As filed with the Securities and Exchange Commission on March 18, 1999
HOUSTON INTERWEB DESIGN, INC.
(Exact name of Registrant as specified in its charter)
(AMENDMENT NO. 1)
TEXAS 7310 76-0532709
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
HARRY L. WHITE
HOUSTON INTERWEB DESIGN, INC. HOUSTON INTERWEB DESIGN, INC.
1770 ST. JAMES PLACE, SUITE 420 1770 ST. JAMES, SUITE 420
HOUSTON, TEXAS 77056 HOUSTON, TEXAS 77056
(713) 627-9494 (713) 627-9494
(Address and telephone number (Name, address and telephone number
of principal executive offices) of agent for service)
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Copies To:
THOMAS C. PRITCHARD
BREWER & PRITCHARD, P.C.
1111 BAGBY, 24TH FLOOR
HOUSTON, TEXAS 77002
PHONE (713) 209-2911
FACSIMILE (713) 209-2921
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE BEING OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1)(2) REGISTRATION FEE(3)
Common Stock................... 1,169,300 .0156799 $18,334.51 $100.00
TOTAL.......................... 1,169,300 .0156799 $18,334.51 $100.00
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
SUBJECT TO COMPLETION, DATED MARCH 18, 1999
HOUSTON INTERWEB DESIGN, INC.
DISTRIBUTION OF 750,000 SHARES OF COMMON STOCK HELD BY PINKMONKEY.COM ,INC.
RESALE OF 419,300 SHARES OF COMMON STOCK HELD BY SELLING STOCKHOLDERS
This prospectus relates to the registration of the distribution by PinkMonkey.com, Inc. of 750,000 shares of company common stock to its shareholders of record as of February 15, 1999. This prospectus also relates to the resale of 419,300 shares of company common stock currently outstanding, which may be sold by the selling stockholders. Shares offered by the selling stockholders may be sold by one or more of the following methods without limitation:
- ordinary brokerage-dealer transactions in which a broker solicits purchases; or
- face to face transactions between the selling stockholders and purchasers without a broker-dealer.
A current prospectus must be in effect at the time of the sale of the shares of common stock. Each selling stockholder or dealer effecting a transaction in the registered securities, whether or not participating in a distribution, is required to deliver a current prospectus at the time of the sale. The company will not receive any proceeds from the distribution to PinkMonkey.com shareholders or the resale of common stock by the selling stockholders.
As the distribution and the resale of the shares of common stock is being registered under the Securities Act of 1933, holders who subsequently resell shares to the public may be deemed to be underwriters. As a result, they may be subject to certain statutory liabilities if the registration statement contains a material misstatement or omits a statement of material fact. The company has not agreed to indemnify any of the PinkMonkey.com shareholders or the selling stockholders regarding such liability.
Currently, there is no market for the company's shares.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 2.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ABOUT THE COMPANY THAT DIFFERS FROM, OR ADDS TO, THE INFORMATION IN THIS PROSPECTUS OR IN OUR DOCUMENTS THAT WE FILED WITH THE SEC. ACCORDINGLY, IF ANYONE DOES GIVE YOU DIFFERENT OR ADDITIONAL INFORMATION YOU SHOULD NOT RELY ON IT. IF YOU ARE IN A JURISDICTION WHERE IT IS UNLAWFUL TO BUY THE SECURITIES OFFERED BY THIS PROSPECTUS, OR IF YOU ARE A PERSON TO WHOM IT IS UNLAWFUL TO DIRECT SUCH ACTIVITIES, THEN THE OFFER PRESENTED BY THIS PROSPECTUS DOES NOT EXTEND TO YOU. THE INFORMATION IN THE PROSPECTUS SPEAKS ONLY AS OF THIS DATE UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE APPLIES.
The date of this prospectus is March 18, 1999.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
WE HAVE A LIMITED OPERATING HISTORY WITH A HISTORY OF LOSSES AND
WE ANTICIPATE LOSSES UNTIL AT LEAST THE YEAR 2000. . . . . . . . . . . . . . . . .2
OUR WORKING CAPITAL REQUIREMENTS MAY REQUIRE US TO PURSUE ADDITIONAL
FINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING WE WILL BE ABLE TO
CONTINUE AS A GOING CONCERN . . . . . . . . . . . . . . . . . . . . . . . . . . .2
A VARIETY OF FACTORS MAY CAUSE OUR QUARTERLY OPERATION RESULTS TO FLUCTUATE. . . .3
AS AN ADVERTISING MEDIUM THE INTERNET IS STILL AN EVOLVING MARKET. . . . . . . . .3
OUR BUSINESS MODEL IS UNPROVEN AND DEPENDS on the Market's
ACCEPTANCE OF OUR SITEBLAZER NETWORK . . . . . . . . . . . . . . . . . . . . . . .3
RISK OF SYSTEM FAILURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
OUR ABILITY TO ADAPT TO RAPIDLY CHANGING TECHNOLOGY. . . . . . . . . . . . . . . .4
VARIOUS FACTORS RELATING TO COMPETITION IN THE INTERNET INDUSTRY . . . . . . . . .4
OUR ABILITY TO EFFECTIVELY MANAGE GROWTH IN OUR OPERATIONS . . . . . . . . . . . .5
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL. . . . . . . . . . . . . . . . . . . . .5
WE DEPEND ON THIRD PARTIES TO DISTRIBUTE OUR PRODUCTS AND SERVICES . . . . . . . .5
OUR BUSINESS IS DEPENDENT ON THE MAINTENANCE OF THE INTERNET
INFRASTRUCTURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
WE ARE DEPENDENT ON OUR PROPRIETARY RIGHTS . . . . . . . . . . . . . . . . . . . .6
RISKS OF INFRINGEMENT IN INTERNET-RELATED INDUSTRIES . . . . . . . . . . . . . . .6
POSSIBLE ADDITIONAL TAX BURDENS. . . . . . . . . . . . . . . . . . . . . . . . . .6
GOVERNMENT REGULATION OF INTERNET ACTIVITIES . . . . . . . . . . . . . . . . . . .7
THERE IS NO PUBLIC MARKET FOR OUR COMMON STOCK . . . . . . . . . . . . . . . . . .7
POSSIBLE VOLATILITY OF STOCK PRICE . . . . . . . . . . . . . . . . . . . . . . . .7
SHARES ELIGIBLE FOR FUTURE SALE. . . . . . . . . . . . . . . . . . . . . . . . . .7
CONFLICTS OF INTEREST BETWEEN THE COMPANY AND PINKMONKEY.COM . . . . . . . . . . .8
PINKMONKEY.COM MAY BE DEEMED TO BE AN UNDERWRITER. . . . . . . . . . . . . . . . .8
STATUS OF PINKMONKEY SHAREHOLDERS WHO RESELL COMMON STOCK. . . . . . . . . . . . .8
PENNY STOCK REGULATIONS MAY DECREASE YOUR ABILITY TO SELL OUR COMMON STOCK . . . .8
YEAR 2000 IMPLICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
CONTINUED CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS. . . . . . . .9
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR AMENDED AND
RESTATED ARTICLES OF INCORPORATION AND BY-LAWS AND THE POSSIBLE ISSUANCE OF
PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
LACK OF DISINTERESTED, INDEPENDENT DIRECTORS . . . . . . . . . . . . . . . . . . .9
Note Regarding Forward-looking Statements. . . . . . . . . . . . . . . . . . . . . .9
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Management's Discussion And Analysis of Financial Condition And Results of
Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Divisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Affiliated Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Description of Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Certain Transactions And Organization Within Last Five Years . . . . . . . . . . . 22
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Shares Eligible For Future Sale. . . . . . . . . . . . . . . . . . . . . . . . . . 22
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Interest of Named Experts And Counsel. . . . . . . . . . . . . . . . . . . . . . . 26
Disclosure of Commission Position on Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . 26
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus. It is not complete and may not contain all of the information that you should consider. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and financial statements. The company's principal executive office is located at 1770 St. James Place, Suite 420, Houston, Texas 77056, (713) 627-9494. Unless otherwise indicated, this prospectus reflects a 165-for-one forward stock split that occurred in August 1998.
KEY FACTS
The Company . . . . . . . . . . . . Houston Interweb Design is a web site
development company specializing in
the design, creation and marketing of
cost-effective Internet products.
Common Stock to be Distributed . . 750,000 shares to be distributed to
the shareholders of record of
PinkMonkey.com, Inc.("PinkMonkey.com")
as of February 15, 1999.
Common Stock to be Resold . . . . . 419,300 shares by selling
stockholders.
Common Stock Outstanding . . . . . 16,448,300 shares
Risk Factors . . . . . . . . . . . An investment in the shares of common
stock involves a high degree of risk.
Prospective investors should review
carefully the information set forth
under "Risk Factors" beginning on
page 2.
No Proceeds . . . . . . . . . . . . The distribution and resale will
result in no proceeds to the company.
Lack of Market . . . . . . . . . . There is currently no market for the
common stock, and there is no
assurance that any market will
develop. If a market develops for the
company's securities, it will likely
be limited, sporadic and highly
volatile.
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SUMMARY FINANCIAL DATA
THE FINANCIAL INFORMATION PRESENTED BELOW IS DERIVED FROM THE AUDITED FINANCIAL STATEMENTS OF THE COMPANY FOR THE PERIOD FROM INCEPTION (AUGUST 9, 1996) THROUGH JULY 31, 1997, AND FOR THE YEAR ENDED JULY 31, 1998, AND UNAUDITED INFORMATION FOR THE SIX MONTHS ENDED JANUARY 31, 1998, AS COMPARED TO THE SIX MONTHS ENDED JANUARY 31, 1999.
AUDITED UNAUDITED
------- ---------
PERIOD ENDED YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JULY 31, 1997 JULY 31, 1998 JANUARY 31, 1998 JANUARY 31, 1999
------------- ------------- ---------------- ----------------
Revenues . . . . . . . . . . . $185,994 $628,070 $262,437 $258,747
Total Expenses . . . . . . . . 225,824 1,402,169 277,069 770,029
------------- ------------- ---------------- ----------------
Income (Loss) Before
Federal Income Tax . . . . . (69,830) (774,099) (14,632) (511,282)
Federal Income Tax (Benefit) . (4,998) 7,496 1,045 2,498
Net Loss . . . . . . . . . . . $(64,832) $(81,595) $(13,587) $(508,784)
------------- ------------- ---------------- ----------------
------------- ------------- ---------------- ----------------
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BALANCE SHEET DATA
JULY 31, 1997 JULY 31, 1998 JANUARY 31, 1999
------------- ------------- ----------------
Working Capital Deficits . $(74,061) $(106,092) $(297,219)
Total Assets . . . . . . . 88,338 159,369 113,235
Long-Term Liabilities . . . -- -- --
Shareholders' Deficit . . . (60,832) (92,427) (278,870)
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RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE THAT THERE ARE VARIOUS RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CONSIDER
CAREFULLY THESE RISK FACTORS TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE YOU DECIDE TO PURCHASE SHARES OF OUR COMMON STOCK. OUR FAILURE TO ADDRESS ANY OF THESE RISKS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
WE HAVE A LIMITED OPERATING HISTORY WITH A HISTORY OF LOSSES AND WE ANTICIPATE LOSSES UNTIL AT LEAST THE YEAR 2000
We were incorporated in August 1996, and our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies with limited operating histories, particularly companies in the new and rapidly evolving markets for the Internet and Internet services. We can provide no assurance that we will be successful in addressing such risks. Although we have experienced revenue growth, growth rates may not be sustained and are not necessarily indicative of future operating results. Since our inception, we have had an accumulated deficit of $1,355,211 and as of January 31, 1999, had cash in the amount of $43,640. Given the level of planned operating and capital expenditures, we anticipate that we will continue to incur operating losses at least into the year 2000. We can provide no assurance that operating losses will not increase in the future or that we will ever achieve or sustain profitability. If revenues do not grow at anticipated rates, if increases in operating expenses precede or are not subsequently followed by commensurate increases in revenues, or if we are unable to adjust operating expense levels accordingly, our business, results of operations, and financial condition will be materially and adversely affected.
OUR WORKING CAPITAL REQUIREMENTS MAY REQUIRE US TO PURSUE ADDITIONAL FINANCING
At January 31, 1999, we had a working capital deficit of $297,219. Our ability to maintain adequate working capital will be largely dependent upon our results of operations. Net cash used in the operation of our business was $275 for the period from inception (August 9, 1996) to July 31, 1997, as compared to net cash provided by operating activities of $3,169 for the year ended July 31, 1998. For the six-month period ended January 31, 1998, net cash provided in the operation of our business was $39,228 and as compared to net cash used in the operation of our business of $182,992 for the six months ended January 31, 1999. We may need to raise additional capital to fund future operations and to satisfy future capital requirements. We can provide no assurance that we will be able to raise needed capital on favorable terms, if at all. If we are unable to secure sufficient capital in the future, our ability to pursue our business strategy will be limited and our results from operations may be impaired. We can provide no assurance that our estimate of our liquidity needs is accurate or that new business development or other unforeseen events will not occur, resulting in the need to raise additional funds. The failure to raise any needed additional funds will likely have a material adverse effect on our company. In addition, it is possible that raising additional funds will result in substantial additional dilution.
OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING WE WILL BE ABLE TO CONTINUE AS A GOING CONCERN
The financial statements included herein have been prepared assuming the company will be able to continue as a going concern. The company had a working capital deficit of $106,092 and a stockholders' deficit of $92,427 at July 31, 1998, and experienced significant losses in fiscal 1998 which raise doubts about the Company's ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or capital and to refinance its debt and ultimately attain profitable operations.
A VARIETY OF FACTORS MAY CAUSE OUR QUARTERLY OPERATION RESULTS TO FLUCTUATE
Our results of operations may fluctuate significantly in the future as a result of a variety of factors, many of which are beyond our control. These factors include:
- our ability to attract new customers at a steady rate,
- our ability to operate at favorable gross margins,
- the level of user traffic on the web sites,
- our licensees and/or independent reseller's ability to generate revenues,
- the timing and number of new hires,
- demand for and changes in pricing models for Internet development and design,
- government regulation, and
- general economic conditions and economic conditions specific to the Internet and online commerce.
For the foreseeable future, our revenues will be directly contingent on the development and design of web sites, which, due to our limited operating history, makes future revenues and results of operations difficult to forecast.
AS AN ADVERTISING MEDIUM THE INTERNET IS STILL AN EVOLVING MARKET
The market for the development and design of web sites has only recently begun to develop, is rapidly evolving and is characterized by an increasing number of market entrants. As is typical of a new and rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty. Since we expect to derive substantially all of our revenues in the foreseeable future from the development and design of web sites, our future success is highly dependent on the increased use of the Internet. The Internet as an advertising medium has not been available for a sufficient period to gauge its effectiveness as compared with traditional advertising media. The utilization of Internet web sites, particularly by those entities that have historically relied upon traditional media for advertising, requires the acceptance of a new way of conducting business and exchanging information. We can provide no assurance that the market for the development and design of web sites will continue to emerge or become sustainable. If the market fails to develop or develops more slowly than expected, our business, results of operations and financial condition could be materially and adversely affected. There are no widely accepted standards for the measurement of the effectiveness of an Internet web site as an advertising medium.
Further, we can provide no assurance that customers will determine that SiteBlazer.com and the SITEBLAZER network, the usage of which currently comprises a large portion of our revenues, is an effective or attractive medium, and we can provide no assurance that the SITEBLAZER network will increase sales for our customers.
OUR BUSINESS MODEL IS UNPROVEN AND DEPENDS ON THE MARKET'S ACCEPTANCE OF OUR SITEBLAZER NETWORK
Our business model is to generate revenues by designing and developing Internet web sites and placing these web sites in the SITEBLAZER network. The profit potential of our business model is unproven, and, to be successful, we must, among other things, develop and market programs that achieve broad market acceptance and recognition by our customers, Internet advertisers, commerce partners and Internet users. We can provide no assurance that the SITEBLAZER network, or SiteBlazer.com, in particular, will achieve broad market acceptance. Market acceptance of the SITEBLAZER network will depend, in large part, on the market's acceptance of our search engine. Our ability to generate significant revenues from SiteBlazer.com will depend, in part, on the development of the SITEBLAZER network and our ability to attract search engines and have web sites generate sufficient user traffic with characteristics that are attractive to such search engines. Accordingly, we can provide no assurance that our business model will be successful or that it can sustain revenue growth and maintain sufficient gross margins.
RISK OF SYSTEM FAILURE
The performance of our servers and networking hardware and the Internet infrastructure is critical to our business and reputation and our ability to attract web users, new customers and commerce partners to our web sites. Any system failure that causes an interruption in service or a decrease in responsiveness of our web sites could result in less traffic on our web sites and, if sustained or repeated, could impair our reputation and the attractiveness of our brand name.
Our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering. In addition, our operations are dependent upon our ability to protect our computer systems against damage from fire, power loss, telecommunications failures, vandalism and other malicious acts, and similar unexpected adverse events. Finally, to the extent we do not effectively address any capacity constraints, such constraints could cause system failure. The occurrence of any of these events could result in interruptions, delays or cessation in services.
OUR ABILITY TO ADAPT TO RAPIDLY CHANGING TECHNOLOGY
The market in which we compete is characterized by rapidly changing technology, evolving industry standards, frequent new products and services and changing customer demands. Accordingly, our success will depend on our ability to adapt to rapidly changing technologies and industry standards, and our ability to continually improve the speed, performance, features, ease of use and reliability of our server and networking system in response to both evolving demands of the marketplace and competitive service and product offerings.
We continually strive to incorporate new technology into our web sites for the benefit of our customers, visitors and commerce partners. Introducing new technology into our systems involves numerous technical challenges, substantial amounts of personal resources and often times takes many months to complete. We can provide no assurance that we will be successful in integrating new technology into our web sites on a timely basis or without degrading the responsiveness and speed of our web sites or that, once integrated, new technology will function as expected. The continuing and uninterrupted performance of our computer system is critical to the success of our business.
VARIOUS FACTORS RELATING TO COMPETITION IN THE INTERNET INDUSTRY
The market for customers, visitors and related products and services is intensely competitive and such competition is expected to continue to increase. There are no substantial barriers to entry in this market and we believe that our ability to compete depends upon many factors within and beyond our control, including:
- the timing and market acceptance of new product and services developed by us and our competitors,
- customer service and support,
- sales and marketing efforts,
- the ease of use,
- performance,
- price, and
- reliability of our products and services
We also compete with:
- Internet content providers and Internet service providers,
- web directories,
- search engines,
- shareware archives,
- content sites,
- commercial online services and sites maintained by Internet service providers,
- thousands of Internet sites operated by individuals, and
- government and educational institutions.
We believe that the number of Internet companies relying on revenues from their company web sites will increase substantially in the future. Accordingly, we will likely face increased competition, resulting in increased pricing pressures on our web site design rates.
Many of our existing and potential competitors, including web site designers have longer operating histories in the Internet market, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products and services. Such competitors are able to undertake more extensive marketing campaigns for their brands and services, adopt more aggressive pricing policies and make more attractive offers to potential employees, distribution partners and commerce companies.
We also expect that competition may increase as a result of industry consolidation. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the comprehensive set of services offered to customers. Accordingly, it is possible that new competitors or alliances among existing or potential competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which would have a material adverse effect on our business, results of operations and financial condition.
OUR ABILITY TO EFFECTIVELY MANAGE GROWTH IN OUR OPERATIONS
We have experienced rapid growth in our operations. This rapid growth has placed, and is expected to continue to place, a significant strain on our managerial, operational and financial resources. We have grown from three employees as of August 31, 1996, to 21 employees as of March 5, 1999. We expect that the number of employees will continue to increase for the foreseeable future, including the hiring of new programmers, graphic designers and other personnel. Furthermore, we must continue to improve our financial and management controls, reporting systems and procedures, and expand, train and manage our work force. We can provide no assurance that our systems, procedures or controls will be adequate to support our expanding operations or that our management will be able to achieve the rapid execution necessary to successfully offer our solutions and implement our business plan.
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL
Our future success depends, in significant part, upon the continued service of our key technical, sales and senior management personnel, particularly Harry L. White, chief executive officer and chairman of the board of directors, Lee A. Magness, chief financial officer, and Richard J. Finn, chief technology officer, all of whom have entered into employment agreements which expire in August 2001. The loss of the services of one or more of the our key personnel could have a material adverse effect on our business, results of operations and financial condition. We do not maintain "key man" life insurance policies for Messrs. White, Magness and Finn. Our future success also depends on our continuing ability to attract and retain highly qualified technical, sales and marketing, customer support, financial and accounting, and managerial personnel. Competition for such personnel in the Internet industry is intense, and we can provide no assurance that we will be able to retain our key personnel or that we will attract, assimilate or retain other highly qualified personnel in the future.
WE DEPEND ON THIRD PARTIES TO DISTRIBUTE OUR PRODUCTS AND SERVICES
We rely on arrangements with independent resellers and licensees to market and distribute our software products. Under our arrangements with independent resellers and licensees, we typically grant a non-exclusive license to distribute our software technology and restrict the reseller's/licensee's ability to distribute software programs in competition with us. We can provide no assurance that the sales forces of these independent resellers and/or licensees will actively pursue this opportunity to market and distribute our software technology or that significant revenues will be generated by these relationships. These independent resellers and licensees have only recently begun to offer our products and, as such, have extremely limited experience in distributing our software technology. We currently have agreements with Websource Media, L.L.C. and Harry Bauge. For the fiscal year ended July 31, 1998, Websource Media and Bauge accounted for an aggregate of $288,572 or 46% of revenues.
The loss of one or more of the licensees or resellers that represent a material portion of our revenues could have a material adverse effect on our business, results of operations and financial condition. In addition, the non-payment or late payment of amounts due by a significant licensee or reseller could have a material adverse effect on our business. We cannot accurately predict the timing or the extent of the success of these resellers and licensees.
OUR BUSINESS IS DEPENDENT ON THE MAINTENANCE OF THE INTERNET INFRASTRUCTURE
Our success will depend, in large part, upon the maintenance of the Internet infrastructure, such as a reliable network backbone with the necessary speed, data capacity and security. To the extent that the Internet continues to experience increased numbers of users, frequency of use or increased requirements of users, we can provide no assurance that the Internet infrastructure will continue to be able to support the demands placed on it or that the performance or reliability of the Internet will not be adversely affected. Furthermore, the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and such outages and delays could adversely affect the web sites of customers utilizing our programs and the level of traffic on such web sites. In addition, the Internet could lose its viability as a form of media due to delays in the development or adoption of new standards and protocols that can handle increased levels of activity. If the necessary infrastructure, standards or protocols or complimentary products, services or facilities are not developed, or if the Internet does not become a viable commercial medium, our business will be materially and adversely affected. Even if such infrastructures, standards or protocols or complimentary products, services or facilities are developed, we can provide no assurance that we will not be required to incur substantial expenditures in order to adapt our solutions to changing or emerging technologies.
WE ARE DEPENDENT ON OUR PROPRIETARY RIGHTS
We regard our intellectual property as critical to our success, and we expect to rely upon trademark, service mark, copyright and trade secret laws in the United States and other jurisdictions to protect our proprietary rights. We have applied for the registration for the trademark and service mark SITEBLAZER with the United States Patent and Trademark Office. We are in the process of applying for the registration for the trademark Political Net.com in the United States. We pursue the protection of our trademarks by applying to register the trademarks in the United States and (based upon anticipated use) internationally. We are applying for a European Community Trademark for SITEBLAZER to protect our trademarks in every country in the European Community. We can provide no assurance that any of our trademark registrations will be approved or granted and, if they are granted, that they will not be successfully challenged by others or invalidated through administrative process or litigation. Further, if our trademark registrations are not approved or granted due to the prior issuance of trademarks to third parties or for other reasons, we can provide no assurance that we could enter into arrangements with such third parties on commercially reasonable terms allowing the company to continue to use such trademarks. Trademark, copyright and trade secret protection may not be available in every country in which our programs are available. In addition, we plan to protect our proprietary rights through confidentiality agreements with employees, consultants, advisors, licensees, resellers and others. We can provide no assurance that the confidentiality agreements will provide adequate protection for our proprietary rights.
