common stock that we issued in
January 2000, Mr. Eaker has deferred payment of his salary and other benefits
that we are obligated to pay under his employment agreement with our company.
Beginning January 1, 2000, Mr. Eaker has provided office space, staff, and other
operating expenses for our corporate headquarters at the headquarters of Gregory
Editions, Inc., which is owned and operated by Mr. Eaker. We have reflected all
expenses incurred through December 31, 1999 and paid by Mr. Eaker, as well as
all deferred salaries through December 31, 1999, in our financial statements for
the quarter ended December 31, 1999.
We currently do not have meaningful cash resources or cash flows from
operations to support our business. The future success of our business currently
depends upon our ability to raise additional capital. 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
We did not experience any disruption to our operations as a result of
any failure of our systems or the systems of any of our significant vendors,
suppliers or other third-parties to function properly on or after January 1,
2000.
ITEM 3. DESCRIPTION OF PROPERTY.
Our executive offices currently are located at the headquarters of
Gregory Editions, Inc., which is owned and operated by Mark L. Eaker, our
Chairman of the Board, President, and Chief Executive Officer. We currently do
not have a formal arrangement with Gregory Editions for use of our office space.
We intend to enter into a formal arrangement with Gregory Editions or to acquire
separate facilities as and when we obtain additional financing and our
operations grow.
20
<PAGE>
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 May 31, 2000, 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 ................................ 1,404,000 14.8%
Keith M. Chesser ............................. 500,000 5.3%
Mike A. Santellanes .......................... 499,999 5.3%
Joseph D. Patterson .......................... 250,000 2.6%
All directors and officers
as a group (four persons) ................... 2,653,999 28.0%
NON-MANAGEMENT 5% STOCKHOLDER (3)
Michael R. Raburn ............................ 500,000 5.3%
----------
(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 12919 S.W. Freeway, Suite 170, Stafford, Texas 77477.
(2) Percentages are based on 9,490,547 shares outstanding as of May 31, 2000.
None of the identified persons hold stock options or warrants to acquire
our common stock.
(3) The information with respect to non-management ownership is derived from
information obtained from our transfer agent as of March 14, 2000.
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<PAGE>
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
Joseph D. Patterson 51 Director
MARK L. EAKER has served as our Chairman of the Board, President, and
Chief Executive Officer since November 1999. Mr. Eaker has served as President
and director of Gregory Editions, Inc., a publisher and distributor of fine art
reproductions, since November 1995. Mr. Eaker served as President of Somerset
House Publishing in Houston, Texas, from October 1993 until October 1995.
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. From 1997 until
October 1998, Mr. Chesser served as Business Manager for Cimarron Fine Art
Studio. Mr. Chesser was not regularly employed during 1996 and 1997 due to a
medical disability. During 1994 and 1995, Mr. Chesser served as an Account
Representative and Financial Planner for National Financial Design. During 1993
and 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. Mr. Chesser is a Certified Public Accountant.
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.
JOSEPH D. PATTERSON has served as a director of our company since
December 1999. Mr. Patterson was employed by Hallmark Cards, Inc., a
multi-billion dollar greeting card, artwork, and collectibles distributor, from
June 1978 until June 1998, most recently as a Director - Corporate Development.
Mr. Patterson retired from Hallmark in June 1998.
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<PAGE>
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 May 31, 2000, 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. 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 rests 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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<PAGE>
DIRECTORS' COMPENSATION
We currently do not pay any cash compensation to our directors for
their services to us. We may reimburse our directors for certain expenses in
connection with attendance at board and committee meetings. In January 2000, we
issued 250,000 shares of common stock to Joseph D. Patterson for his services as
a director of our company.
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.
Pursuant to the agreement, we issued 1,000,000 shares of our common stock to Mr.
Eaker in January 2000. The agreement also provides that Mr. Eaker will be
eligible to receive an annual bonus in an amount, if any, as determined by our
Board of Directors. 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 and benefits 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. As of May 31, 2000, we have not granted any options to Mr. Chesser under
the employment agreement. 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 his
salary and benefits 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 400,000 shares
of our common stock. We paid Mr. Eaker a non-refundable deposit of $225,000 in
cash and 266,000 shares of common stock in connection with the letter of intent.
Because our company was unable to fulfill its obligations in order to consummate
the transaction, the letter of intent expired and Mr. Eaker retained the
non-refundable deposit. In addition, as of May 31, 2000, Mr. Eaker has
personally paid expenses totaling approximately $50,000 on behalf of our company
and has deferred payment of his salary and other benefits that we are obligated
to pay under his employment agreement with our company. Beginning January 1,
2000, Mr. Eaker has provided office space, staff, and other operating expenses
for our corporate headquarters at the headquarters of Gregory Editions, Inc.,
which is owned and operated by Mr. Eaker.
Through December 31, 1999, we leased printing equipment from Michael
Raburn, a former officer and director of our company, pursuant to an oral
agreement under which we paid $10,000 per month. We incurred expenses of $50,000
in fiscal 1999 and none in the first quarter of fiscal 2000 under this
agreement. Through December 31, 1999, we also conducted our operations in a
building leased by Michael Raburn. We paid a total of approximately $27,200 of
lease obligations for this building, although we were not a party to the lease
and occupied the building at the pleasure of Mr.. Raburn. Effective December 31,
1999, we discontinued our printing and publishing operations and moved our
remaining Internet-based operations out of the building leased by Mr. Raburn.
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 pursuant to a verbal agreement between us and Mr. Eaker in August
1998. 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.
24
<PAGE>
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 January 2000, we issued 1,000,000 shares of common stock to Mark
Eaker pursuant to his employment agreement. We also issued 250,000 shares of
common stock to Joseph Patterson in January 2000 for his services as a director
of our company.
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 May 31, 2000, there were
9,490,547 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 AND OPTIONS
In November 1999, we issued warrants to purchase an aggregate of
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 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.
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On January 3, 2000, we issued warrants to acquire 100,000 shares of
common stock to one person as compensation for services rendered to our company.
The warrants have an exercise price of $1.25 per share and expire on January 1,
2005.
On February 16, 2000, we issued options to acquire 200,000 shares of
common stock to one person for a total purchase price of $1,000. The options
have an exercise price of $.50 per share and expire on February 16, 2002.
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 that 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.
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.
26
<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................................... 1.75 0.19
2000:
First Quarter.................................... $0.48 $0.21
Second Quarter (through May 31, 2000)............ 0.40 0.16
As of May 31, 2000, there were 51 holders of record of our common
stock. The closing bid price of our common stock on the National Quotation
Bureau's "Pink Sheets" on May 31, 2000 was $0.15 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
27
<PAGE>
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 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
subsequent 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.
On April 1, 1997, our predecessor, Biovid Corporation, 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. Biovid issued these shares
pursuant to the exemption provided by Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering. We determined that
this offering fit within the exemption provided by Section 4(2) based upon the
fact that it was the initial issuance of stock by Biovid to its initial three
stockholders, two of whom also were directors of Biovid at that time.
On May 19, 1997, we sold an aggregate of 1,250,000 shares of common
stock to 25 non-accredited investors 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 as a transaction by an issuer
not involving a public offering.
On August 13, 1998, we issued an aggregate of 2,085,000 shares of
common stock to the 12 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 as a
transaction by an issuer not involving a public offering. We determined that
this offering fit within the exemption provided by Section 4(2) based upon the
fact that we issued the shares solely to the 12 existing stockholders of
Signature Editions, Inc., we did not engage in any form of general solicitation
or general advertisement in connection with the issuance of these shares, and we
placed restrictive legends on the certificates representing the shares to ensure
that the shares would not be redistributed.
On January 27, 1999, we issued an aggregate of 100,000 shares of common
stock valued at $9,000 to Mark L. Eaker as payment for consulting services
pursuant to a verbal agreement between us and Mr. Eaker in August 1998. We
issued these shares pursuant to the exemption provided by Rule 701 under the
Securities Act for securities issued in compensatory circumstances.
28
<PAGE>
On March 3, 1999, we issued an aggregate of 1,926,000 shares of common
stock to the 20 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 as a transaction
by an issuer not involving a public offering. We determined that this offering
fit within the exemption provided by Section 4(2) based upon the fact that we
issued the shares solely to the 20 existing stockholders of Interarts
Incorporated, we did not engage in any form of general solicitation or general
advertisement in connection with the issuance of these shares, and we placed
restrictive legends on the certificates representing the shares to ensure that
the shares would not be redistributed.