RISKS OF INFRINGEMENT IN INTERNET-RELATED INDUSTRIES
Legal standards relating to the validity, enforceability and scope of protection of certain proprietary rights in Internet-related industries are uncertain and still evolving, and we can provide no assurance as to the future viability or value of any of our proprietary rights. We can provide no assurance that the steps taken to protect our proprietary rights will be adequate or that third parties will not infringe or misappropriate our proprietary rights. Any such infringement or misappropriation, should it occur, could have a material adverse effect on our business. Furthermore, we can provide no assurance that our business activities will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against us. From time to time we expect to be subject to claims in the ordinary course of our business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties by us or our commerce partners. We can provide no assurance that future litigation will not have an material adverse effect on our business. Claims of infringement and any resultant litigation could subject us to significant liability for damages and could result in invalidation of our proprietary rights. Even if not meritorious, claims of infringement could be time-consuming and expensive to defend, and could result in the diversion of management time and attention, any of which could have a material adverse effect on our business.
POSSIBLE ADDITIONAL TAX BURDENS
We do not currently collect sales or other similar taxes in states other than Texas. However, one or more states may seek to impose sales tax collection obligations on out-of-state companies which engage in or facilitate online commerce, and a number of proposals have been made at the state and local levels that would impose
additional taxes on the sale of goods and services through the Internet. These proposals, if adopted, could substantially impair the growth of electronic commerce and could adversely affect our opportunity to derive financial benefit from our activities.
Legislation limiting the ability of the states to impose taxes on Internet-based transactions has been proposed by Congress. Failure to enact this legislation could allow various states to impose taxes on Internet-based commerce and the imposition of taxes could have a material adverse effect on our business.
GOVERNMENT REGULATION OF INTERNET ACTIVITIES
Due to concerns arising in connection with the increasing popularity and use of the Internet, a number of laws and regulations may be adopted covering issues such as: user privacy, pricing, characteristics, acceptable content, taxation and quality of products and services. Such legislation could dampen the growth of Internet use generally and decrease the acceptance of the Internet as a communications and commercial medium. In addition, because the growing popularity and use of the Internet have burdened the existing telecommunications infrastructure and many areas with high web use have begun to experience interruptions in phone service, certain local telephone carriers have petitioned governmental bodies to regulate Internet service providers and online service providers in a manner similar to long distance telephone carriers by imposing access fees. If any of these petitions is granted, the costs of communicating on the Internet could increase substantially, potentially adversely affecting the growth in use of the Internet. Further, due to the global nature of the Internet, it is possible that, although transmissions relating to our programs originate in the State of Texas, the governments of other states or foreign countries may attempt to regulate our transmissions. We can provide no assurance that violations of local laws will not be alleged or charged by state or foreign governments, that we might not unintentionally violate such laws or that such laws will not be modified, or new laws enacted, in the future. Any of the foregoing developments could have a material adverse effect on our business.
THERE IS NO PUBLIC MARKET FOR OUR COMMON STOCK
Prior to this prospectus, there has been no public market for our common stock. Upon the registration statement becoming effective, the common stock will not be listed on a national securities exchange, Nasdaq, or on the OTC Electronic Bulletin Board. Our strategy is to list the common stock on the OTC Electronic Bulletin Board, as soon as practicable, and to develop a public market for our common stock by soliciting brokers to become market makers of our shares. However, to date, we have not solicited any brokers to become market makers or undertaken to list the common stock on the OTC Electronic Bulletin Board. We can provide no assurance that an active trading market for the common stock will develop or be sustained upon the registration statement becoming effective or that the market price of the common stock will not decline below the initial public trading price. The initial public trading price will be determined independently by market makers.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of our common stock could be subject to wide fluctuations:
- in response to variations in quarterly results of operations,
- the gain or loss of significant web site customers,
- changes in earning estimates by analysts,
- announcements of technological innovations or new solutions by the company or its competitors,
- general conditions in Internet-related industries,
- and other events or factors, many of which are beyond our control.
In addition, the stock market has usually experienced extreme price and volume fluctuations which have affected the market price for many companies in our industry which have been unrelated to the operating performance of these companies. These market fluctuations may have a material adverse effect on the market price of our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
As of March 17, 1999, a total of 16,448,300 shares of common stock were outstanding. The 419,300 shares of common stock held by the selling shareholders, along with the 750,000 shares of common stock distributed to
PinkMonkey.com shareholders will be eligible for immediate resale in the public market. All of the remaining 15,279,000 shares of common stock outstanding will be subject to resale pursuant to the provisions of Rule 144. Sales of common stock in the public market may have an adverse effect on prevailing market prices for the common stock.
CONFLICTS OF INTEREST BETWEEN THE COMPANY AND PINKMONKEY.COM
Mr. White has served as a director of PinkMonkey.com since May 1998 and has been issued a warrant to purchase 100,000 shares of PinkMonkey.com common stock at an exercise price of $0.625 per share expiring April 2001. Mr. White abstains from voting on all matters involving transactions between PinkMonkey.com and Houston Interweb. Mr. Magness owns 70,000 shares of PinkMonkey.com common stock. Mr. Magness will participate in the distribution of common stock to PinkMonkey.com shareholders. We can provide no assurance that the ownership of equity securities by the above individuals will not result in potential conflicts of interest. If conflicts of interest do arise, such conflicts may have an adverse effect on the company. We believe the 750,000 share issuance was made in a good-faith, arms-length transaction.
PINKMONKEY.COM MAY BE DEEMED TO BE AN UNDERWRITER
PinkMonkey.com might be deemed to be an underwriter by reason of its intent to distribute its 750,000 shares to its shareholders. A consequence to PinkMonkey.com, should it be deemed to be an underwriter is that any person who purchases the registered shares within three years after the distribution could assert a claim against PinkMonkey.com under Section 11 of the Securities Act. The purchase could be in the open market as long as the shares purchased can be traced to the shares PinkMonkey.com distributes to its shareholders. Such a claim, to be successful, must be based upon a showing that statements in this registration statement were false or misleading with respect to a material fact or that the registration statement omitted required material information. We have not agreed to indemnify PinkMonkey.com regarding this potential liability.
STATUS OF PINKMONKEY.COM SHAREHOLDERS WHO RESELL COMMON STOCK
PinkMonkey.com shareholders who subsequently resell shares of common stock to the public may be deemed to be underwriters with respect to such shares for purposes of the Securities Act with the result that they may be subject to certain statutory liabilities if this registration statement is defective. We have not agreed to indemnify any of these shareholders regarding this potential liability. In addition, any profit on the sale of shares of common stock might be deemed underwriting discounts and commissions under the Securities Act.
PENNY STOCK REGULATIONS MAY DECREASE YOUR ABILITY TO SELL OUR COMMON STOCK
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker-dealer must make a special written determination that a penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in any secondary market for a stock that becomes subject to the penny stock rules. Our common stock may be currently subject to the penny stock rules, and accordingly, investors purchasing shares under this prospectus may find it difficult to sell their shares in the future, if at all.
YEAR 2000 IMPLICATIONS
Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field and cannot reliably distinguish dates beginning on January 1, 2000 from dates prior to the year 2000. Many companies' software and computer systems may need to be upgraded or replaced in order to correctly process dates beginning in 2000 and to comply with the Year 2000 requirements. We have reviewed our internal programs and have determined that there are no significant Year 2000 issues within our systems or services. However, although we believe that our systems are Year 2000 compliant, the equipment and software used by our licensees, resellers or customers may not be Year 2000 compliant. Failure of such third-party equipment or software to properly process dates for the year 2000 could result in unanticipated expenses and a loss of revenues, which could have a material adverse effect on our business.
CONTINUED CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
Prior to the distribution, the directors and executive officers and their affiliates beneficially own approximately 81% of the outstanding common stock. As a result, these stockholders could exercise control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR AMENDED AND RESTATED ARTICLES OF INCORPORATION AND BY-LAWS AND THE POSSIBLE ISSUANCE OF PREFERRED STOCK
Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock without any further vote or action by the stockholders, and to determine the price, rights, preferences, privileges and restrictions, including voting rights of those shares. Since the preferred stock could be issued with voting, liquidation, dividend and other rights superior to those of the common stock, the rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of preferred stock. The issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock.
LACK OF DISINTERESTED, INDEPENDENT DIRECTORS
All of our directors have a direct financial interest in the company. While we believe that our current directors will be able to exercise their fiduciary duty, we intend to add independent, disinterested directors to serve on the board of directors in the near future.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus, in particular in the "Risk Factors" and "Business sections, discuss future expectations, contain projections of results of operation or financial condition or state other "forward-looking" information. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions. In our opinion, important factors which may cause actual results to differ from projections include:
- the success or failure of our management's efforts to implement their business strategy;
- our ability to enter into joint ventures or partnerships with established industry participants;
- our ability to raise sufficient capital to meet operating requirements;
- the uncertainty of consumer demand for our technology;
- our ability to protect our intellectual property rights;
- our ability to compete with major established companies;
- the effect of changing economic conditions;
- the effect of changing technology;
- our ability to attract and retain quality employees; and
- other risks which may be described in future filings with the SEC.
We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements.
USE OF PROCEEDS
The company will not receive any proceeds from the distribution of the company common stock to PinkMonkey.com shareholders or the resale of common stock by the selling stockholders.
DIVIDEND POLICY
The company has not paid any dividends on its common stock and expects to retain any future earnings for use in its business. Future dividend policy will be determined by the board of directors and will depend on a number of factors, including the company's future earnings, capital requirements, financial condition and future prospects, restrictions on dividend payments pursuant to any of the company's future credit or other agreements, and such other factors as the board of directors may deem relevant.
CAPITALIZATION
The following table sets forth the capitalization of the company at January 31, 1999. This table should be read in conjunction with the company's financial statements and notes included elsewhere in this prospectus.
JANUARY 31, 1999
Long-term debt................................. $ -
Shareholders deficit:
Common Stock, no par value,
50,000,000 shares authorized; 16,281,633
shares issued and outstanding.............. 1,090,950
Stock subscription receivables............. (14,609)
Accumulated deficit........................ (1,355,211)
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Total shareholders' equity (deficit)....... $ 278,870)
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Total capitalization........................... $ (812,080)
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the financial statements and notes contained in this prospectus.
GENERAL
The following analysis compares the financial condition of the company for the period from inception (August 9, 1996) to July 31, 1997 and the year ended July 31, 1998, and for the six months ended January 31, 1998, as compared to the six months ended January 31, 1999.
The company recognizes revenue as services are provided, in accordance with customer agreements. For the year ended July 31, 1998, approximately 24% and 22% of the company's total revenues were derived from Websource Media, a company licensee, and Bauge, an independent reseller, respectively. Royalty income from software licensing agreements is recognized as it is earned per the individual terms of each royalty agreement, and is generally comprised of a minimum amount plus a stated percentage of the applicable licensee's sales. The company uses the direct write-off method in accounting for bad debts, the results of which are not materially different from the allowance method.
The company accounts for property and equipment at cost with depreciation calculated using the straight-line method over its estimated useful lives ranging from five to ten years. When assets are retired or otherwise removed from the accounts, any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to expense as incurred and significant renewals and improvements are capitalized.
The company utilizes the liability method in accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using anticipated tax rates and laws that will be in effect when the differences are expected to reverse. The realizability of deferred tax assets are evaluated annually and a valuation allowance is provided if it is likely that the deferred tax assets will not give rise to future benefits in the company's tax returns.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE PERIOD FROM INCEPTION TO JULY 31, 1997 COMPARED WITH THE RESULTS OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1998, AND FOR THE SIX MONTHS ENDED JANUARY 31, 1998 COMPARED WITH THE SIX MONTHS ENDED JANUARY 31, 1999.
Revenues increased from $185,994 for the period from inception through July 31, 1997 to $628,070 for the year ended July 31, 1998. The increase of $442,076 or 238% was primarily due to growth in web sites developed and SITEBLAZER license sales. Revenues decreased from $262,437 for the six months ended January 31, 1998, to $258,797 for the six months ended January 31, 1999. The decreased amount is $3,690 and is attributable to decreased dial-up resales.
Consulting expense increased from $-0- for the period from inception through July 31, 1997 to $749,990 for the year ended July 31, 1998. The increase of $749,990 reflects the issuance of common stock to PinkMonkey.com in exchange for consulting services. The fair value of these issued shares totaling $749,990 was recorded as a consulting expense by the company in July 1998.
Advertising expense increased from $12,173 for the six months ended January 31, 1998, to $33,173 for the six months ended January 31, 1999. The increase of $21,000 or 173% primarily reflects costs of print advertising for the launch of Political Net.com.
General and administrative expenses increased from $3,605 for the period from inception through July 31, 1997 to $20,096 for the year ended July 31, 1998. The increase in general and administrative expenses of $16,491 or 457% primarily reflects the company's emergence from its development stage. General and administrative expenses increased from $3,152 for the six months ended January 31, 1998 to $47,803 for the six months ended January 31, 1999. The increase in general and administrative expenses of $44,651 or 1,417% primarily reflects the company's emergence from its development stage.
The company had a ($64,832) net loss for the period from inception through July 31, 1997 compared with a net loss of ($781,595) for the year ended July 31, 1998. The increased net loss of $716,763 or 1,106% is due primarily to the promotional expense recorded by the company in July 1998 for the fair value of common stock issued to PinkMonkey.com. The company had a ($13,587) net loss for the six months ended January 31, 1998 compared with a net loss of ($508,784) for the six months ended January 31, 1999. The increased net loss of $495,197 or 3,644% is due primarily to the increase in professional fees associated with this registration statement and an increase in salaries of $197,816.
Net loss per share of common stock increased from $(.00) to $(.05) for the period from inception (August 9, 1996) through July 31, 1997, compared to the year ended July 31, 1998.
The company may in the future experience significant fluctuations in its results of operations. Such fluctuations may result in volatility in the price and/or value of the company's common stock if any market develops. Results of operations may fluctuate as a result of a variety of factors, including demand for the company's design and creation of Internet web sites, the introduction of new products and services, the timing of significant marketing programs, the success of reseller and license agreements, the number and timing of the hiring of additional personnel, competitive conditions in the industry and general economic conditions. Shortfalls in revenues may adversely and disproportionately affect the company's results of operations because a high percentage of the company's operating expenses are relatively fixed. Accordingly, the company believes that period to period comparisons of results of operations should not be relied upon as an indication of future results of operations. There can be no assurance that the company will be profitable. Due to the foregoing factors, it is likely that in one or more future periods the company's operating results will be below the expectations of the investor.
The financial statements included herein have been prepared assuming the company will be able to continue as a going concern. The company has a working capital deficit of $106,092 and a stockholders' deficit of $92,427 at July 31, 1998, and experienced significant losses in fiscal 1998 which raise doubts about the Company's ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or capital and to refinance its debt and ultimately attain profitable operations.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1998, the company's primary source of liquidity was $18,988 of cash and $116,271 of accounts receivable. The company's working capital deficit and shareholders' deficit was $74,061 and $60,832 at July 31, 1997, as compared to a working capital deficit of $106,092 and a shareholders' deficit of $92,427 at July 31, 1998. As of January 31, 1999, the company's primary source of liquidity was $43,640 of cash and $51,246 of accounts receivable. The company's working capital deficit and shareholders' deficit was $81,969 and $74,419 at January 31, 1998, as compared to a working capital deficit of $297,219 and a shareholders' deficit of $278,870 at January 31, 1999.
Net cash provided by operating activities during the year ended July 31, 1998 was $3,169 compared with net cash used in operating activities of $275 for the period from inception through July 31, 1997. The increase in net cash provided by operating activities was primarily due to the decreased net loss after backing out the effect of the consulting expenses recorded in July 1999 described herein. Net cash used in operating activities during the six months ended January 31, 1999 was $182, 992 compared with net cash provided by operating activities of $39,228 for the six months ended January 31, 1998. The increase in net cash used in operating activities was primarily due to the increase in net loss for the six months ended January 31, 1999 of $495,187, offset by common stock issued as compensation and a decrease in accounts receivable.
Net cash used in investing activities the year ended July 31, 1998, was $2,332 compared with net cash used in investing activities of $14,796 for the period from inception to July 31, 1997, respectively. The decrease in the net cash used in investing activities is attributed to the decrease in the purchase of property and equipment. Net cash used in investing activities was $2,332 and $5,954 for the six months ended January 31, 1998 and the six months ended January 31, 1999, respectively. The increase in the net cash used in investing activities was attributed to an increase in purchases of property and equipment.
Net cash provided by financing activities was $25,275 for the period from inception (August 9, 1996) through July 31, 1997 compared with net cash provided by financing activities of $7,947 for the year ended July 31, 1998. The decrease in net cash provided by financing activities was primarily due to the repayment of a note. Net cash provided by financing activities was $5,414 for the six months ended January 31, 1998 compared with net cash provided by financing activities of $213,598 for the six months ended January 31, 1999. The increase in net cash provided by financing activities was primarily due to proceeds from issuance of common stock of $198,200.
The company's internally generated cash flows from operations have historically been and continue to be insufficient for its cash needs. As of July 31, 1998, the company's sources of external and internal financing were limited. It is not expected that the internal source of liquidity will improve until significant net cash is provided by operating activities, and until such time, the company will rely upon external sources for liquidity. The company has an unsecured revolving line of credit in the amount of $30,000 with Texas Commerce Bank, and as of January 31, 1999, had utilized approximately $29,200 of this line of credit. There can be no assurance that the company will be able to obtain additional financing on reasonable terms, if at all. Until the company can obtain monthly sales levels of approximately $90,000 which would be sufficient to fund current working capital needs, there is uncertainty as to the ability of the company to expand its business and continue its current operations. The company believes that it will be able to satisfy its cash requirements for the next 12 months. Historically, revenues have covered costs. Management believes that projected revenues from licensees will cover costs. There is no assurance that the current working capital will be sufficient to cover cash requirements for the balance of the current fiscal year or to bring the company to a positive cash flow position. Lower than expected earnings resulting from adverse economic conditions or otherwise, could restrict the company's ability to expand its business as planned, and if severe enough may shorten the period in which the current working capital may be expected to satisfy the company's requirements, force curtailed operations, or cause the company to sell assets. The financial statements included herein have been prepared assuming the company will be able to continue as a going concern. The company has a working capital deficit of $106,092 and a stockholders' deficit of $92,427 at July 31, 1998, and experienced significant losses in fiscal 1998 which raise doubts about the Company's ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or capital and to refinance its debt and ultimately attain profitable operations.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
The company's board of directors has developed a Year 2000 strategy and has established a committee to determine the extent to which the company's operations are vulnerable to Year 2000 Issues. The company believes its operations are Year 2000 compliant. However, variability of definitions of "compliance" with the Year 2000 and of different combinations of software, firmware, and hardware may lead to lawsuits against the company. The outcomes of any such lawsuits and the impact of the company are not estimable at this time. The Year 2000 may affect the company's internal systems, however management believes the effect will be minimal as the company purchased its hardware systems within the last two years from name manufacturers who have certified the equipment year 2000 compliant in their manufacturer's warranty. Management believes out of pocket costs associated with Year 2000 will be minimal. The company has reviewed its internal programs and has determined there are no significant Year 2000 issues within its systems or services. However, although the company believes its systems are Year 2000 compliant, the equipment and software used by its licensees, resellers or customers may not be Year 2000 compliant. Failure of such third-party equipment or software to properly process dates for the year 2000 could result in unanticipated expenses and loss of revenues, which could have an adverse effect on the company's business. There can be no guarantee that the systems of other companies on which the company's operations rely will be timely converted. Any Year 2000 compliance problems of the company could have a material adverse effect on the company's business.
BUSINESS
THE COMPANY
The company was incorporated in the State of Texas in August 1996. The company is a web development company that specializing in the design, creation and marketing of cost-effective Internet products. The company strives to provide businesses, of all sizes, with interactive Internet web sites along with marketing services, to create long-term value for its customers worldwide. Some of the company's marketing services include:
- search engine marketing, which is marketing via advertisements that post findings on the results page of a search on the Internet,
- news group postings,
- custom statistical counters which provide statistical information about the visitors to a web site,
- web site tracking logs which record the number of visitors to a web site, and
- other traditional marketing methods.
In addition, the company develops customized software programs, on various platforms, that are Internet compatible (i.e. accounting/finance interfaces, online databases and Oracle/Lotus Internet database interfaces). The company's long-term strategy is to create valuable interactive web sites, e-commerce interfaces/sites and Intranets and Extranets, which will empower companies to utilize the super-efficiencies of the Internet worldwide. The company assists its customers in improving their Internet presence for products or services offered. The company uses proprietary technology for the creation of web sites which increases the chances that the company's customers' web sites are seen by an Internet user irrespective of the search engine used. Most of the company's custom web sites have password protected administrative areas that allow the company's customers to update their site with little or no programming skills. Although the majority of the company's current revenues are derived from custom web site design and search engine marketing, the company is expanding its operations to include a wider variety of interactive databases, electronic commerce sites, and network security.
The company offers instant web presence through SiteBlazer.com by offering its customers a tool to build customized, updateable web sites. The company developed SiteBlazer.com as a solution for mass production of affordable custom/dynamic web sites. Management expects SiteBlazer.com to provide an avenue for timely web site production at a reduced cost. The company's business divisions utilize SiteBlazer.com and the company's proprietary technology. Customers' web sites are included in the SiteBlazer.net network search engine if the monthly hosting fee is maintained.
THE INTERNET AND WORLD WIDE WEB
The Internet is a global collection of thousands of computer networks interconnected to enable commercial organizations, educational institutions, government agencies and individuals to communicate electronically, access and share information and conduct business. The Internet was historically used by a limited number of academic institutions, defense contractors and government agencies. It was used primarily for remote access to host
computers and for sending and receiving electronic mail. Presently, commercial organizations and individuals are dominating the use of the Internet. Recent technological advances, improved microprocessor speed and the development of easy-to-use graphic user interfaces, combined with cultural and business changes, have enabled the Internet to be integrated into the operations, strategies, and activities of countless commercial organizations and individuals.
The Internet and the World Wide Web have introduced fundamental and structural changes in the way information can be produced, distributed and consumed, lowering the cost of publishing information and extending its potential reach. Companies from many industries are publishing product and company information or advertising materials, collecting customer feedback and demographic information interactively, and offering their products for sale on the web. The structure of web documents allows organizations to publish significant quantities of product information, while simultaneously allowing each user to view only those elements of the information which are of particular interest to them. This feature makes possible the dynamic tailoring of information delivery, to each user's interests, timely and cost effective. The web, by facilitating the publishing and exchange of information, is dramatically increasing the amount of information available to users.
BUSINESS STRATEGY
The mission of each company division is to become one of the predominant service providers within each division's respective market niche. The critical success factors are:
- understanding, developing and applying information technology to the Internet, interactive media markets, and data access and software tools;
- narrowing market focus while consummating strategic alliances to complement product and service offerings;
- investing in strategic Internet or interactive media investments or acquisitions, and
- most importantly, a continued understanding of customers' needs.
Management expects to utilize its expertise in database design/development and project management to create new database management products, and a suite of product and service offerings, that will enable sophisticated direct interactive marketing environments. Management believes these new products will enable the company to take advantage of the demand for data management services created from the Internet and interactive media, while continuing to grow and invest in its design and development of web sites.
The company has adopted a strategy of seeking opportunities to realize gains through the selective investment in companies whose web sites are designed and developed by the company. The company believes that this strategy provides the ability to increase shareholder value, as well as provide diversification within the company. Additionally, the company plans to continue to develop and refine the products and services of its businesses, with the goal of increasing revenue as new products are commercially introduced.
With respect to its businesses, the company will seek to expand its participation in Internet, and interactive media industries, and increase its market share. Key elements of this strategy include:
- UTILIZE THE LATEST TECHNOLOGY AVAILABLE TO THE INTERNET, INCLUDING JAVA, JAVASCRIPT, NEOWEB SCRIPT, TCL/TK AND SHOCKWAVE, TO ACHIEVE OPTIMUM INTERNET PRESENCE. The company builds web sites without the use of editors based on hypertext markup language (HTML), which is an authoring language used to create documents on the World Wide Web. Such editors often do not support many new additions to the web and use codes designed for one particular kind of web server that could present problems. The company is constantly increasing its technological capabilities through the enhancement of existing software and the re-engineering of the company's proprietary database software in order to allow the company's customers greater ability to access, analyze and update their own databases through the use of the company's computer services and software.
- CONTINUE TO ENHANCE AND EXPAND THE COMPANY'S PRODUCTS AND SERVICES. The company has invested significant resources in new business ideas or investments which seek to capitalize on opportunities surrounding the growth of the Internet and the interactive marketing industry. The company intends to continue to pursue the growth and development of its technologies and services and to introduce its products commercially.
- PROVIDE THE HIGHEST LEVEL OF CUSTOMER SERVICE. Management plans to create an Internet presence that adds value to its clients organizations.
- PURSUE INNOVATIVE ADVERTISING SOLUTIONS. The company is actively seeking to develop innovative ways for advertisers to effectively reach their target audiences through the Internet. The company designs and offers customized packages which include the ability to change advertisements quickly and frequently, to link a specific search term to an advertisement, to conduct advertising test campaigns with rapid result delivery and to track daily usage statistics. The company is continuing its development of software that will provide it with the ability to target ads based on demographics and usage patterns.
- CROSS-SELL PRODUCTS AND SERVICES. The company is involved in many aspects of the direct marketing sales cycle. The company has experienced initial success in increasing the number of products and services purchased by its existing clients and intends to further this expansion.
DIVISIONS
CUSTOM WEB SITE DEVELOPMENT
The company develops high-end custom web sites, encompassing original graphics and innovative layouts. The company's business strategy is to develop and design web sites that achieve growth and organizational optimization for the company's customers by creating more efficient navigation, utilizing interactive databases, and by using proprietary technology to increase the likelihood of being found at or near the top of search engines. Management believes that its web site pricing is very competitive. The interactive databases enable customers to self-manage their web sites internally. Many of the company's proprietary scripting programs are adapted and included in individual web sites, allowing customers to manage, modify, and maintain their web sites with little or no programming knowledge. The company currently hosts one hundred eighty custom we sites which it has developed.
SITEBLAZER.COM
The focus of SiteBlazer.com is to allow companies to build customized, updateable web sites, within minutes, at a reduced cost. Management estimates that Interactive web sites typically cost $3,000 to develop, which does not include fees for hosting or changes. For approximately $450 plus a $20 per month hosting fee, SiteBlazer.com offers customers a three page web site. Also through SiteBlazer.com, the company offers additional options for customers to purchase and add to their site, i.e., products page, what's new page, press release page, services page, calendar of events page, interactive forum page and a wide variety of counters, statistic programs, and shopping cart or e-commerce solutions. The individual makes changes to the web site, eliminating any fees for changes. SiteBlazer.com sites also offer an economic avenue to broaden a client's Internet exposure. SiteBlazer.com offers hundreds of professional images, templates, and graphic designs. SiteBlazer.com's templates are constantly replaced, giving web site visitors an appearance of the site being constantly updated. These changes are randomly selected from a large collection of templates which are custom designed for specific business categories. With client-related information and content, SiteBlazer.com can build a site. SITEBLAZER sites can be built individually on-line, or data can be collected and uploaded in batches. With SiteBlazer.com, the company's customers are given a password which allows them to change information on their site at any time, at no extra charge. In addition, when web sites are created, description, title, and keyword tags are automatically embedded in them to attract major search engines. Management believes SiteBlazer.com's templates and databases are easily adapted to other SITEBLAZER applications and the company plans to license its technology with a desire to reach a large number of customers. SiteBlazer.com has been in existence since January 1998 and was launched May 1998. The company has developed one thousand five hundred ninety five SiteBlazer.com web sites. The company's licensees have developed approximately forty-five thousand SiteBlazer.com web sites.
SITEBLAZER NETWORK
The SITEBLAZER network is a business-to-business web guide/search engine designed to increase sales for its customers. The SiteBlazer.com program allows a business to have a stand-alone customized web site and still be part of the SITEBLAZER network. The company believes that the SITEBLAZER network contains up-to-date information, as each web site must pay a monthly hosting fee in order to continue to be on the SITEBLAZER network. The company is populating the SITEBLAZER network with SiteBlazer.com web sites and expects to launch the SITEBLAZER network as a search engine. At the time of launch, the SITEBLAZER network will allow non-SiteBlazer.com web sites to be included in the SITEBLAZER network search engine for a nominal fee.
INTERACTIVE DATABASES
The company has developed proprietary technology involving interactive databases. The interactive databases enable customers to self-manage their web sites internally. Many of the company's proprietary scripting programs are adapted and included in individual web sites, allowing customers to manage and modify their web sites. The company's interactive databases offer a cost-effective alternative to products and services offered by its competitors, and have been successfully implemented in a wide range of applications and by Fortune 500 companies, like Union Carbide and CSX.
POLITICAL NET.COM
The company's Political Net.com provides what management believes will be a rapidly growing network of political web sites by including links to existing sites in the database which are updated on an on-going basis. Visitors can search for politician's sites, participate in online political discussions, keep up-to-date with the most recent news or political events, or even cast their vote in weekly polls. Political Net.com also has chat rooms that focus on topics of interest ranging from family and education issues to foreign affairs. The company believes that Political Net.com provides politicians with a tool to build web sites for themselves quickly and more economically than ever before. Besides offering politicians inexpensive custom web sites, Political Net.com supplies sites to political parties at the county level and above, free of charge. Politicians are already operating sites on Political Net.com.
Political Net.com provides candidates with an opportunity to employ online questionnaires. Candidates can post up to twenty customized questions on their site which saves the costs associated with printing and mailing questionnaires. Potential voters can fill out the questionnaires and submit them with a keystroke. Candidates receive realtime information on what their constituents think about the issues, and can tailor their approaches accordingly. For $500, politicians get a web site with six pages (home page, more info, newsletter, press releases, a contact form for voters to fill out for more information, and an interactive forum page where readers can post their comments or questions) and candidates can post their answers or views. For additional charges, politicians can load up to three pages of their existing literature or brochures into their sites. They can also have their own photo gallery of up to 20 pictures or include up to five minutes of video clips or campaign commercials. Political Net.com's technology is derived from the adaptability of SiteBlazer.com and the SITEBLAZER network. Political Net.com provides a gateway for users to search for their local politicians or candidates and interact with them. Management believes current issues, on-line voting, news feed and resource links make Political Net.com attractive to the average Internet user as well as political parties. Political Net.com has been in existence since July 1998 and was launched in August 1998. The company has developed one hundred ten Political Net.com web sites.
ONLINE ACCOUNTING FINANCIAL PACKAGE
The company is currently developing an online accounting financial package to utilize the Internet to perform accounting work anywhere in the world. The online accounting financial package will allow a company to maintain its records online, including receipts and invoices. The online accounting financial package entails scanning invoices and receipts offsite by existing employees of the particular company. The online accounting financial package utilizes the Internet, and its inexpensive costs, to transmit all of its data throughout the world. All data is archived in a securable database on a secure Internet server. This system may reduce, or even eliminate, the traveling expenses of accountants/bookkeepers. Online accounting has been 30% developed. Expected launch is the fourth quarter of 1999. The company is not aware of any material conditions or uncertainties which need to be resolved prior to commercialization.
ONLINE AUCTION SYSTEM
The company has developed an online auction system which will allow traditional sealed bids or bids that can be viewed online. The online auction system allows dealers to view and bid on items online with products being sold to the highest bidder. The online auction system is adaptable and can be altered from a silent auction, to an auction where the highest bid and bidder are known. In order to utilize the online auction system, a person will need to be pre-approved by the company based on standards provided by the entity hosting the auction. Online auction was successfully beta-tested by CSX in December 1998. Online auction was launched in February 1999. Online auction needs no additional development prior to commercialization, and there are no material conditions or uncertainties which need to be resolved prior to commercialization.
CAMPUS NETWORK
The company developed Campus Network to allow individuals of organizations to build customized, up-datable web sites. Management expects to offer Campus Network to alumni, student groups and organizations, and
fraternities and sororities. Campus Network will allow each individual to have his own customized web site, and also to be a part of a group web site. Campus Network utilizes the SiteBlazer.com program and the SITEBLAZER network. Campus Network was fully beta-tested in November 1998. Campus Network was launched in January 1999. Campus Network needs no additional development prior to commercialization, and there are no material conditions or uncertainties which need to be resolved prior to commercialization.
HUNTING AND FISHING.COM
The company is developing Hunting and Fishing.com and expects it to become one of the most comprehensive collections of hunting and fishing resources on the Internet. The company plans to utilize SiteBlazer.com and the SITEBLAZER network technology for classified advertisements on Hunting and Fishing.com's searchable catalogs to search for: merchandise, hunting and fishing equipment, hunting and fishing licenses/leases, locations to visit and where to stay, state parks and wildlife, hunting seasons and hunting and fishing regulations. Hunting and Fishing.com will allow users to maintain an independent web site, while at the same time being part of a network. Hunting and Fishing.com is 60 % complete. The expected launch date is Fall 1999. The company is not aware of any material conditions or uncertainties which need to be resolved prior to commercialization.
LEGAL NET
The company is developing a legal network to utilize the technology of the SITEBLAZER network to offer web sites to attorneys and law firms. The company expects attorneys and law firms to utilize Legal Net to increase the exposure of their web sites by targeting specific topics which will raise the likelihood of placement/selection on search engines. Legal Net is complete, but has not been beta-tested. The expected launch date is summer 1999. The company is not aware of any material conditions or uncertainties which need to be resolved prior to commercialization.
COMMERCE PARTNER
ARFRA
The company owns a 30% interest in ARFRA, an Internet provider of pet medical records. ARFRA provides documented medical records detailing a pet's medical history in the event that an unexpected medical emergency should arise, or simply to provide a more organized record of a pet's medical history. ARFRA provides all participating veterinarians from anywhere in the continental United States, timely access to a pet's medical history. With ARFRA, pet-owners have the ability to offer timely, life-saving information to all emergency veterinary personnel by presenting an ARFRA access card to any veterinarian and the pet's medical history will be available twenty-four hours a day, three hundred and sixty-five days a year. Each record is securely protected by a personal identification number. The annual cardmember fee is only $25 per year. Nominal update fees may be assessed depending upon the veterinarian visited. ARFRA also offers a unique service called pet-locator. By simply contacting any participating veterinarian, pet-owners now have the unique ability to immediately post a "Lost Pet" bulletin to the network. The bulletin will remain a part of the network records until ARFRA is notified of a pet's recovery. To further assist in the recovery effort, ARFRA will broadcast a personal e-mail message about a missing pet to all ARFRA cardmembers in a member's specific area. In addition, ARFRA allows pet-owners the ability to identify a veterinarian through "Vet Locator." Vet Locator is a network catalog of licensed veterinarians throughout the United States that is provided on a complimentary basis to all members. The company expects to utilize SITEBLAZER technology, allowing pet owners and prospective pet owners to design web sites for: the purchase and sale of pets, grooming/breeding and care of pets, and a pet cemetery. The sites will be indexed in a search engine specific to ARFRA and with the same restrictions as the SITEBLAZER network. ARFRA currently does not have any revenues, and has not distributed any dividends. In addition, other than test participants, there are currently no participating pets or vets in the ARFRA system. The company can provide no assurance that ARFRA will become profitable in the future. The majority shareholder of ARFRA has granted the company an option to purchase the remaining 70% of ARFRA in exchange for 10,000 shares of company common stock.
AFFILIATED TRANSACTION
NETTRADE ONLINE, L.L.C.
In November 1997, the company entered into an agreement with NetTrade Online, L.L.C., a Texas limited liability company, to design, develop, produce and install a computer program and related materials consisting of an interactive web site providing real time/on-line trading of various commodities, incorporating functions commercially available at the time. The company agreed to provide all system engineering services necessary to
design, develop, produce, install, and maintain the program and the hardware. These services include, but are not limited to, special studies, programming and application design and development, systems analysis and design, conversion and implementation planning, and installation evaluation. The company intends to expand this technology to other commodities. NetTrade paid the company $80,000 in connection with this agreement. Webvest, Inc., a company owned by Messrs. White, Magness and Finn, has a 20% ownership interest in NetTrade.
NetTrade has been fully beta-tested. NetTrade's expected launch is March 1999. NetTrade needs no additional development prior to commercialization, and there are no material conditions or uncertainties which need to be resolved prior to commercialization.
SALES AND MARKETING
The company markets its products and services through a marketing staff using both telemarketing and direct sales. The company advertises its products and services through several media sources including trade journals and radio advertising. The company is in the process of developing a television media campaign. The company attends numerous trade shows in the Internet, high technology, and business markets, while further supplementing its sales efforts with space advertising and product and services listings in appropriate directories.
COMPETITION
The market for customers, visitors and related products and services are intensely competitive and such competition is expected to continue to increase. There are no substantial barriers to entry in this market and the company believes that its ability to compete depends upon many factors within and beyond its control, including:
- timing and market acceptance of new products and services developed by the company and its competitors,
- customer service and support,
- sales and marketing efforts, and
- the ease of use, performance, price and reliability of the company's products and services.
The company competes with:
- Internet content providers and ISPs, including web directories,
- search engines,
- shareware archives,
- content sites,
- commercial online services and sites maintained by Internet service providers,
- as well as thousands of Internet sites operated by individuals and government and educational institutions.
The company believes that the principal competitive factors in attracting customers include the amount of traffic on its web site, brand recognition, customer service, the demographics of the company's customers and viewers, the company's ability to offer targeted audiences and the overall cost-effectiveness of the products and services offered by the company. The company believes that the principal competitive factors in attracting search engines to a customer's web site include the company's design, title, meta tags descriptions and key words. The company believes that the number of Internet companies relying on revenues from their company web site will increase substantially in the future. In turn, the company will likely face increased competition, resulting in increased pricing pressures on its web site design rates which could in turn have a material, adverse effect on the company's business.
RESEARCH AND DEVELOPMENT
The company develops and markets a variety of Internet related products and services, as well as a number of database software technologies. These industries are characterized by rapid technological development. The company believes that its future success will largely depend upon its ability to continue the enhancement of its existing products and services and the development of other products and services which complement existing ones.
To date, the company has incurred nominal research and development expenses. In order to respond to rapidly changing competitive and technological conditions, the company expects to incur significant research and development expenses during the initial development phase of new products and services as well as on an on-going basis with established products.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The company regards its technology as proprietary and attempts to protect it by relying on trademark, service mark, copyright and trade secret laws and restrictions on disclosure and transferring title and other methods. The company currently has no patents or patents pending and has not filed for patent protection, and does not anticipate that patents will become a significant part of the company's intellectual property in the future.
The company pursues the registration of its trademarks in the United States and internationally. The company has applied for the registration of the service mark and trademark SITEBLAZER and is in the process of applying for the registration of the trademark Politicalnet in the United States. The company is applying for a European Community Trademark for international protection of SITEBLAZER in every country in the European Community. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which the company's services are distributed or made available through the Internet, and policing unauthorized use of the company's proprietary information is difficult.
The company currently licenses certain technologies to other companies and utilizes an independent reseller to market and distribute the company's products and services. The company has entered into the following material agreements:
- In September 1997, the company entered into an agreement with Websource Media in which the company agreed to transport Internet protocol packets from Websource Media to the Internet and from the Internet to Websource Media. Websource Media paid a setup fee of $480 in connection with this agreement and pays the company fees based on the number of hits per day. This agreement automatically renews for successive one-month terms at the company's then month-to-month rates.
- In June 1998, the company entered into a software reseller agreement with Bauge in which the company granted Bauge a non-exclusive license to market and distribute software products manufactured and hosted by the company in return for royalty payments based on gross revenues of basic web sites and various other royalty payments. In June 1999, the agreement will automatically renew for successive one-year terms upon Bauge achieving certain sales levels.
The company enters into confidentiality agreements with respect to its proprietary technology and limits access to, and distribution of its proprietary information.
EMPLOYEES
As of March 17, 1999, the company employed approximately 21 persons on a full-time basis. None of the company's employees are represented by a labor union. The company has entered into non-disclosure and non-competition agreements with its key personnel which provide that upon the termination of employment with the company for any reason, the individual will not compete with the company for two years. The company believes the non-compete covenants comply with state law, however, the company can provide you no assurances that a state court may determine not to enforce or only partially enforce such covenants. The company believes that its relations with its employees are good.
DESCRIPTION OF PROPERTY
The company currently leases approximately 6,643 square feet of office space in Houston, Texas. The lease expires in October 2000 and the monthly rental is currently $7,196. The company believes that its existing facilities are adequate to meet its current needs and to accommodate anticipated growth.
AVAILABLE INFORMATION
The SEC maintains a web site on the Internet that contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. The address of the site is http:\\www.sec.gov. Visitors to the site may access such information by searching the EDGAR data base on the site.
Prior to the date of this prospectus, the company was not subject to the information and reporting requirements of the Securities Exchange Act of 1934. As a result, the company will become subject to such requirements and begin filling periodic reports, proxy materials and other information with the SEC. The company will provide its shareholders with annual reports containing audited financial statements and, if determined to be feasible, quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. The company has filed a registration statement on Form SB-2 under the Securities Act, with respect to the securities being registered. This prospectus does not contain all the information set forth in the registration statement and its exhibits and schedules, to which reference is made. Copies of the registration statement and its exhibits are on file at the offices of the SEC and may be obtained upon payment of the fees prescribed by the SEC or may be examined, without charge, at the public reference facilities of the SEC, 450 Fifth Street, N.W., Washington D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Upon request, the company will provide without charge to each person who receives a copy of the prospectus, a copy of any of the information that is incorporated by reference in this prospectus (not including exhibits to the information that is incorporated by reference unless the exhibits are themselves specifically incorporated by reference). Any request for information should be directed to the company, attention Harry L. White, at 1770 St. James, Suite 420, Houston, Texas 77056, (713) 627-9494.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The company's directors and executive officers are:
NAME AGE POSITION
---- --- --------
Harry L. White 40 Chairman, Chief Executive Officer, President,
Treasurer and Secretary
Richard J. Finn 22 Chief Technical Officer and Director
Lee A. Magness 34 Chief Financial Officer, General Counsel and
Director
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HARRY L. WHITE has served as chairman, chief executive officer, president, secretary and treasurer of the company since inception. Since May 1998, Mr. White has served as a director of PinkMonkey.com, Inc., an Internet publisher of educational study aids. From December 1986 through February 1997, Mr. White worked at Air Products and Chemicals, a hydrogen production company, as the senior plant technician from December 1996 to February 1997. Mr. White also served as an ISO 9000 Manager from January 1994 to February 1997.
RICHARD J. FINN has served as chief technical officer and director of the company since inception. From December 1995 through February 1997, Mr. Finn served as the assistant webmaster for Neosoft, Inc., an Internet service provider. From August 1995 through December 1995, Mr. Finn served as the assistant network administrator of CyberSin, an Internet service provider. From October 1994 through August 1995, Mr. Finn served as an assistant network administrator for Triconex Systems, Inc.
LEE A. MAGNESS has served as chief financial officer, general counsel and director of the company since inception. Since August 1993, Mr. Magness has served as a financial consultant to various individuals and corporations. Prior to receiving his law degree from Thurgood Marshall School of Law, Mr. Magness served as a senior economic analyst at Transco Energy Corporation.
All executive officers of the company are chosen by the board of directors and serve at the board's discretion. There are no family relationships among the company's officers and directors. The company plans to reimburse directors for any expenses incurred in attending board of directors and Year 2000 board committee meetings.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the chief executive officer of the company for the fiscal year ended July 31, 1998 and from inception (August 9, 1996) through July 31, 1997. No other executive officers of the company received total annual salary and bonus for the fiscal years ended July 31, 1998 or July 31, 1997 in excess of $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM
NAME AND PRINCIPAL FISCAL OTHER ANNUAL COMPENSATION ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
-------- ---- ------ ----- --------------- ------- ------------
Harry L. White, 1998 $70,000(2)
Chief Executive 1997 $30,000(2)
Officer and President
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(1) The named executive officer did not receive perquisites or other benefits
valued in excess of 10% of the total reported annual salary and bonus.
(2) This amount has not been paid to date and is currently being accrued.
EMPLOYMENT AGREEMENTS
In August 1996, Messrs. White, Finn and Magness entered into five year written employment contracts that provide for a base salary of $30,000 for the first year, $70,000 for the second year, and $120,000 annually for years three through five. In addition, these employment agreements entitle each of these individuals to an annual bonus of 1% of the company's earnings before income taxes and depreciation in excess of $5,000,000. In addition to salary, beginning in August 1998, Messrs. White, Finn and Magness each receive $600 per month as a car allowance and $200 per month for miscellaneous expenses. If the company terminates an employment contract with cause, such executive will not engage in certain activities in competition with the company for a period of six months following such termination.
STOCK OPTIONS
In August 1998, the Board of Directors and stockholders adopted a stock option plan under which 500,000 shares of common stock have been reserved for issuance. As of the date of this prospectus, options to purchase 288,000 shares of company common stock have been granted pursuant to the plan. The company does not have a defined benefit plan or any retirement or long-term incentive plans.
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the
beneficial ownership of all shares of the company common stock prior to and
upon the completion of the distribution of such shares to PinkMonkey.com
shareholders by (i) each person who owns beneficially more than five percent
of the outstanding shares of common stock, (ii) each director of the company,
(iii) each named executive officer, and (iv) all directors and officers as a
group.
SHARES BENEFICIALLY PERCENTAGE OF SHARE BENEFICIALLY PERCENTAGE OF
OWNED BEFORE VOTING POWER OWNED AFTER VOTING POWER
THE BEFORE THE THE AFTER THE
NAME OF BENEFICIAL OWNER(1) DISTRIBUTION DISTRIBUTION DISTRIBUTION DISTRIBUTION
Harry L. White 4,488,000 27.3% 4,488,000 27.6%
Richard J. Finn 4,488,000 27.3% 4,488,000 27.6%
Lee A. Magness 4,207,500 25.6% 4,210,300(2) 25.6%
All directors and officer as 13,183,500 80.2% 13,186,300 80.2%
a group (3 persons)
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(1) The business address of each individual is the same as the address of the
company's principal executive offices.
(2) Mr. Magness is the beneficial owner of 70,000 shares of PinkMonkey.com
common stock and will receive approximately 2,800 shares of company common
stock in connection with the distribution.
CERTAIN TRANSACTIONS AND ORGANIZATION WITHIN LAST FIVE YEARS
In August 1996, the company issued 4,488,000 shares of common stock to Harry L. White, 4,488,000 shares of common stock to Richard J. Finn, 4,207,500 shares of common stock to Lee A. Magness, 726,000 shares of common stock to Essitam Capital, Ltd., 709,500 shares of common stock to Sonsonate Capital, Ltd., and 660,000 shares of common stock to Seyat Capital, Ltd. for nominal consideration in connection with the company's formation. Peter Eberly is president and director of Essitam Capital Ltd., Timur Pulatoe is president and director of Sonsonate Capital, Ltd., and Woodward L. Terry is president and director of Seyat Capital, Ltd.
In July 1997, Messrs. White and Magness loaned the company $5,378 and $15,897, respectively. These loans bore interest at the rate of 6% per annum and were repaid as of July 31, 1998.
In November 1997, the company entered into an agreement with NetTrade for the design, development, production and installation of a computer program consisting of an interactive web site on the Internet providing real time/on-line trading of commodities. The company received $80,000 in connection with this agreement. Webvest, Inc., a company owned by Messrs. White, Magness and Finn, has a 20% ownership interest in NetTrade.
In September 1998, the company issued 750,000 shares of common stock to PinkMonkey.com in consideration for $10, services rendered, and PinkMonkey.com agreeing to distribute the 750,000 shares to PinkMonkey.com shareholders. Additionally, the company agreed to file a registration statement with the SEC registering the common stock distributed to PinkMonkey.com shareholders. Harry L. White, a director of PinkMonkey.com, was issued a warrant to purchase 100,000 shares of PinkMonkey.com common stock at an exercise price of $.625 per share in consideration for services rendered. Mr. Magness purchased 70,000 shares of PinkMonkey.com common stock for in a private placement for an aggregate purchase price of $35,000.
DESCRIPTION OF SECURITIES
The company is authorized to issue up to 55,000,000 shares, of which 50,000,000 shares are no par value common stock, and 5,000,000 shares are preferred stock, par value $.01 per share.
COMMON STOCK
The holders of shares of common stock are entitled to one vote per share on each matter submitted to a vote of stockholders. In the event of liquidation, holders of common stock are entitled to share ratably in the distribution of assets remaining after payment of liabilities, if any. Holders of common stock have no cumulative voting rights, and, accordingly, the holders of a majority of the outstanding shares have the ability to elect all of the directors. Holders of common stock have no preemptive or other rights to subscribe for shares. Holders of common stock are entitled to such dividends as may be declared by the board of directors out of legally available funds. The outstanding common stock is, and the common stock to be outstanding upon completion of this offering will be, validly issued, fully paid and non-assessable.