On April 6, 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. One of the purchasers was an accredited investor. The other purchaser was
our legal counsel at that time and had served as our legal counsel since our
inception. We issued these shares pursuant to the exemption provided by Rule 504
of Regulation D under the Securities Act as a transaction by an issuer not
involving a public offering.
On May 1, 1999, we issued an aggregate of 900,000 shares of common
stock to the 12 stockholders of Cimarron Studio, Inc. in exchange for all of
those persons' shares of Cimarron Studio, Inc. We completed the acquisition in
September 1999. We issued these shares pursuant to the exemption provided by
Section 4(2) of the Securities Act as a transaction by an issuer not involving a
public offering. We determined that this offering fit within the exemption
provided by Section 4(2) based upon the fact that we issued the shares solely to
the 12 existing stockholders of Cimarron Studio, Inc., we did not engage in any
form of general solicitation or general advertisement in connection with the
issuance of these shares, and we placed restrictive legends on the certificates
representing the shares to ensure that the shares would not be redistributed.
On July 2, 1999, July 9, 1999, August 12, 1999, August 31, 1999,
September 21, 1999, and September 27, 1999, we issued an aggregate of 135,700
shares of common stock valued at $351,947, 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 for securities issued in compensatory
circumstances.
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 that 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 wished to exercise the warrant with respect to the
500,000 shares that were exercisable. We disputed the former employee's right to
exercise the warrant and in January 2000 we agreed to issue the former employee
350,000 shares of common stock in settlement of the warrant. We issued these
warrants pursuant to the exemption provided by Rule 701 under the Securities Act
for securities issued in compensatory circumstances.
On October 29, 1999 and November 4, 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 warrants pursuant to the exemption provided
by Rule 505 of Regulation D under the Securities Act as a transaction by an
issuer not involving a public offering.
On January 3, 2000, we issued warrants to acquire 100,000 shares of
common stock to one person as compensation for services rendered to our company.
The warrants have an exercise price of $1.25 per share and expire on January 1,
2005. We issued these shares pursuant to the exemption provided by Section 4(2)
of the Securities Act as a transaction by an issuer not involving a public
offering. We determined that this offering fit within the exemption provided by
Section 4(2) based upon the fact that we issued the warrants to only one
individual with whom we had a prior relationship as a result of that person's
services to our company, and we did not engage in any form of general
solicitation or general advertisement in connection with the issuance of these
warrants.
29
<PAGE>
On January 4, 2000, we issued (a) 1,000,000 shares of common stock to
Mark L. Eaker pursuant to his employment agreement and (b) 266,000 shares of
common stock to Mr. Eaker in connection with a letter of intent to acquire Mr.
Eaker's business. See Item 6, "Executive Compensation - Employment Agreements"
and Item 7, "Certain Relationships and Related Transactions." We issued these
shares pursuant to the exemption provided by Section 4(2) of the Securities Act
as a transaction by an issuer not involving a public offering. We determined
that this offering fit within the exemption provided by Section 4(2) based upon
Mr. Eaker's relationship with our company as Chairman of the Board, President,
and Chief Executive Officer, and we placed restrictive legends on the
certificates representing the shares to ensure that the shares would not be
redistributed.
On January 4, 2000, we issued 250,000 shares of common stock to Joseph
D. Patterson for his services as a director of our company. We issued these
shares pursuant to the exemption provided by Section 4(2) of the Securities Act
as a transaction by an issuer not involving a public offering. We determined
that this offering fit within the exemption provided by Section 4(2) based upon
Mr. Patterson's relationship with our company as a director, and we placed
restrictive legends on the certificates representing the shares to ensure that
the shares would not be redistributed.
On January 4, 2000, we issued 291,324 shares of our common stock valued
at $1.00 per share or an aggregate of $291,324, to Integrated Information
Systems in payment for services rendered in developing and hosting our Web site.