PREFERRED STOCK
The company has authorized the issuance of up to 5,000,000 shares of preferred stock. The company has no present plans for the issuance of such preferred stock. The issuance of such preferred stock could adversely affect the rights of the holders of common stock and, therefore, reduce the value of the common stock.
TRANSFER AGENT
The company's transfer agent is Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004.
SHARES ELIGIBLE FOR FUTURE SALE
There are 16,281,633 shares of common stock currently outstanding. Upon the effectiveness of this registration statement, 1,169,300 shares of common stock will be eligible for immediate resale in the public market if and when any market for the common stock develops. Sales of such shares held by affiliates will, however, be subject to the restrictions of Rule 144 promulgated under the Securities Act. An affiliate of the issuer is any person who directly or indirectly controls, is controlled by, or is under common control with, the issuer. Affiliates of the company may include its directors, executive officers, and persons directly or indirectly owning 10% or more of the outstanding common stock. Under Rule 144 resales of common stock for the account of affiliates cannot be made
until it has been held for one year from the later of its acquisition from the company or an affiliate of the company. Thereafter, shares of common stock may be resold without registration subject to Rule 144's volume limitation, aggregation, broker transaction, notice filing requirements, and requirements concerning publicly available information about the company. The volume limitations provide that a person (or persons who must aggregate their sales) cannot, within any three-month period, sell more than the greater of one percent of the then outstanding shares, or the average weekly reported trading volume during the four calendar weeks preceding each such sale.
PLAN OF DISTRIBUTION
REASONS FOR THE DISTRIBUTION
The company agreed to distribute the shares to PinkMonkey.com based on the company's relationship with PinkMonkey.com, including the ongoing and significant business services supplied to PinkMonkey.com by the company, and ongoing business and financial advice supplied by principals of PinkMonkey.com to the company. As a result of the distribution, and upon the effectiveness of this registration statement, the company will become a reporting company with a substantial shareholder base, thus enabling it, in the opinion of management, to more effectively raise money as a public entity. The company has not agreed to indemnify PinkMonkey.com against any liability arising under the Securities Act.
CERTAIN RELATIONSHIPS BETWEEN THE COMPANY AND PINKMONKEY.COM
The company has a direct relationship with PinkMonkey.com as the company hosts, maintains, develops and updates the PinkMonkey.com website.
Harry White, president and director of the company, serves as a director of PinkMonkey.com. As compensation for his services as a director, Mr. White was awarded a warrant to purchase 100,000 shares of PinkMonkey.com common stock. Mr. White has not exercised this warrant, accordingly, he will not participate in the distribution. Lee Magness, an officer and director of the company, purchased 70,000 shares of PinkMonkey.com common stock at a purchase price of $.50 in a private placement pursuant to Section 4(2) of the Securities Act, and will be entitled to participate in the distribution. Mr. Magness is not an affiliate of PinkMonkey.com.
The agreement between the company and PinkMonkey.com in which the shares subject to distribution were issued was negotiated between Messrs. White and Magness, on behalf of the company, and Patrick R. Greene, on behalf of PinkMonkey.com. Mr. Greene is the chief executive officer and a shareholder of PinkMonkey.com and will participate in the distribution of company common stock.
MANNER OF EFFECTING THE DISTRIBUTION
This prospectus relates to the distribution by PinkMonkey.com of 750,000 shares of company common stock. The company's common stock will be distributed by American Registrar Transfer Company, the distribution agent, to PinkMonkey.com shareholders of record as of February 15, 1999, on a pro rata basis, based on the outstanding number shares of PinkMonkey.com common stock on the record date, which was 16,817,512 shares of common stock. However, any PinkMonkey.com shareholder who is entitled to receive ten shares or less of company common stock will receive a cash dividend in lieu of the shares of company common stock. All the shares of company common stock distributed will be fully paid and nonassessable and the holders thereof will not be entitled to preemptive rights. No consideration will be paid to PinkMonkey.com or the company by the PinkMonkey.com shareholders for the shares of company common stock received in the distribution. Following the distribution, PinkMonkey.com will own no shares of the company common stock or other securities of the company. The distribution is currently expected to be effected as soon as practicable after the registration statement, of which this prospectus is a part, is declared effective. Certificates representing the shares of company common stock will be mailed to the PinkMonkey.com shareholders on the distribution date or as soon thereafter as practicable. The company will not receive any proceeds from the resale of common stock by the PinkMonkey.com shareholders.
LISTING AND TRADING OF THE COMMON STOCK
The company hopes to list the common stock on the OTC Electronic Bulletin Board after the registration statement becomes effective. Shares of common stock distributed to the PinkMonkey.com shareholders will be freely transferable, except for shares received by persons who may be deemed to be "affiliates" of the company under the Securities Act. Persons who may be deemed to be affiliates of the company after the distribution include individuals or entities that control, are controlled by or are under common control with the company, and include
directors and principal executive officers of the company, as well as any stockholder owning 10% or more of the total stock issued and outstanding. Under Rule 144, resales of common stock for the account of affiliates cannot be made until the common stock has been held for one year from the later of its acquisition from the company or an affiliate of the company. Thereafter, shares of common stock may be resold without registration subject to Rule 144's volume limitation, aggregation, broker transaction, notice filing requirements, and requirements concerning publicly available information about the company. The volume limitations provide that a person (or persons who must aggregate their sales) cannot, within any three-month period, sell more than the greater of one percent of the then outstanding shares, or the average weekly reported trading volume during the four calendar weeks preceding each such sale. The three individuals listed as directors and executive management of the company are affiliates of the company. The company currently has approximately 31 record holders. The company believes it will have more than 100 stockholders after the distribution.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The following is a summary of a tax opinion rendered by the accounting
firm of Malone & Bailey, PLLC, describing (1) the material United States
federal income tax considerations affecting holders of PinkMonkey.com common
stock receiving shares of company common stock in the in the distribution,
(2) tax consequences of the distribution to the company, and (3) tax
consequences of the distribution to PinkMonkey.com. This summary does not
discuss all aspects of federal taxation that may be relevant to a particular
investor or to certain types of investors subject to special treatment under
the federal tax laws (for example, banks, dealers in securities, life
insurance companies, tax-exempt organizations, and foreign persons), nor does
it discuss any aspect of state, local or foreign tax laws.
HOLDERS OF PINKMONKEY.COM COMMON STOCK RECEIVING SHARES OF COMMON STOCK IN THE DISTRIBUTION SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THEIR INDIVIDUAL TAX CONSEQUENCES OF THE DISTRIBUTION UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, AND UNDER ANY APPLICABLE STATE, LOCAL OR FOREIGN TAX LAWS.
It is the opinion of Malone & Bailey, PLLC that:
- The distribution will be taxable as a capital gain to PinkMonkey.com shareholders to the extent the fair market value of the company common stock exceeds the price the PinkMonkey.com shareholders paid for their PinkMonkey.com stock.
- The distribution qualifies as a deductible expense to the company for US tax purposes.
- The distribution will be taxed as ordinary income to PinkMonkey.com.
SELLING STOCKHOLDERS
The 419,300 shares offered by the selling stockholders may be sold by one or more of the following methods, without limitation: (i) ordinary brokerage transactions and transactions in which the broker-dealer solicits purchases; and (ii) face-to-face transactions between sellers and purchasers without a broker-dealer. In effecting sales, brokers or dealers engaged by the selling stockholders may arrange for other brokers or dealers to participate. The brokers or dealers may receive commissions or discounts from the selling stockholders in amounts to be negotiated. The brokers and dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act, in connection with such sales. The selling stockholder or dealer effecting a transaction in the registered securities, whether or not participating in a distribution, is required to deliver a prospectus. As a result of the shares being registered under the Securities Act, holders who subsequently resell such shares to the public may be deemed to be underwriters with respect to such shares of common stock for purposes of the Securities Act, with the result that they may be subject to certain statutory liabilities if the registration statement to which this prospectus relates contains a material misstatement or omits a statement of material fact. The company has not agreed to indemnify any of the selling stockholders regarding this liability. The company will not receive any proceeds from the resale of common stock by the selling stockholders.
SELLING STOCKHOLDERS
This prospectus relates to the resale of 419,300 shares of common stock by the selling stockholders. The table below sets forth information with respect to the resale of shares of common stock by the selling stockholders. The company will not receive any proceeds from the resale of common stock by the selling stockholders for shares currently outstanding.
RESALE OF COMMON STOCK BY SELLING STOCKHOLDERS
SHARES CURRENTLY OUTSTANDING
SHARE BENEFICIALLY AMOUNT OFFERED SHARES BENEFICIALLY
OWNED BEFORE (ASSUMING ALL SHARES OWNED AFTER
STOCKHOLDER RESALE IMMEDIATELY SOLD) RESALE PERCENTAGE
Ashraf K. Abadir 10,000 10,000 0% 0%
Jeffrey A. Ballenger 7,000 7,000 0% 0%
Stephen Bollman 4,000 4,000 0% 0%
Art Chee 100,000 100,000 0% 0%
Andrew B. Doerr(1) 8,366 8,366 0% 0%
Leo Detassis 6,667 6,667 0% 0%
Allen G. Dusek 3,000 3,000 0% 0%
Debbie Esparza(2) 10,000 10,000 0% 0%
Richard A. Finn 5,000 5,000 0% 0%
W.B. Finn 1,000 1,000 0% 0%
Henry Hailes 10,000 10,000 0% 0%
Paul Hailes 10,000 10,000 0% 0%
Arthur Hebron 76,667 76,667 0% 0%
Lucy Hebron 10,000 10,000 0% 0%
Tom Hillman 2,000 2,000 0% 0%
Hannah M. Loev 12,500 12,500 0% 0%
David L. Magness 15,000 15,000 0% 0%
Price Lloyd Magness 5,000 5,000 0% 0%
Walter L. Magness 22,000 22,000 0% 0%
Hungson Van Nguyen 3,000 3,000 0% 0%
True Lam V. Nguyen 1,000 1,000 0% 0%
Dan Nelson 40,000 40,000 0% 0%
Chris Truax 20,000 20,000 0% 0%
Anthony Rahati 5,000 5,000 0% 0%
Steve Reynolds 1,750 1,750 0% 0%
Lora W. Rhein 10,000 10,000 0% 0%
Frank Rhodes 1,800 1,800 0% 0%
Larry Shoemaker 5,000 5,000 0% 0%
Don C. Smith 2,000 2,000 0% 0%
25
|
Jukka Tolonen 5,800 5,800 0% 0% Keith Ward 750 750 0% 0% Kevin Work(3) 5,000 5,000 0% 0% |
(1) Andrew B. Doerr, an employee of the company, was awarded 5,000 shares of
company common stock for services rendered. The remaining shares held be
Mr. Doerr were purchased by him.
(2) Debbie Esparza, an employee of the company, was awarded 10,000 shares of
company common stock for services rendered.
(3) Kevin Work, an employee of the company, was awarded 5,000 shares of company
common stock for services rendered.
LEGAL PROCEEDINGS
The company was a plaintiff in HOUSTON INTERWEB DESIGN, INC. V. LANDRY'S SEAFOOD RESTAURANTS, INC. filed in the District Court of Harris County, Texas; 133rd Judicial District. The complaint alleged breach of contract and the company sought damages of $300,000. Landry's filed a counter-claim against the company asserting infringement of Landry's federally registered trademark LANDRY'S SEAFOOD HOUSE. The matter was resolved in the company's favor and the counter-claim was dropped.
INTEREST OF NAMED EXPERTS AND COUNSEL
Certain legal matters with respect to the issuance of shares of the company's common stock will be passed upon for the company by Brewer & Pritchard, P.C., Houston, Texas. Principals of Brewer & Pritchard, P.C. own 185,000 shares of PinkMonkey.com common stock, and will receive shares of company common stock in the distribution.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Currently, there is no public trading market for the company's securities and there can be no assurance that any market will develop. If a market develops for the company's securities, it will likely be limited, sporadic and highly volatile.
FINANCIAL STATEMENTS
The financial statements of the company appearing in this Form SB-2 Registration Statement for the period from inception (August 9, 1996) to July 31, 1997, and the year ended July 31, 1998, have been audited by Mann, Frankfort, Stein and Lipp, P.C.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon for the company by Brewer & Pritchard, P. C., Houston, Texas.
HOUSTON INTERWEB DESIGN, INC.
FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
C O N T E N T S
Page
----
Independent Auditors' Report ........................................F-2
Balance Sheets ......................................................F-3
Statements of Operations ............................................F-4
Statements of Changes in Stockholders' Deficit ......................F-5
Statements of Cash Flows ............................................F-6
Notes to Financial Statements .......................................F-7
|
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Houston InterWeb Design, Inc.
We have audited the accompanying balance sheets of Houston InterWeb Design, Inc. as of July 31, 1998 and 1997, and the related statements of operations, changes in stockholders' deficit, and cash flows for the year ended July 31, 1998 and for the period from inception (August 9, 1996) to July 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Houston InterWeb Design, Inc. as of July 31, 1998 and 1997, and the results of its operations and its cash flows for the year ended July 31, 1998 and for the period from inception (August 9, 1996) to July 31, 1997 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.
As shown in the financial statements, the Company incurred a net loss of $781,595 for 1998 and has incurred substantial net losses since inception. At July 31, 1998, current liabilities exceed current assets by $106,092 and total liabilities exceed total assets by $92,427. These factors, and the others discussed in Note B, raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
MANN FRANKFORT STEIN & LIPP, P.C.
Houston, Texas
September 8, 1998
HOUSTON INTERWEB DESIGN, INC.
BALANCE SHEETS
July 31,
------------------------ January 31,
1998 1997 1999
--------- -------- -----------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 18,988 $ 10,204 $ 43,640
Accounts receivable - trade - affiliates 55,259 14,611 23,043
Accounts receivable - trade - nonaffiliates 61,012 42,070 28,203
Deferred income tax asset - 4,998 -
Other current assets 10,445 3,226 -
--------- -------- -----------
TOTAL CURRENT ASSETS 145,704 75,109 94,886
PROPERTY AND EQUIPMENT
Office equipment 4,056 2,306 10,010
Furniture and fixtures 13,072 12,490 13,072
--------- -------- -----------
17,128 14,796 23,082
Less: accumulated depreciation 3,463 1,567 4,733
--------- -------- -----------
TOTAL PROPERTY AND EQUIPMENT 13,665 13,229 18,349
INVESTMENT UNDER THE EQUITY METHOD - - -
--------- -------- -----------
TOTAL ASSETS $ 159,369 $ 88,338 $ 113,235
--------- -------- -----------
--------- -------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 220,086 $127,895 $ 307,910
Advances payable - affiliate - - 30,000
Deposits - - 24,976
Deferred income tax liability 2,498 - -
Note payable - line of credit 29,212 - 29,219
Notes payable to stockholders - 21,275 -
--------- -------- -----------
TOTAL CURRENT LIABILITIES 251,796 149,170 392,105
STOCKHOLDERS' DEFICIT
Common stock, no par value, 50,000,000 shares
authorized, 16,029,000 and 15,279,000 shares
issued and outstanding at July 31, 1998 and 1997,
respectively, and 16,281,633 shares issued at
January 31, 1999 754,000 4,000 1,090,950
Stock subscriptions receivable - - (14,609)
Accumulated deficit (846,427) (64,832) (1,355,211)
--------- -------- -----------
TOTAL STOCKHOLDERS' DEFICIT (92,427) (60,832) (278,870)
--------- -------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 159,369 $ 88,338 $ 113,235
--------- -------- -----------
--------- -------- -----------
|
See accompanying notes to financial statements.
HOUSTON INTERWEB DESIGN, INC.
STATEMENTS OF OPERATIONS
Period From
Inception
(August 9, Six Months Ended
Year Ended 1996) January 31,
July 31, to July 31, -----------------------------
1998 1997 1999 1998
-------------- ------------- ------------- --------------
(unaudited) (unaudited)
REVENUES
Affiliates $ 110,951 $ 22,830 $ 41,486 $ 80,000
Nonaffiliates 517,119 163,164 217,261 182,437
-------------- ------------- ------------- --------------
TOTAL REVENUES 628,070 185,994 258,747 262,437
EXPENSES
Advertising 32,620 28,215 33,173 12,173
Computer equipment 25,051 38,248 21,528 16,998
Consulting costs 749,990 - - -
Contract labor 68,198 44,755 11,247 21,982
Depreciation 1,896 1,567 1,270 949
General and administrative 20,096 3,605 47,803 3,152
Interest 6,080 2,690 3,082 3,736
Internet service 29,019 8,073 17,932 11,063
Professional fees 15,288 1,228 201,706 -
Rent 21,105 10,450 37,449 8,873
Repairs and maintenance 3,474 3,391 2,773 4,205
Salaries and benefits 384,082 93,188 372,222 174,406
Supplies 26,036 11,461 5,228 11,314
Telephone 11,797 4,806 5,891 5,814
Travel 7,437 4,147 8,725 2,404
-------------- ------------- ------------- --------------
TOTAL EXPENSES 1,402,169 255,824 770,029 277,069
-------------- ------------- ------------- --------------
INCOME (LOSS) BEFORE FEDERAL
INCOME TAXES (774,099) (69,830) (511,282) (14,632)
FEDERAL INCOME TAX EXPENSE
(BENEFIT)
Deferred 7,496 (4,998) (2,498) (1,045)
-------------- ------------- ------------- --------------
NET LOSS $ (781,595) $ (64,832) $ (508,784) $ (13,587)
============== ============= ============= ==============
NET LOSS PER SHARE, BASIC AND
DILUTED $ (0.05) $ - $ (0.03) $ -
============= ============= ============ ==============
AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 15,341,535 15,279,000 16,128,268 15,279,000
============== ============= ============= ==============
|
See accompanying notes to financial statements.
HOUSTON INTERWEB DESIGN, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEAR ENDED JULY 31, 1998 AND PERIOD FROM INCEPTION (AUGUST 9, 1996) TO
JULY 31, 1997
Common Stock Stock
----------------------------- Accumulated Subscription
Shares Amount Deficit Receivable Total
------------- -------------- ------------- ------------- --------------
Contributions 15,279,000 $ 4,000 $ - $ - $ 4,000
Net loss, period from inception
(August 9, 1996) to July 31, 1997 - - (64,832) - (64,832)
------------- -------------- ------------- ------------- --------------
Balance, July 31, 1997 15,279,000 4,000 (64,832) - (60,832)
Issuance of common stock, issued
as compensation 750,000 750,000 - - 750,000
Net loss, year ended July 31, 1998 - - (781,595) - (781,595)
------------- -------------- ------------- ------------- --------------
Balance, July 31, 1998 16,029,000 754,000 (846,427) - (92,427)
Net loss, six months ended
January 31, 1999 (unaudited) - - (508,784) - (508,784)
Issuance of common stock
(unaudited) 160,133 198,200 - - 198,200
Issuance of common stock as
compensation (unaudited) 20,000 30,000 - - 30,000
Issuance of common stock for
services rendered (unaudited) 72,500 108,750 - - 108,750
Stock subscription receivable - - - (14,609) (14,609)
------------- -------------- ------------- ------------- --------------
Balance, January 31, 1999
(unaudited) 16,281,633 $ 1,090,950 $ (1,355,211) $ (14,609) $ (278,870)
============= ============== ============= ============= ==============
|
See accompanying notes to financial statements.
HOUSTON INTERWEB DESIGN, INC.
STATEMENTS OF CASH FLOWS
Period From
Inception
(August 9, Six Months Ended
Year Ended 1996) January 31,
July 31, to July 31, -------------------------
1998 1997 1999 1998
---------- ----------- ----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(781,595) $(64,832) $(508,784) $(13,587)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 1,896 1,567 1,270 949
Deferred income tax expense (benefit) 7,496 (4,998) (2,498) (1,045)
Common stock issued as compensation 749,990 - 138,750 -
Changes in assets and liabilities:
Accounts receivable (59,590) (56,681) 65,025 (25,451)
Deposits - - 24,976 -
Other current assets (7,219) (3,226) 10,445 2,287
Accounts payable and accrued expenses 92,191 127,895 87,824 76,075
---------- ----------- ----------- -----------
784,764 64,557 325,792 52,815
---------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 3,169 (275) (182,992) 39,228
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,332) (14,796) (5,954) (2,332)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from affiliate - - 30,000 -
Net proceeds (repayments) from notes payable (21,275) 21,275 - (21,275)
Net proceeds from line of credit 29,212 - 7 26,689
Proceeds from issuance of common stock 10 4,000 198,200 -
Increase in stock subscriptions receivable - - (14,609) -
---------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 7,947 25,275 213,598 5,414
---------- ----------- ----------- -----------
NET INCREASE IN CASH 8,784 10,204 24,652 42,310
CASH AT BEGINNING OF PERIOD 10,204 - 18,988 10,204
---------- ----------- ----------- -----------
CASH AT END OF YEAR $ 18,988 $ 10,204 $ 43,640 $ 52,514
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid $ 6,080 $ 2,690 $ 3,082 $ 3,736
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
SUPPLEMENTAL NONCASH FINANCING
ACTIVITIES
July 31, 1998 issuance of 750,000 common
shares in exchange for consulting services $ 749,990 $ - $ - $ -
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
January 31, 1999 issuance of 92,500
common shares as compensation and for
services rendered $ - $ - $ 138,750 $ -
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
|
See accompanying notes to financial statements.
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE A - NATURE OF OPERATIONS
Houston InterWeb Design, Inc. (the Company) was incorporated in the State of Texas in August, 1996. The Company is engaged in the design and creation of internet websites for customers. The Company uses internally developed technology for the creation of websites, which it licenses to customers, which ensures that customers websites are brought up in front of an internet user irrespective of the search engine used.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements have been prepared assuming the Company will be able to continue as a going concern. The Company has a working capital deficit of $106,092 and a stockholders' deficit of $92,427 at July 31, 1998, and experienced significant losses in fiscal 1998 which raise doubts about the Company's ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or capital and to refinance its debt and ultimately attain profitable operations.
Management's plans include the following:
- Increasing revenues by attracting new customers by increasing its sales and market operations to develop an awareness by potential customers of the Company's ability to create valuable interactive web sites.
- As described in Note J, the Company recently entered into a contract with a corporation (reseller) to market and distribute software products manufactured and hosted by the Company. The amount of revenue, if any, as a result of the above contract cannot presently be determined.
- Obtaining equity capital or debt financing.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost with depreciation calculated using the straight-line method over its estimated useful lives ranging from five to ten years. When assets are retired or otherwise removed from the accounts, any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to expense as incurred and significant renewals and improvements are capitalized.
REVENUE RECOGNITION: Revenues are recognized as services are provided, in accordance with customer agreements. For the year ended July 31, 1998, revenues from significant customers totaled $368,572. Included in this amount is $80,000 earned from a nonrecurring customer. Royalty income from website or other related licensing agreements is recognized as it is earned per the individual terms of each royalty agreement, and is generally comprised of a minimum amount which varies by customer, plus a stated percentage of the applicable licensee's sales. The Company uses the direct write-off method in accounting for bad debts, the results of which are not materially different from the allowance method.
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES: The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using anticipated tax rates and laws that will be in effect when the differences are expected to reverse. The realizability of deferred tax assets are evaluated annually and a valuation allowance is provided if it is more likely than not that the deferred tax assets will not give rise to future benefits in the Company's tax returns.
USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM INFORMATION: The accompanying financial information as of January 31, 1999 and for the six months ended January 31, 1999 and 1998 has been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements reflect all adjustments, consisting of normal recurring accruals which are, in the opinion of management, necessary to fairly present such information in accordance with generally accepted accounting principles.
NOTE C - INVESTMENTS UNDER THE EQUITY METHOD
At July 31, 1998, the Company owned a 30% interest in an internet provider of pet medical records (the investee). The Company obtained this ownership interest in exchange for providing its internet website search engine technology to this investee. The Company believes the fair value of these services provided to this investee to be de minimis, and therefore, has recorded its 30% ownership interest in this investee at a zero basis on its balance sheet. Additionally, at July 31, 1998 and January 31, 1999, the activities of the investee had not commenced.
NOTE D - NOTE PAYABLE
Note payable consist of the following:
July 31,
-------------------
1998 1997
------- -------
Revolving line of credit with a bank, providing for
$30,000 maximum borrowings; uncollateralized,
bearing interest at prime plus 1%; interest payable
monthly, principal payable on demand at the bank's
option. $29,212 $ -
------- -------
------- -------
|
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE E - INCOME TAXES
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at July 31, 1998 and 1997 are as follows:
July 31,
-------------------
1998 1997
-------- -------
Deferred tax assets:
Net operating loss carryforward $290,373 $ 5,177
Cash-to-accrual differences - 4,998
-------- -------
Total gross deferred tax assets 290,373 10,175
Less: valuation allowance 290,373 5,177
-------- -------
- 4,998
Deferred tax liabilities:
Tax over book depreciation (371) -
Cash-to-accrual differences (2,127) -
-------- -------
Total gross deferred tax liabilities (2,498) -
-------- -------
Net current deferred tax assets (liability) $ (2,498) $ 4,998
-------- -------
-------- -------
|
The Company has net operating loss carryforwards of approximately $854,000 as of July 31, 1998, which expire through the year 2013. Valuation allowances have been provided for all net operating losses due to lack of evidence of future recoverability at July 31, 1998.
The difference between the reported income tax expense (benefit) and the income tax expense (benefit) computed by multiplying the loss before income taxes by the federal statutory income tax rate is as follows:
Year Ended July 31,
---------------------
1998 1997
--------- --------
Current tax benefit computed at federal
statutory tax rate $(263,194) $(23,742)
Effect of marginal tax brackets - 11,284
Change in valuation allowance 285,196 5,177
Other (14,506) 2,283
--------- --------
Total income tax expense (benefit) $ 7,496 $ (4,998)
--------- --------
--------- --------
|
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE F - RELATED PARTY TRANSACTIONS
The Company has notes payable to its stockholders, unsecured, with interest payable at 6%, maturing July 31, 1998. Interest expense on these notes totaled approximately $293 in 1998 and $1,660 in 1997. The following is a summary of notes payable to stockholders:
July 31,
-------------------
1998 1997
------- -------
Lee Magness $ - $15,897
Harry White - 5,378
------- -------
$ - $21,275
------- -------
------- -------
|
In July 1998, the Company issued 4,545.4545 shares of its common stock to a
publicly traded affiliate (certain officers and stockholders of the Company
are directors and own stock in the affiliate) in exchange for ten dollars
cash consideration and various consulting services provided. After giving
effect to the 165 for 1 common stock split discussed below in Notes H and I,
the amount of shares issued to this affiliate became 750,000. It is
anticipated that this affiliate will subsequently distribute these 750,000
shares to its stockholders. In accordance with Financial Accounting Standards
Board Statement in its Emerging Issues Task Force Issue 96-18, ACCOUNTING FOR
EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR
IN CONJUNCTION WITH SELLING, GOODS OR SERVICES, $749,990 was recognized to
account for the fair value of the consulting services received from this
affiliate.
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company's minimum rental commitments under a noncancelable operating lease for office space is as follows:
Years Ending July 31,
---------------------
1999 $ 86,360
2000 86,360
2001 21,590
--------
$194,310
--------
--------
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Total rental expense for the year ended July 31, 1998 was $21,105 and for the initial period ended July 31, 1997 was $10,450.
The Company has instituted legal proceedings against a party for breach of contract seeking damages of $300,000. The party has made a counter claim against the Company, but has not plead any amount of damages. Management is of the opinion that the counter claim filed by the party is without basis and that the Company will prevail. Accordingly, no gain or loss has been accrued in these financial statements pertaining to these proceedings. In January 1999, in accordance with a confidential and mutual release and settlement agreement, the Company received nominal consideration in exchange for the mutual releases of all parties.
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has employment agreements with three of its stockholders providing a base annual salary through August, 2001. The base salary may be increased at the Company's option. In addition, this employment agreement entitles each of these stockholders to an annual bonus of 1% of the Company's earnings (before income taxes and depreciation) in excess of $5,000,000. Minimum annual commitments under these agreements amount to $360,000. Amounts incurred by the Company related to these employment agreements were $210,000 and $90,000 for the fiscal year ended July 31, 1998, and the initial period ended July 31, 1997, respectively, and $180,000 and $105,000 for the six months ended January 31, 1999 and 1998, respectively.
NOTE H - EARNINGS PER SHARE
In accordance with Financial Accounting Standards Board Statement 128, EARNINGS PER SHARE, basic earnings per common share amounts are calculated using the average number of common shares outstanding during each period, retroactively adjusted to give effect to the 165 for 1 common stock split discussed previously in Note F, and below in Note I. As there were no dilutive potential common shares outstanding during the year ended July 31, 1998, or during the initial period ended July 31, 1997, basic average shares outstanding and earnings per share are equal to diluted average shares outstanding and earnings per share, respectively, for the year ended July 31, 1998, and for the initial period ended July 31, 1997 and for the six month periods ended January 31, 1999 and 1998.
NOTE I - STOCKHOLDERS' EQUITY
Subsequent to July 31, 1998, in contemplation of the stock split and employee incentive stock option plan discussed below, the Company amended its articles of incorporation to increase its authorized capital to 50,000,000 common shares of no par value, and 5,000,000 preferred shares with $.01 par value. No preferred shares have been issued to date. All references herein have been restated to reflect the amended amounts.
On August 19, 1998, the Company effected a stock split on its common stock of 165 for 1 for stockholders of record on August 19, 1998. Subsequent to this stock split, and prior to October 31, 1998, the Company sold an additional 117,500 shares of its common stock to various individuals at prices ranging from $1 per share to $1.50 per share. As a result of the stock split and the subsequent sales of common stock, the total common stock of the Company issued and outstanding increased to 16,146,500 shares. All references to shares issued have been restated for the above stock split for all periods presented.
On August 21, 1998, the Company formed an incentive stock option plan for its employees under which 500,000 shares of common stock will be awarded to employees based upon criteria established under the plan. During February 1999, 288,000 options were issued to employees under this plan although no options have been exercised to date.
HOUSTON INTERWEB DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JULY 31, 1998 AND INITIAL PERIOD ENDED JULY 31, 1997
(INFORMATION SUBSEQUENT TO JULY 31, 1998 IS UNAUDITED)
NOTE J - SUBSEQUENT EVENTS
Subsequent to January 31, 1999, the Company has continued to issue shares of common stock to individuals for cash at prices ranging from $1.00 per share to $1.50 per share.
At the end of January 1999, the Company entered into a contract with a corporation (reseller) to market and distribute software products manufactured and hosted by the Company. The amount of revenue, if any, as a result of the above contract cannot presently be determined.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Texas law authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breach of directors' fiduciary duty of care. The amended and restated articles of incorporation of the company limit the liability of directors of the company (in their capacity as directors but not in their capacity as officers) to the company or its stockholders to the fullest extent permitted by Texas law. Specifically, directors of the company will not be personally liable for monetary damages for breach of a director's fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the company or its stockholders, (ii) for acts or omissions not in good faith that constitute a breach of duty of the director to the company or an act or omission which involves intentional misconduct or a knowing violation of law, (iii) for an act or omission for which the liability of a director is expressly provided by an applicable statute, or (iv) for any transaction from which the director received an improper personal benefit, whether the benefit resulted from an action taken within the scope of the director's office. Section 2.41 of the Texas Business Corporation Act relates to directors' liability for unlawful dividends and stock issuances.
The inclusion of this provision in the amended and restated articles of incorporation may have the effect of reducing the likelihood of derivative litigation against directors, and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the company and its stockholders.
The company's amended and restated articles of incorporation provide for the indemnification of its executive officers and directors, and the advancement to them of expenses in connection with any proceedings and claims, to the fullest extent permitted by the Texas Business Corporation Act. The amended and restated articles of incorporation include related provisions meant to facilitate the indemnities' receipt of such benefits. These provisions cover, among other things: (i) specification of the method of determining entitlement to indemnification and the selection of independent counsel that will in some cases make such determination, (ii) specification of certain time periods by which certain payments or determinations must be made and actions must be taken, and (iii) the establishment of certain presumptions in favor of an indemnitee. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the company pursuant to the foregoing provisions, the company has been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in connection with the distribution of the securities being registered. The expenses shall be paid by the Registrant.
SEC Registration Fee................. $ 100.00
Printing and Engraving Expenses...... 2,000.00
Legal Fees and Expenses.............. 40,000.00
Accounting Fees and Expenses......... 35,000.00
Miscellaneous........................ 5,000.00
----------
TOTAL................................ $82,100.00
----------
----------
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ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In August 1996, the company issued an aggregate of 15,279,000 shares of common stock to three individuals and three entities for nominal consideration in connection with the company's formation. The company believes theses transactions were exempt from registration pursuant to Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering.
From August 1998 through November 1998, the company issued an aggregate of 160,133 shares of common stock in consideration for an aggregate of $197,499.50. The Company believes that the foregoing transactions are exempt from registration as a limited offering pursuant to Rule 504 of Regulation D.
In July 1998, the company issued 750,000 shares of common stock to
PinkMonkey.com for nominal consideration and services rendered. The company
believes theses transactions were exempt from registration pursuant to
Section 4(2) of the Securities Act as transactions by an issuer not involving
a public offering.
In November 1998, the company issued an aggregate of 72,500 shares of common stock to three individuals in consideration for services rendered. The company believes theses transactions were exempt from registration pursuant to Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering.
In November 1998, the company issued an aggregate of 20,000 shares to three employees in consideration for services rendered. The company believes theses transactions were exempt from registration pursuant to Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering.
In January 1999, the company issued 66,667 shares of company common stock to an accredited individual for $100,000.00. The company believes theses transactions were exempt from registration pursuant to Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering.
In February 1999, the company issued 100,000 shares of company common stock to an accredited individual for $150,000.00. The company believes theses transactions were exempt from registration pursuant to Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering.
ITEM 27. EXHIBITS
INDEX TO EXHIBITS
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
3.1(1) Amended and Restated Articles of Incorporation
3.2(1) Articles of Amendment to the Articles of Incorporation
3.3(1) By-Laws of the company
3.4(1) Articles of Correction to the Amended and Restated Articles
of Incorporation
3.5(1) Articles of Correction to the Articles of Amendment to the
Articles of Incorporation
4.1(1) Form of Specimen of common stock
5.1(1) Legal Opinion
8.1(3) Tax Opinion
10.1(1) Letter Agreement between the company and
PinkMonkey.com, Inc.
II-2
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10.2(1) Software License and Marketing Agreement between the company
and Websource Media, L.L.C.
10.3(1) Software Reseller Agreement between the company and Harry
Bauge
10.4(1) Letter Agreement between the company and Harry Bauge
10.5(1) Agreement between the company and NetTrade Online, L.L.C.
10.6(1) Employment Agreement between the company and Harry White
10.7(1) Employment Agreement between the company and Richard Finn
10.8(1) Employment Agreement between the company and Lee Magness
10.9(3) Lease Agreement
23.1(1) Consent of Mann, Frankfort, Stein and Lipp, P.C.
23.2(2) Consent of Brewer & Pritchard , P.C.
27.1(1) Financial Data Schedule
|
(1) Filed as an Exhibit to the company's registration statement on Form SB-2
(File No. 67871) and herein incorporated by reference.
(2) Contained in Exhibit 5.1.
(3) Filed herewith.
ITEM 28. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the Securities Act;
ii. Reflect in the prospectus any facts or events arising after the effective date of which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and
iii. Include any additional or changed material on the plan of distribution.
(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) i. That, for the purpose of determining liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4), or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as
of the time it was declared effective.
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II-3
ii. For determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on the 18th day of March, 1999.
HOUSTON INTERWEB DESIGN, INC.
By: /s/ HARRY L. WHITE
-----------------------------
HARRY L. WHITE, President and
Chief Executive Officer
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This registration statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ HARRY L. WHITE ------------------- President, Treasurer, March 18, 1999 HARRY L. WHITE Secretary and Chairman /s/ RICHARD J. FINN ------------------- Chief Technical Officer and March 18, 1999 RICHARD J. FINN Director /s/ LEE A. MAGNESS ------------------- Chief Financial Officer, General March 18, 1999 LEE A. MAGNESS Counsel and Director |
II-5
March 18, 1999
Board of Directors
Houston InterWeb Design, Inc.
1770 St. James Place
Suite 515
Houston, Texas 77056
Gentlemen:
As counsel for Houston InterWeb Design, Inc., a Texas corporation ("Company"), you have requested our firm to render this opinion in connection with the Registration Statement of the Company on Form SB-2 filed under the Securities Act of 1933, as amended ("Act"), with the Securities and Exchange Commission relating to the registration of the distribution of 750,000 shares of Company common stock to the stockholders of PinkMonkey.com, Inc. and the registration of the resale of 419,300 shares of Company common stock.
We are familiar with the registration statement and the registration contemplated thereby. In giving this opinion, we have reviewed the registration statement and such other documents and certificates of public officials and of officers of the Company with respect to the accuracy of the factual matters contained therein as we have felt necessary or appropriate in order to render the opinions expressed herein. In making our examination, we have assumed the genuineness of all signatures, the authenticity of all documents presented to us as originals, the conformity to original documents of all documents presented to us as copies thereof, and the authenticity of the original documents from which any such copies were made, which assumptions we have not independently verified.
Based upon all the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas.
2. The shares to be issued upon the distribution and resale are validly authorized and will be validly issued, fully paid and nonassessable.
Board of Directors
March 18, 1999
We consent to the use in the registration statement of the reference to Brewer & Pritchard, P.C. under the heading "Legal Matters."
Very truly yours,
BREWER & PRITCHARD, P.C.
Exhibit 8.1
[LETTERHEAD OF MALONE & BAILEY, PLLC]
February 24, 1999
To the Board of Directors and Shareholders
Houston Interweb Design, Inc.
Houston, Texas
You have requested our opinion on behalf of Houston Interweb Design, Inc. (a Texas corporation) ("Company"), its shareholders, PinkMonkey.com, Inc. ("PinkMonkey"), and their shareholders regarding the material federal income tax consequences resulting from the distribution of 750,000 shares of Company stock ("Distribution") through PinkMonkey as a conduit to PinkMonkey's shareholders. The distribution to PinkMonkey occurred July 1998 by agreement, and PinkMonkey has represented that such shares will be distributed to its shareholders soon.
The Distribution is about 4.7% of total outstanding Company stock as of July 31, 1998. At the time of the share issuance, PinkMonkey had contractually agreed to distribute such shares ratably among its shareholders, although as of this date it has not done so.
Specifically, you have asked us to address the following issues:
1. Whether the Distribution qualifies as a tax-deductible expense to the Company for U. S. tax purposes.
2. Whether gain or loss will be recognized by any current holders of Company common stock.
3. Whether the Distribution will be taxable as ordinary income to PinkMonkey.
4. Whether the Distribution will be taxable as a capital gain to PinkMonkey shareholders to the extent the fair market value of Company stock exceeds the price PinkMonkey shareholders paid for their PinkMonkey stock.
Our opinions are based solely upon:
a) The material facts as described in the amended Form SB-2 accompanying this opinion and filed with the Securities and Exchange Commission on or about March 4, 1999;
b) Management's representations as to:
i) The purpose of the distribution, as previously stated, and
ii) The valuation of the shares as of the distribution date; and
c) Relevant current provisions of the Internal Revenue Code of 1986, as amended, Treasury Regulations thereunder (including proposed and temporary Treasury Regulations), and interpretations of the foregoing as expressed in court decisions, applicable legislative history, and the administrative rulings and practices of the IRS.
It is our opinion, based upon the facts, assumptions, and representations contained herein, that:
1. The Distribution qualifies as a deductible expense for U. S. tax purposes.
2. No gain or loss will be recognized by current holders of Company Common Stock because they will receive none of the Distribution.
3. The Distribution will be taxable as ordinary income to PinkMonkey.
4. The Distribution will be taxable as a capital gain to PinkMonkey shareholders to the extent the fair market value of Company stock exceeds the price PinkMonkey shareholders paid for their PinkMonkey stock.
The Company issued 750,000 shares in July 1998 to PinkMonkey with the agreement that PinkMonkey would distribute such shares ratably to PinkMonkey shareholders within a reasonable time.
1. Company management have determined the valuation of such shares to be $1 per share, or $750,000, based on their review of limited contemporaneous sales of their stock to insiders and third parties. The shares were issued as compensation for services rendered. PinkMonkey has not yet reviewed this valuation or made any determination on its own of valuation to report to its shareholders. Such determination may be different and such difference may be significant. PinkMonkey's separate valuation, if any, may materially change the taxability of distributions to PinkMonkey shareholders by altering the net taxable distribution amount.
2. The Distribution was intended to increase the ownership distribution of the Company to active investors familiar with Internet commerce transactions.
3. The Company and PinkMonkey will each pay their own expenses, if any, incurred in connection with the Distribution.
4. PinkMonkey has agreed to distribute the 750,000 shares ratably among its shareholders in a taxable distribution.
5. No part of the Distribution will be distributed by PinkMonkey to current Company shareholders, excepting about 3,000 shares to Company officer and director Lee Magness, who owns 70,000 shares out of about 17,000,000 shares of PinkMonkey currently outstanding.
6. PinkMonkey has paid about $150,000 in cash to date for services rendered
by the Company in setting up and maintaining PinkMonkey's web site. These were and are arms-length transactions freely negotiated.
7. Company officer and director Harry White owns warrants to currently purchase 100,000 shares of PinkMonkey stock at $.625 per share, although he has not yet exercised these warrants. Mr. White received his warrants in consideration for services as a director of PinkMonkey.
8. There are no other interested party transactions between the Company and PinkMonkey.
9. The 750,000 shares represents about 4.7% of total Company stock then and currently outstanding.
10. There is no plan to issue additional stock to PinkMonkey.
11. There is no plan by interested parties of either the Company or PinkMonkey to purchase any part of the 750,000 shares.
12. Neither the Company nor PinkMonkey is an investment company as defined in IRC section 368(a)(2)(F)(iii) and (iv).
(1) These provisions and interpretations are subject to change, which may or may not be retroactive in effect, that might result in material modifications of our opinion. Our opinion does not foreclose the possibility of a contrary determination by the IRS or a court of competent jurisdiction, or of a contrary position taken by the IRS or the Treasury Department in regulations or rulings issued in the future. In this regard, our opinion or an opinion by counsel with respect to an outcome on the merits with respect to such issue, is not binding on the IRS or the courts, and is not a guarantee that the IRS will not assert a contrary position with respect to such issue or that a court will not sustain such a position asserted by the IRS.
(2) This opinion does not address any state, local or other tax consequences that may result from the transaction set forth above.
(3) This opinion does not address any transactions other than the single distribution described above, or any transactions whatsoever, if the assumptions and representations set forth herein are not true and accurate at all relevant times. In the event any one of the assumptions or representations is incorrect, the conclusions reached in this opinion might be adversely affected.
(4) This opinion is based on the transaction as described in the document we reviewed (listed above). Should the actual document be revised again, the conclusions in this opinion could be adversely affected.
(5) Malone & Bailey, PLLC consents to referencing this opinion in the Company's Form SB-2 referred to above and to the filing of this opinion as an exhibit to the Registration Statement.
(6) We have relied upon the representations set forth in the transaction documents set forth in the transaction documents regarding matters of law outside the tax area including, for example, the validity of (1) the corporations involved in the proposed transactions, and (2) the
agreements including the appropriate filings of each with the federal and state government agencies as appropriate.
* * * * * * * * * * * * *
If you have any questions, please call John C. Malone at (713) 840-1210.
Sincerely,
/s/ Malone & Bailey, PLLC |
Exhibit 10.9
LEASE AGREEMENT
AND
BASIC LEASE INFORMATION
Tenant: HOUSTON INTERWEB DESIGN, INC.
a TEXAS CORPORATION
Notification Address: 1770 ST. JAMES PLACE, SUITE
HOUSTON, TEXAS 77056
Attention: HARRY WHITE
Facsimile Number:
Landlord: PATRIOT SAINT JAMES II INVESTORS, L.P.,
a Delaware Limited partnership.
Notification Address: 3030 LBJ Freeway, Suite 1500, Dallas, Texas 75234
Attention: Leasing Director
Facsimile Number: (214) 888-8029
Building: SAINT JAMES II office building, located at 1770
ST. JAMES PLACE, HOUSTON, HARRIS COUNTY, TEXAS.
Premises: Suite No. 515, containing 1,274 square feet of
Net Rentable Area in the Building, as shown on
the floor plan attached to this Lease as
EXHIBIT A.
Term: The period beginning on the Commencement Date
and ending at 6:00 p.m. on the last day of the
thirty sixth full calendar month after the
Commencement Date. Thus, unless the Commencement
Date falls on the first day of a calendar month,
the Term will also include the initial partial
calendar month immediately following the
Commencement Date.
Base Rent: Months(1) Rate(2) Annual Amount(3) Month Installment
1 through 36 $ 13.00 $ 16,526.04 $ 1,380.17
(1) Full calendar months after the Commencement
Date. For any initial partial calendar month,
the monthly installment of Base Rent will be the
same as in the first full calendar month after
the Commencement Date.
(2) Per square foot of Net Rentable Area per annum.
(3) Expressed on an annualized basis even though
the applicable period may be longer or shorter
than twelve months.
Security Deposit: $ 1,380.17
Base Year: Calendar year 1997
Operating Costs Base Rate: The rate of Operating Costs per square foot of
Net Rentable Area in the Building for the Base
Year.
Tax Costs Base Rate: The rate of Tax Costs per square foot of Net
Rentable Area in the Building for the Base Year.
Utilities Costs Base Rate: The rate of Utilities Costs per square foot of
Net Rentable Area in the Building for the Base
Year.
Tenant Improvements: Any leasehold improvements installed in the
Premises as of the date of this Lease, together
with (and as altered by) the Work Letter
Improvements, if any.
Broker: NONE
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THE BASIC LEASE INFORMATION IS PART OF THE LEASE. EACH TERM IN THE LEFT COLUMN IS USED THROUGHOUT THE LEASE AS A DEFINED TERM WITH THE MEANING STATED IN THE BASIC LEASE INFORMATION.
LEASE AGREEMENT
I. PREMISES AND TERM
1.1 DEMISE OF PREMISES. Landlord demises to Tenant the Premises located in the Building, which is situated on the land described in EXHIBIT B (together with the Building and other improvements now or hereafter located thereon, the "Property"), and covenants that subject to the terms and conditions of this Lease, Tenant will quietly have, hold, and enjoy the Premises so long as Tenant pays Rent as required by this Lease and otherwise performs and complies with this Lease. Tenant accepts the Premises from Landlord in an "as is" condition (save only for the Work Letter Improvements, if any) without warranty of any kind except as may be expressly stated to the contrary in this Lease, and agrees to surrender the Premises to Landlord in the condition required by this Lease on the expiration of the Term or earlier termination of this Lease. So long as Tenant occupies the Premises, Tenant will have the nonexclusive right to use the lobbies, walks, parking facilities, drives, and other areas of the Property made available by Landlord from time to time for the common use of occupants of the Building.
1.2 TERM. The Term will commence on the date (the "COMMENCEMENT DATE") that is the earlier of (a) the Substantial Completion Date (as defined in the Work Letter attached as RIDER 1), or (b) the date on which tenant first begins to occupy the Premises; and unless terminated earlier pursuant to this Lease, the Term will expire at the time specified in the Basic Lease Information. On receipt from Landlord, Tenant must execute a declaration in the form of EXHIBIT C to confirm the date upon which the Commencement Date occurred. Pending resolution of any objections Tenant may have to the date reflected as the Commencement Date in the declaration, Rent must be paid based on that date; and on resolution of Tenant's objections, an appropriate reduction or increase (without interest or penalty) will be made in the next Monthly Rent Installment due.
1.3 AREA CALCULATIONS. All calculations of Usable Area and Net Rentable Area under this Lease will be made in accordance with the following definitions:
(a) "USABLE AREA" means: (i) in the case of a full-floor space to be occupied by a single tenant, the entire area of the floor measured from the inside surface of the outer pane of glass and extensions of the plane thereof in non-glass areas to the inside surface of the opposite outer pane of glass and extensions of the plane thereof in non-glass areas, including all On-Floor Common Area and excluding only Service Area and General Common Area; and (ii) in the case of space on a floor to be occupied by more than one (1) tenant, the area enclosed by the inside surface of the outer pane of glass and extensions of the plane thereof in non-glass areas and by demising walls (measured from the midpoint of demising walls), excluding only Service Area, On-Floor Common Area, and General Common Area. No deduction will be made for columns or projections necessary to the Building.