We issued these shares pursuant to the exemption provided by Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering. We
determined that this offering fit within the exemption provided by Section 4(2)
based upon the fact that we issued the shares to only one entity, we have an
extensive business relationship with Integrated Information Systems as the
developer and host of our Web site, and we placed restrictive legends on the
certificates representing the shares to ensure that the shares would not be
redistributed.
On February 8, 2000, we issued 60,000 shares of common stock valued at
$0.25 per share, or an aggregate of $15,000, to one person as compensation for
legal services provided to our company. We issued these shares pursuant to the
exemption provided by Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering. We determined that this offering fit
within the exemption provided by Section 4(2) based upon the fact that we issued
the shares to only one individual who had an extensive relationship with our
company as legal counsel since the time of inception, and we placed restrictive
legends on the certificates representing the shares to ensure that the shares
would not be redistributed.
On February 16, 2000, we issued options to acquire 200,000 shares of
common stock to one person for a total purchase price of $1,000. The options
have an exercise price of $.50 per share and expire on February 16, 2002. We
issued these options pursuant to the exemption provided by Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering. We
determined that this offering fit within the exemption provided by Section 4(2)
based upon the fact that the offering was made to only one individual with whom
management of our company had a pre-existing relationship, and the offering was
made without any general solicitation or general advertisement.
On March 3, 2000, we sold 200,000 shares of common stock to one
accredited investor for a total purchase price of $100,000, or $0.50 per share.
We sold these shares pursuant to the exemption provided by Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering. We
determined that this offering fit within the exemption provided by Section 4(2)
based upon the fact that the offering was made to only one individual who had
previously served as an officer of our company, the offering was made without
any general solicitation or general advertisement, and we placed restrictive
legends on the certificates representing the shares to ensure that the shares
would not be redistributed.
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
30
<PAGE>
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-31 of this Report. No supplementary financial information is
required.
31
<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*
4.3 Common Stock Purchase Warrant dated January 3, 2000, issued to
Gene Bowlds*
4.4 Non-Statutory Stock Option Certificate dated February 16, 2000, issued
to Michael Paloma*
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 Restated Financial Data Schedule for the Fiscal Year Ended
September 30, 1999
27.2 Restated Financial Data Schedule for the Three Months Ended
December 31, 1999
----------
* Previously filed.
ITEM 2. DESCRIPTION OF EXHIBITS.
The information required by this Item is contained in Part III, Item 1,
"Index to Exhibits."
32
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this Amendment No. 3 to Registration Statement on Form
10-SB to be signed on its behalf by the undersigned, thereunto duly authorized.
Deerbrook Publishing Group, Inc.
--------------------------------
(Registrant)
Date: September 5, 2000 By: /s/ Mark L. Eaker
----------------- ------------------------------
(Signature)
Name: Mark L. Eaker
Title: President and Chief Executive Officer
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors
Deerbrook Publishing Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Deerbrook
Publishing Group, Inc. and Subsidiaries as of September 30, 1999, 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 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, 1998) 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, LLP
Certified Public Accountants
Phoenix, Arizona
November 10, 1999
F-1
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
September 30, December 31,
1999 1999
------------- ------------
Current Assets:
Cash and cash equivalents (Note 1) $ 36,066 $ 139
Accounts receivable
- trade, net (Note 1) 20,000 150
Prepaid expenses and other assets (Note 4) 143,800 93,800
Deposit (Note 12) -- 318,100
---------- ----------
Total Current Assets 199,866 412,189
---------- ----------
Property and Equipment, net
(Notes 1, 2 and 3) 118,918 113,840
---------- ----------
Other Assets:
Inventory (Note 1) 160,239 160,842
Goodwill (Note 1) 458,318 158,873
Net assets of discontinued
operations (Notes 1 and 11) 58,267 53,748
Deferred offering costs -- 176,620
Deposit (Note 12) -- 225,000
---------- ----------
676,824 550,083
---------- ----------
Total Assets $ 995,608 $1,076,112
========== ==========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-2
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
September 30, December 31,
1999 1999
----------- -----------
Current Liabilities:
Obligation under capital lease
- current portion (Notes 1 and 3) $ 17,143 $ 21,755
Notes payable - related parties (Note 6) 30,000 30,000
Accounts payable 243,504 472,403
Accrued payroll (Note 4) 149,899 194,778
Other liabilities (Note 6) 53,465 163,900
----------- -----------
Total Current Liabilities 494,011 882,836
Long-Term Liabilities:
Obligation under capital lease
- non-current (Notes 1 and 3) 95,507 90,894
----------- -----------
Total Liabilities 589,518 973,730
----------- -----------
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 9,968 8,623
Additional paid-in capital 2,028,935 2,380,280
Warrants -- 450,000
Accumulated deficit (1,632,813) (2,736,521)
----------- -----------
Total Stockholders' Equity (Deficit) 406,090 102,382
----------- -----------
Total Liabilities and Stockholders'
Equity $ 995,608 $ 1,076,112
=========== ===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-3
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Date of
Inception (Unaudited)
(June 9,1998) Three Months Ended
Year Ended Through -----------------------------
September 30, September 30, December 31, December 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 29,026 $ -- $ 1,123 $ 5,805
Cost of Revenues (20,219) -- (4,899) (3,174)
----------- ----------- ----------- -----------
Gross Profit (Loss) 8,807 -- (3,776) 2,631
General and Administrative
Expenses (1,316,860) (287,287) (728,470) (7,247)
Other income 260 -- -- --
Interest expense (3,173) -- -- --
----------- ----------- ----------- -----------
Loss from Continuing Operations
before Income Taxes (1,310,966) (287,287) (732,246) (4,616)
Income Taxes -- -- -- --
----------- ----------- ----------- -----------
Loss from Continuing Operations (1,310,966) (287,287) (732,246) (4,616)
Loss from Discontinued Operations (34,560) -- (371,462) --
----------- ----------- ----------- -----------
Net Loss $(1,345,526) $ (287,287) $(1,103,708) $ (4,616)
=========== =========== =========== ===========
Basic Loss Per Share:
Loss from continuing operations $ (.20) $ (.10) $ (.11) $ --
Loss from discontinued operations (.01) -- (.06) --
----------- ----------- ----------- -----------
Net Loss $ (.21) $ (.10) $ (.17) $ --
=========== =========== =========== ===========
Weighted Average Number of Shares
Outstanding 6,404,953 2,751,228 6,404,953 2,751,228
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-4
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM THE DATE OF INCEPTION
(JUNE 9, 1998) THROUGH DECEMBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Total
Additional Stock-
Common Stock Paid-in Accumulated holders'
Shares Amount Capital Warrants Deficit Equity
------ ------ ------- -------- ------- ------
<S> <C> <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 135,700 136 351,811 -- -- 351,947
Purchase of Cimarron Studio, Inc. 900,000 900 224,100 -- -- 225,000
Net loss, year ended September 30, 1999 -- -- -- -- (1,345,526) (1,345,526)
---------- -------- ---------- --------- ----------- -----------
Balance, September 30, 1999 9,968,224 9,968 2,028,935 -- (1,632,813) 406,090
Return of common stock (Note 7) (2,345,000) (2,345) 2,345 -- -- --
Issuance of common stock (Note 7) 1,000,000 1,000 349,000 -- -- 350,000
Sale of 600,000 common stock
warrants (Note 7) -- -- -- 450,000 -- 450,000
Loss for the three months ended
December 31, 1999 (unaudited) -- -- -- -- (1,103,708) (1,103,708)
---------- -------- ---------- --------- ----------- -----------
8,623,224 $ 8,623 $2,380,280 $ 450,000 $(2,736,521) $ 102,382
========== ======== ========== ========= =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Date of
Inception (Unaudited)
(June 9,1998) Three Months Ended
Year Ended Through -----------------------------
September 30, September 30, December 31, December 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,345,526) $ (287,287) $(1,103,708) $ (4,616)
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Depreciation and amortization 1,220 -- 27,778 --
Impairment of long-term asset -- -- 276,745 --
Common stock issued for
inventory and services 351,947 351,610 350,000 --
Net assets acquired in acquisitions (3,946) -- -- --
Net assets of discontinued operations (50,033) -- 4,519 --
Changes in operating assets and liabilities:
Accounts receivable
- trade (21,666) -- 19,850 --
- related entities 8,544 (8,544) -- 6,811
Prepaid expenses and other assets (143,900) 125 50,000 --
Inventory (83,804) (118,935) (603) (1,782)
Deferred offering costs -- -- (176,620) --
Accounts payable 243,504 -- 228,899 --
Accrued payroll 149,899 -- 44,879 --
Other liabilities 53,466 -- 110,434 --
----------- ----------- ----------- -----------
Net cash provided (used) by
operating activities (840,295) (63,031) (167,827) 413
----------- ----------- ----------- -----------
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-6
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Date of
Inception (Unaudited)
(June 9,1998) Three Months Ended