(b) "NET RENTABLE AREA" means: (i) in the case of a full-floor space to be occupied by a single tenant, the Usable Area of the floor plus an allocation of General Common Area; and (ii) in the case of space on a floor to be occupied by more than one (1) tenant, the Usable Area of the space plus an allocation of both General Common Area and On-Floor Common Area.
(c) "SERVICE AREA" means an area within vertical penetrations such as (and measured from the midpoint of the walls enclosing) Building stairs, elevator shafts, fire towers, flues, vents, stacks, vertical pipe shafts, and vertical ducts, but excluding structural columns and areas for the specific use of any tenant (such as special stairs or elevators).
(d) "ON-FLOOR COMMON AREA" means the total area on a floor of a Building located within (and measured from the midpoint of the walls enclosing or inside surface of the outer pane of glass enclosing) public corridors, elevator foyers, rest rooms, mechanical rooms, janitor closets, telephone, electrical and equipment rooms, and other similar facilities for the use of all tenants on that floor. The total On-Floor Common Area of a floor to be occupied by more than one (1) tenant will be allocated to the Net Rentable Area of a particular space on that floor in proportion to the Usable Area of that space relative to the total Usable Area on that floor.
(e) "GENERAL COMMON AREA" means the total area of the Building within (and measured from the midpoint of the walls enclosing or from the inside surface of the outer pane of glass enclosing, or extensions of the plane thereof in non-glass areas) the Building's elevator machine rooms, main mechanical rooms, loading dock facilities, telephone switch rooms, main electrical rooms, public lobbies, engineering, security, postal and cleaning areas, and other areas not leased or held for lease within the Building, but which are necessary or desirable for the proper utilization of the Building generally or to provide services to the Building generally. The total General Common Area of the Building will be allocated to the Net Rentable Area of a particular space in proportion to the Usable Area of that space relative to the total Usable Area of the Building.
1.4 ADJUSTMENT OR NET RENTABLE AREA. The Net Rentable Area of the Premises will not be adjusted as a result of variations resulting from initial construction of any Work Letter Improvements. If the Net Rentable area of the Premises or Building changes for any reason, any Rent calculations based on Net Rentable Area will be adjusted accordingly effective as of Tenant's receipt of written notice from Landlord of the adjustment and the reason therefor. Tenant may object to errors in the adjustment by Landlord only if Tenant notifies Landlord in writing within thirty (30) days thereafter of the specific errors made by Landlord. Pending resolution of any such objections by Tenant, Rent must be paid as adjusted by Landlord based on the change in Net Rentable Area; and on resolution of Tenant's objections, an appropriate reduction or increase (without interest or penalty) will be made in the next Monthly Rent Installment due.
1.5 RELOCATION OF THE PREMISES. Upon written notice to Tenant, Landlord may substitute for the Premises other space in the Building of substantially the same Net Rentable Area as the Premises with leasehold improvements that as nearly as practical, are substantially the same as the Tenant Improvements initially installed in the Premises. Within ten (10) days after Landlord's written request, Tenant must execute an amendment to this Lease whereby all references to the Premises in this Lease are changed to refer to the space substituted for the Premises, Base Rent is adjusted to reflect any resulting change in Net Rentable Area, and all other provisions of this Lease remain unchanged. Landlord will reimburse Tenant for all reasonable and documented costs incurred to third parties as a direct and necessary result of Tenant's relocation to the space substituted for the Premises, including expenses for moving property, reconnecting equipment, and reprinting stationery.
1.6 ALTERATIONS OF THE PROPERTY. Landlord may (without unreasonable interference with Tenant's use of the Premises) make alterations, additions, or improvements to the Building and other parts of the Property from time to time, enter upon the Premises as necessary therefor, and close or restrict access to portions of the Building or other portions of the Property for any reason. Landlord may change the name or address of the Building.
II. RENT
2.1 PAYMENT OF RENT. On or before the first day of each calendar month throughout the Term, Tenant must pay Landlord in advance without demand or notice the "MONTHLY RENT INSTALLMENT" consisting of the total of (a) the monthly installment of Base Rent specified in the Basic Lease Information for the applicable calendar month, (b) one-twelfth (1/12th) of the Base Rent Adjustment as estimated by Landlord for the applicable calendar year, and (c) any Monthly Parking Charge. On Tenant's execution of this Lease, Tenant must pay Landlord one (1) month's Base Rent in the amount of the monthly
installment of Base Rent in effect for the first calendar month of the Term to be applied to the first full Monthly Rent Installment. If the Commencement Date falls on other than the first day of a calendar month, then on the Commencement Date Tenant must pay Landlord a prorated portion of one (1) month's Monthly Rent Installment based on the number of days elapsed during the Term in that month. All sums of money payable by Tenant to Landlord pursuant to this Lease constitute rent, and all such sums, together with the Monthly Rent Installments, are referred to generically in this Lease as "RENT." Except as expressly stated to the contrary in this Lease, all Rent is payable to Landlord without abatement, set-off, or counterclaim at Landlord's Notification Address (or at any other address that Landlord may designate in writing from time to time).
2.2 BASE RENT ADJUSTMENT. The "BASE RENT ADJUSTMENT" for each calendar year will equal the product of (a) the Net Rentable Area of the Premises, times (b) a rate per annum per square foot of Net Rentable Area equal to the sum of (i) the excess, if any, of the rate of Operating Costs per square foot of Net Rentable Area in the Building for the applicable calendar year over the Operating Costs Base Rate, (ii) the excess, if any, of the rate of Tax Costs per square foot of Net Rentable Area in the Building for the applicable calendar year over the Tax Costs Base Rate, and (iii) the excess, if any, of the rate of Utilities Costs per square foot of Net Rentable Area in the Building for the applicable calendar year over the Utilities Costs Base Rate. Effective on any change in the Net Rentable Area of the Premises or the Building in accordance with this Lease, the calculation of the Base Rent Adjustment will change accordingly. The Base Rent Adjustment will never lower Base Rent below the amount specified in the Basic Lease Information. Prior to January 1 of each calendar year after the Base Year (or as soon thereafter as reasonably practical), Landlord will provide an estimate of the Base Rent Adjustment for the forthcoming calendar year, and the Monthly Rent Installments due thereafter will be adjusted to reflect the Base Rent Adjustment so estimated by Landlord. By June 1 of each calendar year, or as soon thereafter as reasonably practical, Landlord will furnish to Tenant a statement (the "ANNUAL STATEMENT") showing in reasonable detail the calculation of the Base Rent Adjustment for the immediately preceding calendar year and comparing the actual Base Rent Adjustment to the estimated Base Rent Adjustment actually paid by Tenant. If the estimated Base Rent Adjustment paid is less than the actual Base Rent Adjustment reflected on the Annual Statement, Tenant must pay Landlord the amount of the deficit in a lump sum no later than thirty (30) days after receipt of the Annual Statement. If the estimated Base Rent Adjustment paid is greater than the actual Base Rent Adjustment reflected on the Annual Statement, Landlord will allow Tenant equal monthly credits against the Monthly Rent Installments due for the remainder of the then current calendar year in an aggregate amount equal to the surplus, or if Landlord so chooses, Landlord will pay Tenant the amount of the surplus in a lump sum within thirty (30) days after delivery of the Annual Statement. In calculating any surplus or deficit owed for any calendar year in which the Term expires, the Base Rent Adjustment will be prorated in proportion to the number of days elapsed during the Term in that calendar year.
2.3 OPERATING COSTS. "OPERATING COSTS" means all expenses and costs of any kind incurred by Landlord in connection with the ownership, operation, management, maintenance, or repair of the Property other than Tax Costs, Utilities Costs, and Excluded Costs. Operating Costs include without limitation, all of the following:
(a) Wages, salaries, fees, and all related expenses (including without limitation, taxes, insurance, and benefits) of all personnel engaged in the operation, management, maintenance, or repair of the Property.
(b) Costs of supplies, tools, equipment, and other materials, including replacement parts and equipment, whether purchased, leased, used, or consumed in the operation, maintenance, or repair of the Property.
(c) Costs of maintenance or service agreements for the Property, including without limitation, access control service, window cleaning, traffic control, janitorial service, landscape maintenance, and elevator maintenance.
(d) Costs of operation, maintenance, or repair of interior and exterior common or public areas of the Property, including without limitation, sidewalks, driveways, parking areas, and landscaping.
(e) Legal or accounting costs for the Property, including without limitation, a reasonable allocation of off-site costs and costs of annual audits of Operating Costs, Tax Costs, and Utilities Costs by certified public accountants, if performed.
(f) Costs of insurance carried by Landlord relating to the Property, including without limitation, fire and casualty insurance (with extended, all-risk, or other coverages), rental loss or business interruption insurance, plus the cost of all deductible payments made by Landlord.
(g) Assessments, fees, or similar charges for the Property's share of the cost of operating and maintaining common areas and facilities of any office or business park in which the Property is located.
(h) Costs of complying with Laws applicable to the operation, management, maintenance, or repair of the Property, including without limitation, costs for licenses, permits, and inspection fees.
(i) Amortization in accordance with generally accepted accounting
principles of capital expenditures and reasonable financing charges for items
that are primarily for the purpose of (i) reducing or avoiding increases in
Operating Costs in Landlord's good faith estimate, (ii) promoting safety, or
(iii) complying with Laws imposed after the initial construction of the
Building. In addition to the foregoing, Landlord may include in Operating
Costs unamortized capital expenditures that in the aggregate are less than
two percent (2%) of the estimated amount of the total Operating Costs, Tax
Costs, and Utilities Costs for the applicable calendar year.
(j) Management fees and costs of a Property management office in the Building or an allocation of the costs of an off-site central office maintained for management of the Property.
2.4 TAX COSTS. "TAX COSTS" means all of the following that are not Excluded Costs and that are imposed by Law on the Property or on Landlord in connection with the ownership or operation of the Property: (a) general and special ad valorem and other taxes, assessments, and charges; (b) any future capital levy, rent, or other tax, assessment, or charge imposed in place of or in addition to the ad valorem and other taxes, assessments, or other governmental charges presently in effect; and (c) consulting, accounting, legal fees, and other costs resulting from any challenge of ad valorem or other taxes, assessments, or other governmental charges. If the Property is not separately assessed, Landlord will allocate Tax Costs to the Property on a reasonable basis.
2.5 UTILITIES COSTS. "UTILITIES COSTS" means all of the following that are
not Excluded Costs and that are incurred by Landlord in connection with the
ownership or operation of the Property; (a) costs and expenses for
consumption or use of public or private utility services for the Property,
including without limitation, water, steam, sewer, waste disposal, gas,
telecommunications, and electricity; and (b) amortization in accordance with
generally accepted accounting principles of capital expenditures and
reasonable financing charges for items that are primarily for the purpose of
(i) reducing or avoiding increases in Utilities Costs in Landlord's good
faith estimate, or (ii) complying with Laws imposed after the initial
construction of the Building.
2.6 EXCLUDED COSTS. "EXCLUDED COSTS" means all of the following:
(a) Except as expressly included in the definitions of Operating Costs and Utilities Costs, capital expenditures as determined in accordance with generally accepted accounting principles, depreciation and amortization, and interest and other finance charges.
(b) Costs for the initial construction of the Property or for improvements to leased premises.
(c) Costs for the sale or financing of the Property, including brokerage commissions, attorneys' and accountants' fees, closing costs, title insurance premiums, and other similar costs.
(d) Leasing commissions, attorneys' fees, and other expenses in connection with negotiations for leases or disputes with particular tenants.
(e) Repair or replacement costs paid with proceeds of insurance or condemnation.
(f) Costs for which Landlord is reimbursed by any tenant or other party, including without limitation, costs for furnishing any utilities or services in addition to or in excess of those included in Building Standard Services.
(g) Taxes attributable to the personal property or trade fixtures of any tenant.
(h) Utilities or other costs that are payable directly to a third party by any tenant.
(i) Taxes on net income, death taxes, franchise taxes, and taxes in connection with any change of ownership of the Property.
(j) Penalties for late payment of taxes, utility bills, or other amounts owned by Landlord except to the extent Landlord was in good faith contesting payment.
2.7 ACCOUNTING PRINCIPLES. Operating Costs, Tax Costs, and Utilities Costs will be computed on an accrual basis in accordance with generally accepted accounting principles consistently applied. Tax Costs will accrue in the calendar year levied or assessed except for Tax Costs attributable to special taxes and assessments that are payable in installments, which will accrue only to the extent of the installment payable each calendar year. Operating Costs, Tax Costs, and Utilities Costs will be calculated on an annualized basis for a full calendar year. In calculating Operating Costs, Tax Costs, and Utilities Costs, costs that vary with occupancy (such as janitorial service and utilities) will be appropriately adjusted to reflect the amount that such variable costs would have been with occupancy at the greater of ninety-five percent (95%) of the Net Rentable Area of the Building or the actual occupancy of the Building throughout the applicable calendar year. All rates per square foot of Net Rentable Area in the Building involved in determining the Base Rent Adjustment will be calculated based on the greater of ninety-five percent (95%) of the Net Rentable Area of the Building or the actual occupancy of the Building throughout the applicable calendar year.
2.8 LATE PAYMENT OF RENT. Past-due Rent will bear interest from the date due until paid at the rate per annum that is the lesser of (a) five percent (5%) in excess of the "prime rate" or "base rate" of Bank One, Texas, National Association (or its successor) from time to time (or if such rate is discontinued, the rate charged by the bank to its most creditworthy commercial borrowers), or (b) the maximum interest rate allowed by Law. Any Rent or other sum required to be paid to Landlord on written demand will be due and payable on Tenant's receipt of a bill, invoice, or other written demand for payment from Landlord. If any Monthly Rent Installment is more than five (5) days past due, or if any other payment of Rent or any other sum is more than ten (10) days past due, Tenant must pay Landlord on written demand a late charge that is the greater of $250.00 or five percent (5%) of the amount of the Monthly Rest Installment or other Rent past due. Late charges are intended to compensate Landlord for additional administrative expenses associated with late payment. Any payment of past-due Rent will be applied first to any late charges owed, then to any interest accrued, and finally to the balance of Rend owed.
2.9 SECURITY DEPOSIT. Tenant must pay the Security Deposit to Landlord on Tenant's execution of this Lease. Tenant will not receive any interest on the Security Deposit. Landlord may commingle the Security Deposit with other funds of Landlord. If a Tenant Default occurs, Landlord may (in addition to any other remedies) apply the Security Deposit in whole or in part to pay any Rent, damages, or other sums owed by Tenant. On written demand by Landlord following such application, Tenant must pay Landlord a sufficient sum to restore the Security Deposit to the full amount specified in the Basic Lease Information. The Security Deposit is not an advance payment of Rent or a measure of Landlord's damages for a Tenant Default. Upon full payment and performance of this Lease by Tenant (including without limitation, final payment of any deficiency in the Base Rent Adjustment owed by Tenant as reflected in the final Annual Statement), Landlord will refund to Tenant any balance of the Security Deposit remaining after deducting any Rent, damages, or other sums owed by Tenant.
III. SERVICES FURNISHED BY LANDLORD
3.1 BUILDING STANDARD SERVICES. So long as Tenant occupies the Premises and no Tenant Default has occurred, Landlord will furnish the following "BUILDING STANDARD SERVICES":
(a) Central heating, ventilating, and air conditioning ("HVAC") in the Premises in season between the hours (the "BUILDING HOURS") of 7:00 a.m. to 6:00 p.m., Monday through Friday, and 8:00 a.m. to 1:00 p.m., Saturday, exclusive of holidays observed by national banks in the city where the Property is located.
(b) Electricity for routine lighting and the operation of general office machines such as typewriters, dictating equipment, adding machines, personal computers, copying machines, and the like that are designed to operate at or below the rated voltage and current loads of the outlets, circuits, and other electrical equipment initially installed in the Premises as part of the Tenant Improvements and that do not consume, either singly or in the aggregate, an amount of electrical power per square foot of Usable Area materially in excess of the amount of electrical power per square foot of Usable Area normally consumed in ordinary general office occupancy of the Building.
(c) Building standard janitorial service in the Premises Monday through Friday, exclusive of holidays observed by national banks in the city in which the Property is located.
(d) Replacement as needed of Building standard fluorescent light bulbs in the Premises.
(e) Initial issuance to Tenant of two (2) keys for each corridor door to the Premises, and if Landlord provides electronic access control to tenants of the Building generally, initial issuance to Tenant's employees in the Premises of access cards for use in Building standard electronic access card readers (not to exceed one (1) access card per 333 square feet of Net Rentable Area in the Premises).
(f) Initial installation in Building standard graphics of Tenant's name and suite number on the main exterior door of the Premises, and if Landlord provides a tenant directory in the main Building lobby, one (1) initial listing of Tenant's name on the tenant directory.
(g) Nonexclusive use of rest rooms with hot and cold water at locations provided for the use of the Building's tenants generally.
(h) Nonexclusive use of passenger elevator service to the floor of the Premises, with at least one (1) cab in service twenty-four (24) hours per day.
(i) Routine maintenance, replacement, and repair of the structural components of the Building, of the mechanical, electrical, and plumbing systems and equipment serving the Building generally, and of the interior and exterior common areas of the Building, including the Building's ground floor lobby, exterior lighting, landscaping, and irrigation on the Property, and parking, driveway, and walkway areas on the Property.
(j) Operation of equipment and/or employment of personnel for the purpose of attempting to control access to the ground floor lobby of the Building during other than Building Hours.
3.2 ADDITIONAL SERVICES. If Landlord chooses to do so, Landlord may make additional services available to tenants of the Building. Unless the additional services are furnished to office tenants of the Building generally, Landlord will establish a Building standard charge to be billed to the particular tenants that request or utilize the additional service. The following additional services will be available for a Building standard charge if requested by Tenant:
(a) If requested far enough in advance in accordance standard procedures established for the Building, HVAC service during other than Building Hours. The Building standard charge may include a minimum area and a minimum number of hours of HVAC operation.
(b) Replacement of electronic access cards.
(c) If Landlord provides a tenant directory in the main Building lobby, and to the extent space is available, additional or changed listings on the tenant directory.
3.3 EXCESS OR SPECIAL SERVICE REQUIREMENTS. Landlord and Tenant agree that:
(a) If any equipment in the Premises generates excessive heat or requires a range of ambient temperature and humidity outside of that afforded by the operation of the Building's standard HVAC equipment at thermostat settings that Landlord considers standard for the Building, Landlord may require Tenant to cease using such equipment within ten (10) days after written notice from Landlord. If Tenant fails to do so, Landlord may elect to install supplemental HVAC and metering equipment, in which case Tenant must pay the following costs to Landlord from time to time on written demand: (i) the cost of the supplemental equipment and its design and installation plus a Building standard charge to compensate Landlord for the additional administrative burden; (ii) the cost of maintenance, replacement, and repair of the supplemental equipment plus a Building standard charge to compensate Landlord for the additional administrative burden; and (iii) costs of electrical power consumed and chilled water as metered or otherwise reasonably determined by Landlord, plus actual costs of accounting and billing therefor.
(b) No equipment may be used that requires or uses electricity in excess of the rated voltage and current loads of the outlets, circuits, and other electrical equipment initially installed in the Premises as part of the Tenant improvements, and Landlord may enter the Premises and disconnect such equipment immediately without prior notice to Tenant. If any type or quantity of equipment in the Premises consumes electrical power in an amount per square foot of Usable Area that is materially in excess of the amount of electrical power per square foot of Usable Area normally consumed in ordinary general office occupancy of the Building, Landlord may require Tenant to cease using such equipment within ten (10) days after written notice from Landlord. If Tenant fails to do so, Landlord may elect to install supplemental metering equipment, in which case Tenant must pay the following costs to Landlord from time to time on written demand: (i) the cost of the supplemental equipment and its design and installation plus a Building standard charge to compensate Landlord for the additional administrative burden; (ii) the cost of maintenance, replacement, and repair of the supplemental equipment plus a Building standard charge to compensate Landlord for the additional administrative burden; and (iii) metered costs of electrical power consumed in excess of that included in Utilities Costs, plus actual costs of accounting and billing therefor.
(c) If any improvements in the Premises or any of the fixture, furnishings, fixtures, equipment, or other personal property in the Premises requires janitorial services in excess of that reasonably considered standard for the Building by Landlord, if additional janitorial service is required to clean and store cooking, eating, and drinking utensils and equipment in the Premises, or if additional janitorial service is required to properly dispose of food, drink, or other wastes and debris in the Premises, Landlord may refuse to provide such services (in which case Tenant must provide such services at its cost in a manner reasonably satisfactory to Landlord), or Landlord may elect to provide such services (in which case Tenant must pay Landlord from time to time on written demand the additional cost of such services plus a Building standard charge to compensate Landlord for the additional administrative burden).
(d) If the Premises or any other part of the Property is damaged by any act or omission of Tenant or its employees, agents, or contractors, Landlord will make needed repairs or replacements, but Tenant must pay Landlord on written demand the cost of the repairs and replacements in excess of insurance proceeds actually received by Landlord, if any, plus a Building standard charge to compensate Landlord for the additional administrative burden. Landlord will have no obligation to begin such repair or replacement work until Landlord receives all insurance proceeds and any funds due from Tenant.
(e) All sums payable by Tenant pursuant to this Section are in addition to the Base Rent Adjustment, which will be payable without reduction in accordance with other applicable provisions of this Lease.
IV USE AND OCCUPANCY BY TENANT
4.1 USE. The Premises may be used and occupied only for general office purposes and for no other purpose whatsoever. Tenant may not engage in or cause, must ensure that none of its employees, agents, or contractors engages in or causes, and must use good faith, reasonable efforts to ensure that none of its customers or other visitors engages in or causes any of the following in the Premises or elsewhere on the Property: (a) any action or the placement of any object that is visible from the exterior of the Building or from lobby or other common areas of the Property and that adversely affects the appearance of the Property; (b) any emission of harmful or offensive odors or fumes or any loud or disturbing noises; (c) any excessive load on floors or other structural elements of the Building or on the mechanical, electrical, and plumbing systems of the Building; (d) any fire or other hazard that might adversely affect the availability or cost of insurance carried by Landlord or other tenants; (e) any use, generation, storage, treatment, transportation, or disposal of any Hazardous Material (except for generally available office equipment and supplies that contain small quantities or low concentrations of Hazardous Material so long as they are properly used and stored within the Premises, properly disposed of by Tenant at a location other than the Property, and do not by Law require any license or permit); (f) any waste, nuisance, or other unreasonable interference with or disturbance of Landlord's business or the occupancy of any other tenant of the Property; (g) any criminal or other disreputable conduct that might adversely affect the reputation of Landlord or the Property; (h) any noncompliance with rules, procedures, or instructions of Landlord or its employees, agents, or contractors relating to protection of life or personal safety or to security or access control; or (h) any noncompliance with the Building Rules attached as Exhibit D (or amendments or additions to such rules hereafter promulgated by Landlord). "Hazardous Material" means any toxic or hazardous waste, material, or substance or any other substance that is prohibited, limited, or regulated as a health or environmental hazard or pollutant under any Law, or that even if not so regulated, could or does pose a hazard to the environment or to the health and safety of the occupants of the Building or others.
4.2 COMPLIANCE WITH LAWS. Tenant at its cost must comply with, must cause its employes, agents, and contractors to comply with, and must use good faith, reasonable efforts to cause its customers and other visitors to comply with all applicable codes, statutes, ordinances, regulations, and other legal requirements of any government or governmental agency (collectively, "Laws") relating to the use, condition, or occupancy of the Premises (including without limitation, all Laws applicable to Tenant's business and operations in the Premises). Without limiting the foregoing, Tenant at its cost must comply with all requirements of the Americans with Disabilities Act and implementing regulations applicable to the use, condition, or occupancy of the Premises other than requirements relating solely to the physical structure of (a) the Work Letter Improvements, if any, as initially installed in the Premises by Landlord, (b) the roof, foundation, and exterior walls of the Building, and (c) the common areas of the Property.
4.3 MAINTENANCE OF THE PREMISES. Tenant must promptly report to Landlord any damage to the Premises. Except to the extent included in Building Standard Services, maintenance, replacement, and repair of all improvements and other components of the Premises must be carried out by Tenant at its cost in a good and workmanlike manner, using contractors approved by Landlord in writing, and in a manner sufficient to keep the Premises and the improvements therein in as good a condition as on the Commencement Date, reasonable wear and tear excepted.
4.4 SIGNS AND ADVERTISING. Except for the entry letters and numerals initially installed by Landlord as part of the Building Standard Services or as specially provided to the contrary in a Rider to this Lease (if any), no signs or other graphics relating to Tenant or its business that are visible from the exterior of the Building or from Lobby or other common areas of the Property may be installed anywhere on the Property. If Landlord elects to permit any such signs or graphics, the size, location, and appearance thereof must be satisfactory to Landlord in its discretion. Tenant may not use the name of Landlord or of the Building or Property for any purpose other than to identify the location of the Premises in Tenant's address.
4.5 ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. Tenant may make no alterations, additions, or improvements to the Premises or the Property without the prior written consent of Landlord (which may be withheld in Landlord's discretion). If Landlord consents, all alterations, additions, or improvements must be completed without cost to Landlord, and Tenant must pay Landlord on written demand the amount of all costs incurred by Landlord for architects and engineers, permits, or other purposes related to the alterations, additions, or improvement, plus a Building standard charge to compensate Landlord for the additional administrative burden. Tenant must comply with all reasonable requirements of Landlord relating to plans and specifications, compliance with building codes and other Laws, employment and bonding of contractors, insurance, compatibility with the Building's mechanical, electrical, and plumbing systems, aesthetic considerations, and other matters as determined by Landlord. All alterations, additions, or improvements, including without limitation, all partitions, walls, railings, carpeting, floor and wall coverings, and other fixtures (excluding Tenant's trade fixtures) will become the property of Landlord when made, and will remain upon the Premises at the expiration of the Term or earlier termination of this Lease. Without limiting the foregoing, each of the following requires Landlord's prior written consent: (a) installation of food, soft drink or other vending machines; (b) removal or replacement of window coverings on exterior windows initially installed in the Premises as part of the Tenant Improvements, or the installation of additional window coverings, drapes, or other window treatments; and (c) rekeying or other changes in the locks or other access control devices on the exterior or interior doors of the Premises, or duplication of any keys or electronic access cards furnished by Landlord.
4.6 PERSONAL PROPERTY AND TRADE FIXTURES. Tenant may not remove any of the following from the Premises: (a) HVAC systems, fixtures, or equipment; (b) lighting fixtures or equipment; (c) carpeting and other attached floor coverings, or raised flooring; (d) plumbing fixtures and equipment; (e) paneling or millwork; (f) build-in shelving or cabinets; (g) drapes, blinds, or other window treatments; and (h) equipment or appliances purchased or installed by Landlord as part of the Work Letter Improvements. Except as provided in the preceding sentence, any personal property or trade fixtures installed in the Premises at Tenant's expense will remain Tenant's personal property, and must be removed from the Property by Tenant on the expiration of the Term or earlier termination of this Lease without damage to the Premises or other parts of the Property. On the expiration of the Term or earlier termination of this Lease Tenant must also deliver to Landlord all keys, electronic access cards, and safe or vault combinations with respect to the Premises, and leave the Premises in a clean condition free of waste, refuse, or debris. If Tenant fails to do so, Landlord may retain, store, or dispose of any trade fixtures or other personal property left in the Premises however Landlord chooses without liability of any kind to Tenant, repair any damage to the Premises or other parts of the Property caused by removal thereof, change or rekey locks and other access control devices as necessary throughout the Building to maintain security, and clean the Premises and properly dispose of all such waste, refuse, or debris; and Tenant must pay to Landlord on written demand all costs and expenses incurred by Landlord in connection with the foregoing, plus a Building standard charge to compensate Landlord for the additional administrative burden.
4.7 TAXES PAYABLE BY TENANT. Tenant must pay any documentary stamp tax, transfer tax, sales or use tax, excise tax, or any other tax, assessment, or charge (other than any income, franchise, or similar tax imposed directly on Landlord or Landlord's net income from the Property) required to be paid on account of (a) the execution of this Lease, (b) the use or occupancy of the Premises by Tenant, (c) the sale or use of goods or services furnished by Landlord directly to Tenant or at Tenant's request, (d) the Rent or other payments due hereunder, or (e) the value of trade fixtures, furnishing, equipment, or other personal property located on the Premises and owned by or in the custody of Tenant. All such taxes, assessments, and charges must be paid promptly as they become due prior to delinquency. Tenant will provide Landlord with copies of paid receipts for such taxes, assessments, or charges promptly after payment. Tenant must also pay on written demand from Landlord any increase in ad valorem taxes or assessments on the Property as a result of alternations, additions, or improvements made after the Commencement Date (as separately assessed or as reasonably valued and allocated by Landlord).
4.8 PROTECTION AGAINST LIENS. No mechanics', materialmen's, or other type of
lien or claim may be filed against Landlord or the Property by, against,
through, or under Tenant or its contractors. If any such lien or claim is
filed, Tenant must either cause the lien or claim to be discharged with ten
(10) days after filing, or if all required approvals from the holders of
Mortgages on the Property are obtain and Tenant furnishes adequate security
to prevent any foreclosure proceedings against the Property, Tenant may in
good faith contest such lien or claim; otherwise, Landlord may, in addition
to any other right or remedy available to it, elect to discharge the lien or
claim by paying the amount alleged to be due or by giving appropriate
security. If Landlord discharges or secures the lien or claim, then Tenant
must reimburse Landlord on written demand for all sums paid and all costs
(including reasonable attorneys' fees and costs of litigation) incurred by
Landlord plus a Building standard charge to compensate Landlord for the
additional administrative burden. All of Tenant's contracts, purchase orders,
or similar documents relating to any labor or materials to be furnished for
the Premises must state that Tenant is solely responsible for payment and
that no lien may attach to the Property to secure any payment due.
4.9 ACCESS BY LANDLORD. Landlord and its agents and representatives may enter the Premises at any time without notice to provide Building Standard Services or in an emergency. At reasonable hours and after reasonable notice, Landlord and its agents and representatives may enter the Premises to conduct inspection, make repairs, alterations, or additions, and to show the Premises to prospective tenants, subtenants, mortgagees, and purchasers.
V. TRANSFERS
5.1 TRANSFERS BY TENANT. Landlord and Tenant agree that:
(a) Without the prior written consent of Landlord in each instance (which may be withheld in Landlord's discretion), Tenant may not do any of the following (a "TENANT TRANSFER"): (i) assign this Lease or any estate or interest therein, whether absolutely or collaterally as security for any obligation; (ii) sublease any part of the Premises; (iii) permit any assignment of this Lease or any estate or interest therein by operation of Law, whether absolutely or collaterally as security for any obligation; (iv) grant any license, concession, or other right of occupancy for any part of the Premises; (v) permit the use of any part of the Premises by any person other than Tenant and its agents and employees; (vi) assign or otherwise transfer ownership of a majority of the assets of Tenant; or (vii) merge or be consolidated into any other entity. In soliciting any Tenant Transfer, Tenant must endeavor to obtain fair market value consideration. No Tenant Transfer to any then current tenant or occupant of the Building will ever be permitted. Any attempted Tenant Transfer without Landlord's prior written consent will be void.
(b) If Tenant requests Landlord's consent to a Tenant Transfer, Landlord may either (i) approve or disapprove the Tenant Transfer, or (ii) terminate this Lease with respect to the part of the Premises affected by the proposed Tenant Transfer. In connection with each Tenant Transfer request by Tenant, Tenant must obtain and furnish
to Landlord all documents, financial reports, and other information Landlord reasonably requires in order to evaluate the proposed transferee. Landlord will advise Tenant of Landlord's decision about the requested Tenant Transfer within thirty (30) days after receipt of Tenant's written Tenant Transfer request and all requested supporting materials. As a condition to giving its consent to a Tenant Transfer, Landlord may require that any instrument to effectuate the Tenant Transfer be in a form satisfactory to Landlord, that the transferee assume the Lease, and that alterations to the Premises needed to comply with Law be carried out without cost to Landlord in accordance the provisions of this Lease relating to alterations of the Premises. If Landlord refuses to consent to a requested Tenant Transfer, this Lease and the obligations and liabilities of Tenant under this Lease will nonetheless remain in full force and effect. The consent of Landlord to one Tenant Transfer is never to be construed as waiving the requirement for Landlord's consent to other Tenant Transfers, nor will any consent by Landlord or any Tenant Transfer discharge or release Tenant from any obligations or liabilities to Landlord under this Lease.
(c) Tenant must pay Landlord all cash or other proceeds of any Tenant Transfer in excess of the Rent payable under this Lease, and Tenant hereby assigns to Landlord all rights it may have or ever acquire to the excess proceeds, which will be due and payable to Landlord on receipt by Tenant and will be accompanied by an accounting of the sums owed, certified by Tenant. No transferee of less than the entire Premises for the full Term as the result of a Tenant Transfer will ever be entitled to exercise any renewal, extension, expansion, termination, or other option provided in this Lease (or in any Rider) or to the return of the Security Deposit. If a Tenant default occurs after any Tenant Transfer, Landlord may, at its option, collect Rent directly from the transferee, and Tenant hereby authorizes any such transferee to pay Rent directly to Landlord at all times after receipt of written notice from Landlord. No direct collection of Rent by Landlord from any transferee following a Tenant Transfer will constitute a novation or otherwise release Tenant from its obligations and liabilities under this Lease.
5.2 TRANSFERS BY LANDLORD. Landlord has the unrestricted right to sell, assign, mortgage, encumber, or otherwise dispose of all or any part of the Property or any interest therein. Upon sale or other disposition of the Property, Landlord will be released from obligations and liabilities thereafter accruing under this Lease, and Tenant will attorn to Landlord's successor and look solely to such successor for performance of the Lease thereafter.
5.3 SUBORDINATION. This Lease is automatically subordinate to all present
and future mortgages, deeds of trust, deeds to secure debt, other security
instruments, or ground or land leases encumbering all or any part of the
Property ("MORTGAGES") and to all renewals, modifications, consolidations,
replacements, and extensions of any Mortgage. No other document is necessary
to subordinate this Lease to any Mortgage, but if Landlord so requests,
Tenant will promptly execute an appropriate document to confirm such
subordination. Upon request of any party succeeding to the interest of
Landlord as a result of enforcement of any Mortgage, Tenant will
automatically become the tenant of such successor in interest without change
in the terms this Lease except that such successor in interest will not be
(a) subject to any credits, offsets, defenses, or claims which Tenant may
have against any prior Landlord, (b) bound by any payment of Rent for more
than one (1) month in advance (except prepayments in the nature of security
for the performance by Tenant of its obligations under this Lease that are
actually received by such successor in interest), (c) bound by any amendment
or modification of this Lease made without the written consent of the holder
of the Mortgage (if such consent is required by the Mortgage), (d) liable for
any act, omission, or default of any prior landlord, or (e) required to make
any capital improvements to the Property or the Premises that Landlord may
have failed to complete. Notwithstanding the foregoing, the holder of any
Mortgage may elect at any time to subordinate its Mortgage to this Lease by
filing a document to such effect in the appropriate public real property
record and giving Tenant notice of such election.
5.4 ESTOPPEL CERTIFICATE. Within ten (10) days after written request from Landlord, Tenant must (a) execute an estoppel certificate on a form provided by Landlord certifying the status of such matters with respect to the Lease as Landlord may request, and (b) furnish landlord the most recent available audited financial statement (or if Tenant does not normally have audited financial statements prepared, the most recent unaudited financial statement) of Tenant and of any guarantor of this Lease. If Tenant fails to deliver a requested estoppel certificate within the required 10-day period, Tenant will be deemed to have agreed to the statements contained in the form provided by Landlord.
VI. RISK MANAGEMENT
6.1 CASUALTY INSURANCE. Landlord must maintain fire and casualty insurance with at least extended coverage on the Building and other improvements included in the Property (excluding trade fixtures and personal property owned by Tenant or in Tenant's custody or control) in amounts desired by Landlord issued by an insurance company authorized to insure properties in the state where the Property is located. Tenant will have no interest in the proceeds of Landlord's insurance. If any improvements in the Premises have a value substantially disproportionate to those found generally in the Building, or if Tenant's use or occupancy poses any increased risk of loss (without implying any consent to such use or occupancy), any resulting increase in Landlord's premiums for such insurance must be paid by Tenant to Landlord on written demand. Tenant at its own cost must maintain fire and casualty insurance with at least extended coverage for the replacement cost of all trade fixtures and personal property located on the Property and owned by Tenant or in Tenant's custody or control, with business interruption coverage for a period of at least six (6) months, issued by an insurance company authorized to insure properties in the state where the Property is located. Tenant must furnish Landlord certificates of insurance evidencing the required fire and casualty insurance coverage prior to the Commencement Date and thereafter prior to each policy renewal date.
6.2 WAIVER OF SUBROGATION AND CLAIMS. Landlord waives all claims, causes of action, or other rights of recovery against Tenant and its employees, agents, and contractors for any loss or damage to the Building and other improvements included in the Property by reason of fire or other insurable risk of loss (whether or not actually insured), regardless of cause or origin (including negligence), and agrees that no insurer will have any right of subrogation to Landlord. Tenant waives all claims, causes of action, or other rights of recovery against Landlord and its employees, agents, and contractors for any loss or damage to any trade fixtures and personal property located on the Property and owned by Tenant or in Tenant's custody or control by reason of fire or other insurable risk of loss (whether or not actually insured), regardless of cause or origin (including negligence), and agrees that no insurer will have any right of subrogation to Tenant. Each of Tenant and Landlord will advise its fire and casualty insurers of the foregoing waiver and ensure that such waiver is a part of each policy of fire and casualty insurance that its carries.
6.3 CASUALTY DAMAGE. If any part of the premises is damaged by fire or
other casualty, Tenant will give prompt notice to Landlord. Landlord may, at
its option, terminate this Lease by so notifying Tenant in writing within
sixty (60) days after the date of a fire or other casualty if (a) the
casualty renders any substantial part of the Premises untenantable and the
repair time to restore the Premises to a tenantable condition (as reasonably
estimated my Landlord) will extend beyond the date that is one hundred eighty
(180) days after the date of the casualty, (b) the casualty renders any
substantial part of the Premises untenantable and at the time, less than two
(2) years remain until the expiration of the Term, (c) any part of the
Property is damaged to the extent that in Landlord's judgment, restoration is
not practical (whether or not the Premises have been damaged by the
casualty), or (d) the holder of any Mortgage requires application of any
insurance proceeds to reduce the Mortgage debt. If the damage by fire or other
casualty renders any substantial part of the premises untenantable and if the
repair time to restore the Premises to a tenantable condition (as reasonably
estimated by Landlord) will extend the date that is one hundred eighty (180)
days after the date of the casualty, Tenant may elect to terminate this Lease
by so notifying Landlord in writing within thirty (30) days after Tenant
receives Landlord's written estimate of the time required for restoration. If
the Lease is not so terminated by Landlord or Tenant, Landlord will promptly
begin and diligently pursue the work of restoring the Premises (including the
Tenant Improvements initially installed in the Premises) to substantially
their former condition as soon as reasonably possible. Landlord will not,
however, be required to restore any alterations, additions, or improvements
other than the initial Tenant Improvements or to spend any amount in excess
of the insurance proceeds
during the time and to the extent the Premises are untenantable as the result of fire or other casualty, but such abatement will not extend the Term.
6.4 CONDEMNATION. If all or substantially all of the Property is condemned or is sold in lieu of condemnation, then this Lease will terminate on the date the condemning authority takes possession of the Property. If less than all of the Property is so condemned or sold (whether or not the Premises are affected) and in Landlord's judgment, the Property cannot be restored to an economically viable condition, or if the holder of any Mortgage requires application of condemnation proceeds to the reduction of the Mortgage debt, Landlord may terminate this Lease by written notice to Tenant effective on the date the condemning authority takes possession of the affected part of the Property. If the condemnation or sale in lieu thereof will render any substantial part of the Premises untenantable, Tenant may terminate this Lease by written notice to Landlord effective on the date the condemning authority takes possession of the affected part of the Premises. If this Lease is not so terminated by Landlord or Tenant, Landlord will, to the extent feasible, restore the Premises (including the Tenant Improvements initially installed in the Premises) to substantially their former condition. Landlord will not, however, be required to restore any alterations, additions, or improvements other than the initial Tenant Improvements or to spend any amount in excess of the condemnation proceeds actually received by Landlord. Landlord will allow Tenant an equitable abatement of Rent during the time and to the extent the Premises are untenantable as the result of any condemnation or sale in lieu thereof, but such abatement will not extend the Term. All condemnation awards and proceeds belong exclusively to Landlord, and Tenant will not be entitled to, and expressly waives and assigns to Landlord, all claims for any compensation for condemnation; provided, however, if Tenant is permitted by applicable law to maintain a separate action that will not reduce condemnation awards or proceeds to Landlord, Tenant may pursue such separate action, but only for loss of business, moving expenses, and Tenant's trade fixtures.
6.5 LIABILITY INSURANCE. Each of Landlord and Tenant must maintain separate policies of commercial general liability insurance issued by an insurance company authorized to transact business in the state where the Property is located. The combined single limit of liability insurance coverage must be at least $2,000,000, or such greater amount as Landlord may reasonably require from time to time (so long as Landlord maintains at least the same limit of coverage). Coverage in excess of $1,000,000 may be provided through a policy of umbrella liability insurance. Tenant's liability insurance policy must name Landlord as an additional insured and contain an undertaking by the insurer not to cancel or change coverage materially without first giving thirty (30) days' written notice to Landlord. Tenant must furnish Landlord certificates of insurance evidencing the required commercial general liability insurance coverage prior to the Commencement Date and thereafter prior to each policy renewal date.
6.6 INDEMNIFICATION. Landlord and Tenant agree that:
(a) Tenant will indemnify, defend, and hold Landlord and its officers, employees, agents, directors, shareholders, and partners harmless against any loss, liability, damage, fine or other governmental penalty, cost, or expense (including reasonable attorneys' fees and costs of litigation), or any claim therefor, resulting from: (i) noncompliance with or violation of any Law applicable to Tenant or its use and occupancy of the Premises; (ii) the use, generation, storage, treatment, or transportation, or the disposal or other release into the environment, of any Hazardous Material by Tenant or its employees, agents, or contractors or as a result of Tenant's use and occupancy of the Premises; (iii) injury to persons or loss or damage to property to the extent caused by any negligent or wrongful act or omission of Tenant or its employees, agents, and contractors, but only to the extent the loss or damage would not be covered by property and casualty insurance of the type and amount required to be carried by Landlord pursuant to this Lease (whether or not actually so carried).
(b) Landlord will indemnify, defend, and hold Tenant and its officers,
employees, agents, directors, shareholders, and partners harmless against any
loss, liability, damage, fine or other governmental penalty, cost, or expense
(including reasonable attorneys' fees and costs of litigation), or any claim
therefor, resulting from: (i) Landlord's noncompliance with or violation of
any Law applicable to Landlord, but only to the extent such noncompliance or
violation is not based on the use or occupancy of the Premises by Tenant or
any other act or omission of Tenant or its employees, agents, or contractors;
(ii) the use, generation, storage, treatment, or transportation, or the
disposal or other release into the environment, of any Hazardous Material by
Landlord or its employees, agents, or contractors; (iii) injury to persons or
loss or damage to property to the extent caused by any negligent or wrongful
act or omission of Landlord or its employees, agents, and contractors, but
only to the extent the loss or damage would not be covered by property and
casualty insurance or the type and amount required to be carried by Tenant
pursuant to this Lease (whether or not actually so carried).
6.7 LIMITATIONS OF LIABILITY. Notwithstanding anything to the contrary in this Lease, Landlord and Tenant agree that:
(a) None of the following will constitute a breach of the covenant of quiet enjoyment, an actual or constructive eviction of Tenant, or a Landlord Default: (i) the unavailability, curtailment, interruption, fluctuation, inadequacy, or other defect in any of the services furnished or to be furnished by Landlord pursuant to Article III of this Lease as a result of any failure or malfunction of, or damage to any lines, equipment, or other facilities on the Property or elsewhere, any act or omission of any utility company, the requirements of any law, the unavailability of materials or supplies, or any other circumstance outside of Landlord's reasonable control so long as Landlord in good faith attempts to remedy such circumstances as quickly as reasonably possible; (ii) any design or other defect in the physical structure of the Building, in the mechanical, electrical, and plumbing system of the Property, or in the Tenant Improvements or any other improvements on the Property so long as Landlord in good faith attempts to remedy the defect as quickly as reasonably possible; or (iii) any repairs, replacements, maintenance, alterations, additions, or improvements to any part of the Property so long as such activities are conducted without unreasonable interference with Tenant's use of the Premises.
(b) Landlord will not be liable (whether in the event of a Landlord Default or in any other circumstance whatsoever), and Tenant hereby waives and releases all claim, causes of action, or other rights of recovery it may ever had against Landlord for: (i) any negligent or other acts or omissions by other tenants or occupants of the Property or their employees, agents, contractors, customers, or visitors; (ii) loss or damage to property or personal injury or death resulting from any negligent or other act or omission of Landlord or its employees, agents, or contractors, relating to the security of the Property; (iii) any loss of business or profits of Tenant or other consequential damages; or (iv) exemplary, punitive, or other special damages of any kind.
(c) None of Landlord's officers, employees, agents, directors, shareholders, or partners will ever have any liability to Tenant under or in connection with this Lease, and Tenant hereby waives and releases all claims, causes of action, or other rights of recovery it may ever have against such parties under or in connection with this Lease.
(d) Tenant agrees to look solely to Landlord's interest in the Property for the recovery of any damages or other sums of money that Landlord may ever owe Tenant under or in connection with this Lease, and Landlord will never be personally liable for payment of any such damages or other sums of money, or any judgment therefor.
6.8 ALLOCATION OF RISKS. TENANT ACKNOWLEDGES THAT IT HAS BEEN ADVISED TO HAVE THE PROVISIONS OF THIS LEASE REVIEWED BY AN ATTORNEY OF ITS OWN CHOOSING AND THAT IT HAD DONE SO OR KNOWINGLY ELECTED NOT TO DO SO. EACH OF THE WAIVERS, RELEASES, AND OTHER LIMITATIONS ON LIABILITY OR CLAIMS PROVIDED IN THIS ARTICLE OR ELSEWHERE IN THIS LEASE (INCLUDING WITHOUT LIMITATION, LIABILITY OR CLAIMS BASED ON NEGLIGENCE OR OTHER FAULT) HAS BEEN KNOWINGLY AND INTENTIONALLY MADE AND AGREED TO BY TENANT. THIS SECTION IS INTENDED TO SATISFY ANY REQUIREMENT OF LAW THAT A WAIVER, RELEASE, OR OTHER LIMITATION OR CLAIMS OR LIABILITY BASED ON NEGLIGENCE OR OTHER FAULT BE CONSPICUOUSLY DISCLOSED.
VII. DEFAULT AND REMEDIES
7.1 TENANT DEFAULT. The occurrence of any of the following will be a "TENANT DEFAULT":
(a) Tenant fails to pay Monthly Rent Installment within five (5) days after the date payment is due, or Tenant fails to pay any other Rent or other sum owing from Tenant to Landlord under this Lease within ten (10) days after the date of Tenant's receipt of a bill, invoice, or other written demand for payment.
(b) Tenant fails to perform or comply with any provision of this Lease not requiring the payment of Rent or other sums of money, and such failure continues for more than fifteen (15) days after written notice from Landlord of such failure; provided, however, if any such failure by Tenant cannot be corrected within such 15-day period solely as a result of nonfinancial circumstances outside of Tenant's control, and if Tenant has commenced substantial corrective actions within such 15-day period and is diligently pursuing such corrective actions, such 15-day period will be extended for such additional time as is reasonably necessary to allow completion of actions to correct Tenant's failure.
(c) Tenant fails to take occupancy of the Premises within fifteen (15) days after the Commencement Date, or Tenant thereafter ceases to do business in or abandons any substantial part of the Premises, whether or not Rent continues to be paid.
(d) If Tenant or any guarantor of this Lease is other than a natural person, the corporate, partnership, or other entity constituting Tenant or such guarantor is dissolved, liquidated, or otherwise ceases to exist in good standing under applicable Law.
(e) Tenant's leasehold estate is taken on execution or other process of Law in any action against Tenant.
(f) Tenant or any guarantor of this Lease files a petition under any
chapter of the United States Bankruptcy Code, as amended, or under any
similar Law of any state, or a petition is filed against Tenant or any such
guarantor under the United States Bankruptcy Code, as amended, or under any
similar Law of any state and is not dismissed with prejudice within twenty
(20) days of filing, or a receiver or trustee is appointed for Tenant's
leasehold estate or for any substantial part of the assets of Tenant or any
such guarantor and such appointment is not dismissed with prejudice within
sixty (60) days, or Tenant or any such guarantor makes a general assignment
for the benefit of creditors.