Year Ended Through -----------------------------
September 30, September 30, December 31, December 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from investing activities:
Purchase of equipment (26,520) (969) -- --
Deposit -- -- (318,100) --
--------- --------- --------- ---------
Net cash used by investing activities (26,520) (969) (318,100) --
--------- --------- --------- ---------
Cash flows from financing activities:
Issuance of common stock and warrants 892,881 42,000 450,000 --
Proceeds from debt
- related parties 35,000 20,000 -- --
Repayment of debt
- related parties (25,000) -- -- --
--------- --------- --------- ---------
Net cash provided by financing
activities 902,881 62,000 450,000 --
--------- --------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 36,066 (2,000) (35,927) 413
Cash and cash equivalents, beginning
of period -- 2,000 36,066 --
--------- --------- --------- ---------
Cash and cash equivalents, end of period $ 36,066 $ -- $ 139 $ 413
========= ========= ========= =========
</TABLE>
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)
<TABLE>
<CAPTION>
Date of
Inception (Unaudited)
(June 9,1998) Three Months Ended
Year Ended Through -----------------------------
September 30, September 30, December 31, December 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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 351,947 -- -- --
Assets acquired through capital
lease obligation 112,649 -- -- --
Excess of purchase price of
subsidiaries over fair value
of net asset acquired 458,318 -- -- --
Issuance of 1,000,000 shares of
common stock for services -- -- 350,000 --
</TABLE>
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 under the purchase method of accounting.
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 under the purchase method of accounting.
Discontinued Operations:
During December 1999, the Company closed its printing and publishing
operations in Phoenix, Arizona. In conjunction with this closure, the
Company's wholly-owned subsidiary, Cimarron Studio, Inc. (a Nevada
corporation) ceased operations.
Cimarron Studio, Inc.'s operating losses for the year ended September 30,
1999 and the three month period ending December 31, 1999 were $34,560 and
$371,462 (unaudited), respectively. The loss for the three month period
ended December 31, 1999 includes an impairment of goodwill in the amount of
$276,745.
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.,
and Interarts Incorporated. The accounts of Cimarron Studio, Inc., a
wholly-owned subsidiary are reflected as net assets of discontinued
operations due to the closure of the printing and publishing operations in
December 1999.
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 and the accounts of Interarts
Incorporated from the date of acquisition (January 28, 1999) through
September 30, 1999. The accounts of Cimarron Studio, Inc. from the date of
acquisition (September 6, 1999) through September 30, 1999 have been
reflected as discontinued operations due to the closure of the printing and
publishing operations during December 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.
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)
Principles of Consolidation: (Continued)
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.
Revenue Recognition:
The Company recognizes revenues from sales at the time of shipment.
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.
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 December 31, 1999
(unaudited) no allowance has been provided for uncollectible accounts
receivable as, in the opinion of management, all accounts receivable
outstanding 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
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)
Property and Equipment: (Continued)
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.
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. Advertising expense totaled approximately $81,000 (unaudited) and
$0 (unaudited) for the three month periods ended December 31, 1999 and
December 31, 1998, respectively.
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 2 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. For the three months ended
December 31, 1999, amortization expense was $22,700 (unaudited).
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)
Goodwill: (Continued)
During the three month period ended December 31, 1999 the Company recorded
an impairment of the goodwill in the amount of $276,745 (unaudited) due to
Cimarron Studio, Inc. ceasing operations and the closure of the printing
and publishing operations.
Net Loss Per Share:
The computation of basic 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).
New Accounting Pronouncements:
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.
F-13
<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)
Stock-Based Compensation:
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and the related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recorded. The Company has adopted the disclosure- only
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation."
2. Property and Equipment:
Property and equipment consist of the following at September 30, 1999 and
December 31, 1999 (unaudited):
(Unaudited)
September 30, December 31,
1999 1999
---- ----
Furniture and fixtures $ 5,090 $ 5,090
Computer and office equipment 115,048 115,048
---------- ----------
120,138 120,138
Less: accumulated depreciation 1,220 6,298
---------- ----------
Net Book Value $ 118,918 $ 113,840
========== ==========
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. Depreciation expense charged to
operation was $5,078 (unaudited) and $0 (unaudited) for the three month
periods ended December 31, 1999 and 1998, respectively.
3. Obligation Under Capital Lease:
The Company leases computer equipment with an approximate value of $92,000,
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.
F-14
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Obligation Under Capital Lease: (Continued)
Future minimum lease payments due under the capital lease at December 31,
1999, are as follows:
(Unaudited)
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 (21,755)
----------
$ 90,894
==========
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
and the three month period ended December 31, 1999 was $364 and $546
(unaudited).
F-15
<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
and December 31, 1999 (unaudited), the Company had paid $35,000 to AOL,
which was recognized as prepaid advertising, as the impressions will not be
displayed until subsequent to December 31, 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
and December 31, 1999 (unaudited), the Company had paid $58,800 to Go2Net,
which was recognized as prepaid advertising, as the impressions had not
been displayed as of December 31, 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, or a straight-line basis over the term of
the contract. As of September 30, 1999 and December 31, 1999 (unaudited),
no advertising expense had been recognized as the impressions will not be
displayed until subsequent to December 31, 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 an aggregate of $425,893 in expenses pursuant to
this contract. As of December 31, 1999 the Company has incurred an
aggregate of $489,695 (unaudited) in expenses pursuant to this contract.
The contract is cancellable at the discretion of the Company or IIS.
F-16
<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 ian
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. Aof
January 5, 2000, the Company has agreed to issue 350,000 shares of common
stock in settlement of the warrants. As of September 30, 1999, the former
employee had requested the exercise of the options, therefore, compensation
expense of $122,500 has been recorded in relation to the grant of the
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 and December 31, 1999 (unaudited), deferred tax
assets consist of the following:
(Unaudited)
September 30, December 31,
1999 1999
---------- ----------
Net operating loss carryforwards $ 400,000 $ 672,000
Less: valuation allowance (400,000) (672,000)
---------- ----------
$ -- $ --
========== ==========
At September 30, 1999 and December 31, 1999 (unaudited), the Company had
federal net operating loss carryforwards in the approximate amounts of
$1,600,000 and $3,000,000 (unaudited), respectively, available to offset
future taxable income through 2019. 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-17
<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 December 31, 1999 (unaudited), notes payable -
related parties consist of 12% interest demand notes with balances of
$30,000 and $30,000 (unaudited), respectively.
Accounts Payable - Related Entity:
At September 30, 1999 and December 31, 1999, the Company has an account
payable of $38,818 and $37,818 (unaudited), 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. 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 $8,600
for the year ended September 30, 1999 and $18,600 (unaudited) for the three
month period ended December 31, 1999.
During the year ended September 30, 1999, the Company leased printing
equipment from a stockholder. Lease expense for the printing equipment was
$10,000 for the year ended September 30, 1999 and $0 (unaudited) for the
three month period ended December 31, 1999.
Subsequent to December 31, 1999 the aforementioned lease commitments were
terminated.
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.
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 were issued
to Mark Eaker, Chief Executive Officer, as part of Mr. Eaker's employment
agreement. The company paid no consideration to the three stockholders for
the return of the 2,345,000 shares of stock.
F-18
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Equity: (Continued)
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.
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 has negotiated with the individual
covered under the warrant agreement to issue 350,000 shares of common stock
for the cancellation of the warrants (Note 4).
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.
Stock Option Plan:
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. As of December 31, 1999, no options have been
issued under the Plan.
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 $20,000.
F-19
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 three month period ended December 31, 1999, which
have resulted in a deficiency in working capital of approximately $471,000
(unaudited) as of December 31, 1999, and an accumulated deficit of
approximately $2,700,000 (unaudited) as of December 31, 1999.
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. Assets To Be Disposed Of:
Assets of the Cimarron Subsidiary to be disposed of consisted of the
following at September 30, 1999:
Bank overdraft $ (8,234)
Accounts receivable - trade 21,666
Inventory 42,500
Property and equipment, net 2,235
Prepaid expenses 100
----------
Net assets to be disposed of $ 58,267
==========
F-20
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Assets To Be Disposed Of: (Continued)
Assets are shown at their expected net realizable value, and have been
separately classified in the accompanying balance sheet at September 30,
1999.
Assets of the Cimarron Subsidiary to be disposed of consisted of the
following at December 31, 1999:
Cash $ 7,751
Accounts receivable - trade, net 1,017
Prepaid expenses 100
Inventory 42,645
Property and equipment, net 2,235
--------
Net assets to be disposed of $ 53,748
========
Assets are shown at their expected net realizable value, and have been
separately classified in the accompanying balance sheet at December 31,
1999.
12. Subsequent Events:
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 was to be $3,300,000 payable in cash and stock. The Company did not
comply with the terms of the agreement and the seller rescinded the
agreement, effective March 1, 2000. A non-refundable deposit in the amount
of $225,000 had been paid to the seller, and has been reflected as a
deposit as of December 31, 1999. In addition, based on the terms of the
agreement, the Company issued 266,000 shares of restricted common stock
during January, 2000. The non-refundable deposit of $225,000, and the
266,000 shares of common stock were to be paid by December 15, 1999 to Mark
Eaker, owner of Gregory Editions. A deposit in the amount of $318,100 has
been recorded as of December 31, 1999, which includes a liability of
$93,100 for the issuance of the common stock. Mr. Eaker is also the Chief
Executive Officer of Deerbrook Publishing Group, Inc.
During January 2000, the Company issued 250,000 shares of common sto a
director for services and 291,324 shares of common stock for pof debt in
the amount of $291,324. In addition, the Company issued warrants to acquire
100,000 shares of common stock to an individual as compensation for
services. The warrants have an exercise price of $1.25 per share and expire
on January 1, 2005. These transactions have not been reflected in the
financial statements as of December 31, 1999.
F-21
<PAGE>
DEERBROOK PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Subsequent Events: (Continued)
During February 2000, the Company issued 60,000 shares of common stock
valued at $15,000 for legal services. In addition, the Company issued
options to acquire 200,000 shares of common stock to an individual fa
purchase price of $1,000. The options have an exercise price of $.50 per
share and expire on February 16, 2002. These transactions have not been
reflected in the financial statements as of December 31, 1999.
During March 2000, the Company sold 200,000 shares of common stock to an
accredited investor for $100,000. This transaction has not been reflected
in the financial statements as of December 31, 1999.
F-22
<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 Cimarron Pro Forma
Inc. and Interarts Studio, Pro Forma Consolidated
Subsidiaries Incorporated(1) 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 1,351,002 -- 176,079 $ 15,000(4) 1,201,559
----------- ----------- --------- -----------
Operating Loss (1,342,613) -- (162,995) (1,180,086)
Other Income (Expense) (2,913) -- -- (2,913)
----------- ----------- --------- -----------
Net Loss before Income
Taxes (1,345,526) -- (162,995) (1,182,999)
Benefit (Provision) for
Income Taxes -- -- -- --
----------- ----------- --------- -----------
Net Loss $(1,345,526) $ -- $(162,995) $(1,182,999)
=========== =========== ========= ===========
Basic loss per share $ (.21) $ (.16)
=========== ===========
Basic Weighted Average Number
of Shares Outstanding (3) 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-23
<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> <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-24
<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, LLP
Certified Public Accountants
Phoenix, Arizona
November 10, 1999
F-25
<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-26
<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
Common Stock Additional 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) (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-27
<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-28
<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-29
<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-30
<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, LLP
Certified Public Accountants
Phoenix, Arizona
November 10, 1999
F-31
<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-32
<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
Common Stock Additional 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
September 6, 1999 -- -- -- (162,995) (162,995)
------- ---- -------- --------- ---------
Balance, September 6, 1999 900,000 $900 $110,350 $(162,995) $ (51,745)
======= ==== ======== ========= =========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-33
<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-34
<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-35