(h) Any guarantor of this Lease fails or refuses to perform or comply with such guarantor's guaranty of this Lease.
7.2 LANDLORD'S REMEDIES. If a Tenant Default has occurred, Landlord may (in addition to any other rights or remedies available by Law) then or at any time thereafter to do any one or more of the following at Landlord's option:
(a) LandLord, with or without terminating this Lease, may take any reasonable action to remedy any failure of Tenant to comply with or perform this Lease, and may enter the Premises as necessary to do so. Tenant must reimburse Landlord on written demand for all costs so incurred plus a Building standard charge to compensate Landlord for the additional administrative burden.
(b) Landlord may terminate this Lease by express written notice of termination to Tenant, enter and repossess the Premises by forcible entry or detainer suit or as otherwise permitted by Law without additional demand or notice of any kind to Tenant, and remove all persons or property therefrom using such lawful force as may be necessary (and Tenant hereby waives any claim for loss or damage by reason of such reentry, repossession, or removal), in which case Landlord will be entitled to recover from Tenant (i) the cost of repossessing the Premises (including without limitation, reasonable attorneys' fees and costs of litigation), (ii) the anticipated cost of any repairs, alterations, additions, and improvements to the Premises, leasing inducements, and brokerage commissions for reletting the Premises, (ii) all unpaid Rent owed at the time of termination, (iv) the present value of the balance of the Rent for the remainder of the Term less the present fair market rental value of the Premises for the same period (taking into account all relevant factors, including market rent concessions and the time necessary to relet the Premises and using a discount rate per annum equal to the interest rate on U.S. Treasury obligations with a maturity comparable to the length of the remainder of the Term), and (v) interest and any other sum of money or damages owing by Tenant to Landlord. On termination of this Lease, Landlord may elect to evict all subtenants and others in possession, or on attornment of any subtenant to Landlord, to recognize such sublease as a direct lease between the subtenant and Landlord.
(c) Landlord may terminate Tenant's right of possession (but not this Lease), enter and repossess the Premises by forcible entry or detainer suit or as otherwise permitted by Law without demand or notice of any kind to Tenant and without terminating this Lease, and remove all persons or property therefrom using such lawful force as may be necessary (and Tenant hereby waives any claim for loss or damage by reason of such reentry, repossession, or removal), in which case Landlord may (but will not be obligated to) relet the Premises for the account of Tenant for such rent and upon such terms as are satisfactory to Landlord, and without preference to any other space in the Building. The rent actually received from such reletting of the Premises, if any, will be applied to (i) the cost of repossessing the Premises (including without limitation, reasonable attorneys' fees and costs of litigation), (ii) the cost of any repairs, alterations, additions, and improvements to the Premises, leasing inducements, and brokerage commissions paid by Landlord for reletting the Premises (which Landlord is hereby authorized to make), (iii) accrued unpaid Rent, and (iv) interest and any other sum of money or damages owing by Tenant to Landlord. If at any time or from time to time the rent actually received from such reletting of the Premises, if any, is not sufficient to pay all such sums then accrued, the deficiency will be due and payable from Tenant to Landlord on written demand. Landlord may file suit to recover any such deficiency at any time or from time to time without being obliged to wait until expiration of the Term, and no recovery of any sum due Landlord will be a defense to recovery of any amount not previously reduced to judgment. No reletting of the Premises will be construed as an election on the part of Landlord to terminate this Lease, which termination will occur, if at all, only by express written notice of termination of Tenant. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for any previous Tenant Default.
(d) In entering the Premises pursuant to this Section, Landlord may use a duplicate or master key or lock combination or other lawful means, and may thereafter change the locks to the Premises to preclude further access by Tenant or others; and Tenant waives any requirement of Law to the contrary. Thereafter, Landlord will not be obliged to permit Tenant or others to enter the Premises; provided, however, during Landlord's normal business hours and at the convenience of Landlord, and upon the written request of Tenant accompanied by such written waivers and releases as Landlord may require, Landlord will escort Tenant or its authorized personnel to the Premises to retrieve any personal belongings or other property of Tenant not subject to any lien or security interest in favor of Landlord.
(e) Even if this Lease is not terminated, Landlord may terminate all rights of Tenant, if any, to receive any allowance, reimbursement payment, or other concession under any provision of this Lease (or any Rider) and all renewal, extension, expansion, cancellation, termination, or other options of Tenant, if any, under any provisions of this Lease (or any Rider).
7.3 HOLDING OVER. If Tenant remains in possession after the expiration of
the Term or earlier termination of this Lease with the express written
consent of Landlord, Tenant will be a month-to-month tenant; otherwise, Tenant
will be a tenant at will. In either case, Tenant must pay a Monthly Rent
Installment each month throughout the holdover period equal to the greater of
(a) twice the Monthly Rent Installment that Tenant was obligated to pay
immediately preceding the start of the holdover period, or (b) the prevailing
market rent for the Premises as reasonably determined by Landlord. No holding
over by Tenant will extend the Term. If Tenant remains in possession as a
tenant at will, Tenant will indemnify, defend, and hold Landlord harmless
against any loss, liability, damage, cost, or expense (including attorneys'
fees and costs of litigation), or any claim therefor, resulting from any
inability or delay in delivering possession to any party to whom Landlord may
have agreed to lease any part of the Premises.
7.4 LIEN FOR RENT. In addition to any lien at Law, Tenant grants Landlord a lien and security interest on all property of Tenant now or hereafter located in the Premises (including proceeds thereof) to secure payment of the Rent and full performance of this Lease by Tenant. Landlord has all rights for the enforcement of such lien and security interest as are available under applicable Law, including without limitation, rights under the Uniform Commercial Code of the state where the Property is located and the right after a Tenant Default to sell the property so encumbered at a public or private sale, with or without having such property at the sale, after giving Tenant reasonable notice of the time of any public sale or of the time after which any private sale is to be made, at which sale Landlord may purchase unless otherwise prohibited by Law. Unless otherwise required by Law, and without excluding any other manner of giving Tenant reasonable notice, any requirement of reasonable notice will be met if notice is given in the manner prescribed in this Lease at least five (5) days before the time of sale. The proceeds of any sale will be applied first to pay Landlord's costs and expenses of accomplishing the sale (including reasonable attorneys' fees and costs of litigation) and then to any other sums owing and unpaid to Landlord under this Lease. Tenant agrees to execute as debtor such financing statements as Landlord may reasonably request in order to perfect its security interest. Landlord, at its election at any time, may file a copy of this Lease (or a copy of the first page, this Section, and the signature page of this Lease) as a financing statement.
7.5 LANDLORD'S DEFAULT. It will be a "LANDLORD DEFAULT" only if Landlord fails to perform or comply with any provision of this Lease and the failure continues for fifteen (15) days after written notice from Tenant to Landlord (with a copy to the holder of any Mortgage if Tenant has been notified in writing of the identity and address of such holder); provided, however, if any such failure by Landlord cannot be corrected within such 15-day period solely as a result of nonfinancial circumstances outside of the control of Landlord, and if substantial corrective actions have commenced within such 15-day period and are being diligently pursued, such fifteen-day period will be extended for such additional time as is reasonably necessary to allow completion of actions to correct Landlord's failure. Except as otherwise provided in this Lease, if a Landlord Default occurs, Tenant will be entitled to all rights and remedies available by Law.
7.6 ATTORNEYS' FEES. In the event of litigation relating to a Tenant Default or a Landlord Default, the defaulting party must pay all reasonable attorneys' fees and expenses incurred by the nondefaulting party in enforcing its rights under this Lease. In addition, if Tenant requests the consent of Landlord to any matter or requests Landlord to take any other action requiring legal services, Tenant must pay all reasonable attorneys' fees and expenses so incurred by Landlord.
7.7. NON-WAIVER. The failure of a party to insist upon the strict performance of any provision of this Lease or to exercise any remedy for default will not be construed as a waiver. The waiver of any noncompliance with this Lease will not keep subsequent similar noncompliance from being a default. No waiver will be effective unless expressed in writing signed by the waiving party, and no course of dealing will constitute a waiver or otherwise modify the provisions of this Lease. No waiver will affect any condition other than the one specified in the waiver and then only for the time and in the manner stated. Landlord's receipt of any Rent or other sums with knowledge of noncompliance with this Lease by Tenant will not be considered a waiver of the noncompliance. No payment by Tenant of a lesser amount than the full amount then due will be considered to be other than on account of the earliest amount due. No endorsement or statement on any check or any letter accompanying any check or payment will be considered an accord and satisfaction, and Landlord may accept any check or payment without prejudice to Landlord's right to recover the balance owing and to pursue any other available remedies. No acceptance by Landlord of keys or possession of the Premises will constitute a surrender or waive any Tenant Default or other liability or obligation of Tenant under this Lease.
7.8 REMEDIES CUMULATIVE. Except as otherwise expressly stated in this Lease, all rights and remedies in this Lease are in addition to such other rights as may be available by Law. The exercise of one right or remedy will not constitute an election to waive or forego any other right or remedy.
VIII. OTHER PROVISIONS
8.1 NOTICES. Any notice in connection with this Lease may be given by (a) depositing written notice in the United States mail, postpaid and certified and addressed to the party at its Notification Address with return receipt requested, (b) delivering written notice by commercial messenger or overnight private delivery service to the party at its Notification Address, or (c) facsimile transmission of written notice to the party at its Notification Address. Unless actually received earlier, written notice deposited in the mail in the manner described above will be effective on the third business day after it is so deposited, even if not received. Written notice given by commercial messenger, overnight private delivery, or facsimile transmission in the manner described above will be effective as of the time of receipt at the Notification Address as evidenced by any confirmation of delivery provided by the messenger or delivery service or by facsimile confirmation of transmission. Each party may change its Notification Address by not less then least ten (10) days' prior written notice to the other party.
8.2 BUILDING STANDARD CHARGES. The Building standard charge for any service or other action is fifteen percent (15%) of the total costs and expenses paid to others for necessary materials, equipment, and services (including legal, architectural, engineering, and other consulting services), or at Landlord's option, a reasonable fee or other charge uniformly established for the Building to compensate Landlord for the additional work and administrative burden.
8.3 BROKERS. Each of Landlord and Tenant represents and warrants to the other that it has not entered into any agreement with, or otherwise had any dealings with any broker or agent other than Broker as the result of which any commission, fee, or other compensation of any kind will be payable by the other party in connection with this Lease. Each party will indemnify, defend, and hold the other party harmless against any loss, liability, damage, cost, or expense (including reasonable attorneys' fees and costs of litigation), or any claim therefor, resulting from the untruth or inaccuracy of the foregoing warranty and representation made by such party. Any fee of commission owing to Broker will be paid only in accordance with the terms of a separate written agreement directly between Landlord and Broker.
8.4 AUTHORITY. Tenant warrants that as of the date of execution of this Lease by Tenant, all consents or approvals (including approvals of any board of directors or partners) required for Tenant's execution, delivery, and performance of this Lease have been obtained, that Tenant has the right and authority to enter into and perform this Lease, and that this Lease is valid and binds Tenant. Landlord warrants that as of the date of execution of this Lease by Landlord, all consents or approvals (including approvals of any board of directors or partners) required for Landlord's execution, delivery, and performance of this Lease have been obtained, that Landlord has the right and authority to enter into and perform this Lease, and that this Lease is valid and binds Landlord.
8.5 RECORDING AND CONFIDENTIALITY. Tenant agrees not to record this Lease or any memorandum or affidavit thereof. Tenant may not disclose the terms of this Lease to any third party except (a) legal counsel to Tenant, (b) any assignee of Tenant's interest in this Lease or sublessee of Tenant, (c) as required by Law or by subpoena or other similar legal process, or (d) for financial reporting purposes.
8.6 INTERPRETIVE PROVISIONS. Landlord and Tenant agree that:
(a) This document, which consists of the Basic Lease information, this Lease Agreement, and its attached Exhibits and Riders (which are identified below the signatures of the parties), embodies the entire contract between the parties, and supersedes all prior agreements and understandings between the parties related to the Premises, including all lease proposals, letters of intent, and similar documents. All representations, warranties, or agreements of an inducement nature, if any, are merged with, and stated in this document. This Lease is being executed in multiple counterparts, each of which is an original for all purposes.
(b) This Lease may be amended or otherwise modified only by a written instrument executed by both Landlord and Tenant. No consent or approval by Landlord will be effective unless given in writing signed by Landlord or its duly authorized representative. Any consent or approval by Landlord will extend only to the matter specifically stated in writing.
(c) The captions appearing in this Lease are included solely for convenience and will never be given any effect in construing this Lease. The presumption that this Lease should be more strictly construed against Landlord as the drafting party does not apply.
(d) If any provision of this Lease is invalid or unenforceable, the remainder of this Lease will not be affected. Each separate provision of this Lease will remain valid and enforceable to the fullest extent permitted by Law.
(e) This Lease binds not only Landlord and Tenant, but also their respective heirs, personal representatives, successors, and assigns (to the extent assignment is permitted by this Lease).
(f) This Lease is governed by the Laws of the state where the Property is located.
(g) All references to "days" in this Lease are to calendar days. All references to "business days" in this Lease are to days that national banks are open for business in the city where the Property is located. All references to the "date of this Lease" are to the date appearing on the cover page of this Lease, which is approximately the date on which Tenant executed this Lease. Time is of the essence.
(h) Any liability or obligation of Landlord or Tenant under this Lease accrued, arising, or based on any act, omission, or other circumstance during the Term will survive the expiration of the Term or earlier termination of this Lease, including without limitation, obligations and liabilities (i) relating to the final adjustment of any estimated installments of the Base Rent Adjustment to the actual Base Rent Adjustment to the actual Base Rent Adjustment owed, (ii) relating to the condition of the Premises, and (iii) arising under agreements in this Lease to indemnify, defend, or hold harmless.
(i) The relationship created by this Lease is that of Landlord and tenant. Landlord and tenant are not partners or joint ventures, and neither has any agency powers on behalf of the other. Tenant is not a beneficiary of any other contract or agreement relating to the Property to which Landlord may be a party, and Tenant has no right to enforce any such other contract or agreement on behalf of itself, Landlord, or any other party.
8.7 EXECUTION AND EFFECTIVENESS. If the name of any Guarantor is reflected in the Basic Lease Information, Landlord's obligations are conditioned upon the receipt by Landlord of the Guaranty of Lease in the form attached as Exhibit E duly executed by such Guarantor, failing which this Lease will be null and void. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or any option for lease. This Lease will be effective only when fully executed and delivered by both Tenant and Landlord.
IN WITNESS WHEREOF, the parties have executed this Lease.
LANDLORD: TENANT:
PATRIOT SAINT JAMES II INVESTORS, L.P. Houston Interweb Design, Inc.
-------------------------------------- ------------------------------------
By: Saint James II Operating Corporation,
its General Partner
By: James L. Mertz, Jr. By: Harry White
------------------------------- -----------------------------
Name: James L. Mertz, Jr. Name: Harry White
------------------------------- -----------------------------
Title: Senior Vice President Title: President
------------------------------- -----------------------------
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A Floor Plan of Premises
B Description of Land
C Form of Commencement Date Certificate
D Building Rules
1 Work Letter
2 Parking
3 Asbestos
4. Tax Contest Rights
EXHIBIT A
FLOOR PLAN OF PREMISES
[FLOOR PLAN]
EXHIBIT A
WORK LETTER
1. The "PLANS" consist of the following described drawings and specifications prepared by ARCHITECTURAL AND ENGINEERING ASSOCIATES, INC. (the "ARCHITECT"), which are hereby approved by Tenant and Landlord:
PRELIMINARY SPACE PLAN DRAWINGS FOR IMPROVEMENTS TO BE CONSTRUCTED TO SUITE 515, PREPARED BY ARCHITECT AND DATED SEPTEMBER 17, 1997. IN ADDITION, LANDLORD WILL PROVIDE A MAXIMUM OF SIX NEW DUPLEX, 110 VOLT ELECTRICAL OUTLETS IN LOCATIONS DESIGNATED BY TENANT, REPLACE THE EXISTING LIGHT LENSES WITH PARABOLIC LENSES AND PROVIDE FOR ONE ADDITIONAL HVAC SUPPLY OUTLET IN THE WORK ROOM.
2. Landlord will promptly begin construction of the alterations, additions, and improvements described in the Plans (the "WORK LETTER IMPROVEMENTS"), and will pursue construction with reasonable diligence to completion. Construction of Work Letter Improvements will be accomplished by contractors selected and employed by Landlord.
3. Landlord will pay the fees and expenses of the Architect in connection with preparation of the Plans and construction of the Work Letter Improvements and the cost of constructing the Work Letter Improvements in accordance with the Plans.
4. If Tenant requests any changes in the Plans, Tenant must submit revised drawings and specifications for Landlord's approval. If Landlord approves the changes, Landlord will incorporate the changes in the Work Letter Improvements following Landlord's receipt of a change order executed by Tenant. As a condition to Landlord's approval, Tenant must pay Landlord in advance the full amount of all construction, architectural, and other costs attributable to the change.
5. The "SUBSTANTIAL COMPLETION DATE" will be the date on which the Work Letter Improvements are completed in all material respects in substantial compliance with the Plans (including any changes thereto approved by a change order executed by Landlord and Tenant) excepting only minor finish and touch-up work that does not interfere in any material respect with the occupancy of the Premises by Tenant. The Substantial Completion Date will be reasonably determined by the Architect, whose good faith determination will bind Landlord and Tenant. After the Substantial Completion Date, Landlord will promptly complete any work required to complete the Work Letter Improvements, and Landlord may enter the Premises for that purpose at any time without prior notice to Tenant.
6. On the Commencement Date, Tenant must pay Landlord one (1) day's Base Rent (at the rate initially in effect after the Commencement Date) for each day that construction of the Work Letter Improvements was delayed by (a) changes in the Plans requested by Tenant, (b) installation of nonstandard equipment, materials, or finishes requiring an unusually long time to obtain or install, or (c) any other act or omission of Tenant or its employees, agents, or contractors.
7. The failure of Tenant to make any payment due under this Work Letter is a failure to pay Rent under the Lease.
EXHIBIT "B"
ATTACHED TO AND MADE A PART
OF
OFFICE LEASE AGREEMENT
LEGAL DESCRIPTION OF THE LAND
Lot Four (4), SAN FELIPE GREEN, a subdivision of the Charles Sage Survey, Abstract 697 in Harris County, Texas, being 3.1502 acres more or less out of a 48.245 acre tract of land recorded as San Felipe Green in Volume 175 Page 92 of the Deed Records of Harris County, Texas, and further described as follows:
STARTING at a point at the Northwest corner of San Felipe Green, said point being on the South R.O.W. line of San Felipe Road and proceeding South 00 deg. 11 min. 37 sec. West a distance of 408.38 feet to a point for Northwest corner and PLACE OF BEGINNING;
THENCE from the Place of Beginning South 00 deg. 11 min. 37 sec. West a distance of 350.00 ft. with the West property line of San Felipe Green to a point for corner;
THENCE South 89 deg. 59 min. 30 sec. East a distance of 390.00 ft. to a point for corner on the West R.O.W. line of St. James Place;
THENCE North 00 deg. 11 min. 37 sec. East a distance of 236.69 feet with the West R.O.W. line of St. James Place to an angle point;
THENCE a distance of 115.58 feet along a curve to the right having a radius of 340.00 feet and a chord length of 115.03 feet at a bearing of North 9 deg. 55 min. 58 sec. East to a point for corner on the West R.O.W. line of St. James Place;
THENCE North 89 deg. 59 min. 30 sec. West a distance of 409.45 feet to the PLACE OF BEGINNING and thus describing a tract of land of 3.1502 acres or 137,224.77 square feet.
EXHIBIT C
FORM OF COMMENCEMENT DATE CERTIFICATE
OCTOBER 16, 1997
Patriot Saint James II Investors, L.P.
3030 LBJ Freeway, Suite 1500
Dallas, Texas 75234
Gentlemen:
Please refer to the Lease Agreement (the "Lease") dated October 15, 1997 between Patriot Saint James II Investors, L.P., ("Landlord") and the undersigned ("Tenant") covering the Premises containing 1,274 square feet of Net Rentable Area on the fourth floor of the Building located at 1770 St. James Place, Houston, Harris County, Texas.
Landlord and Tenant agree that the Commencement Date of the Lease is October 19, 1997.
Very truly yours,
TENANT:
Houston Interweb Design, Inc.
By: /s/ Harry White
----------------------------------
Name: Harry White
----------------------------------
Title: CEO
----------------------------------
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AGREED AND ACCEPTED
this 17 day of November, 1997.
LANDLORD:
Patriot Saint James II INVESTORS, L.P.
By: Saint James II Operating Corporation,
its General Partner
By: /s/ James L. Mertz, Jr.
----------------------------------
Name: James L. Mertz, Jr.
----------------------------------
Title: Senior Vice President & COO
----------------------------------
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NOT TO BE EXECUTED UNTIL THE COMMENCEMENT DATE
RIDER 2
PARKING
1. Tenant is authorized to park 6 vehicles in the parking facilities on the Property (the "PARKING FACILITIES"). No specific parking spaces in the Parking Facilities will be assigned to Tenant. Landlord will issue a parking sticker and/or card for each vehicle of Tenant authorized to be parked in the Parking Facilities, or Landlord will provide a reasonable alternate means to identify authorized vehicles. Landlord may designate the area of the Parking Facilities within which each authorized vehicle may be parked, and Landlord may change such designations from time to time.
2. As part of each Monthly Rent Installment payable under this Lease, Tenant must pay Landlord a "MONTHLY PARKING CHARGE" equal to $0.00 per month (plus any applicable sales tax) times the number of vehicles authorized to be parked in the Parking Facilities.
3. If parking in the Parking Facilities cannot be provided for the full number of vehicles authorized in this Rider owing to fire or other casualty, condemnation or sale in lieu thereof, or any other cause beyond the reasonable control of Landlord, the Lease will continue without abatement of Rent, and Landlord will use reasonable efforts to make available to Tenant replacement unassigned surface or Parking Facilities parking spaces within a reasonable distance from the Property, as determined by Landlord, until the full number of vehicles authorized in this Rider can again be parked in the Parking Facilities. The replacement parking spaces will be provided to Tenant without change in the Monthly Parking Charge.
4. Landlord or the operator of the Parking Facilities may make, modify, and enforce reasonable rules relating to the parking of vehicles in the Parking Facilities. Tenant must abide by such rules and exercise reasonable efforts to cause its employees, agents, contractors, customers, and visitors to abide by such rules.
5. Landlord may alter the size of the Parking Facilities, restripe parking spaces in the Parking Facilities, and designate or assign parking spaces in the Parking Facilities or elsewhere on the Property for visitor parking, reserved parking, or other purposes.
RIDER 3
ASBESTOS
Federal Laws require that in light of the age of the Building, certain areas and materials of the Building are presumed to contain asbestos until proven otherwise. Landlord has conducted a general assessment of the Building in accordance with applicable Laws and is operating under an operations and management plan (the "O&M PLAN") to manage locations of asbestos and "presumed asbestos" in place. Tenant may review the O&M Plan on reasonable advance notice to Landlord. Under applicable Laws and the O&M Plan, special procedures must be followed in performing many ordinary activities such as buffing floors, changing light bulbs, and changing smoke detector batteries, and maintenance personnel must be trained in these procedures. Tenant must comply (and must cause its employees and contractors to comply) with all Laws and provisions of the O&M Plan insofar as they relate to Tenant's use and occupancy of the Premises. Notwithstanding anything to the contrary in the Lease, Tenant may not perform any remodeling, maintenance, repair, or construction activities in the Premises that would violate the O&M Plan.
EXHIBIT D
BUILDING RULES
1. Sidewalks, doorways, vestibules, halls, stairways, elevator lobbies, and other similar common areas of the Building may not be used for the storage of materials or disposal of trash, obstructed by any tenant, or used by any tenant for any purpose other than movement about the Building.
2. Plumbing fixtures may be used only for the purposes for which they are designed, and no sweepings, rubbish, rags, or other unsuitable materials may be disposed in them.
3. Movement in or out of the Building of furniture, office equipment, or any other bulky or heavy materials is restricted to hours reasonably designated by Landlord. Landlord will determine the method and routing of the movement of such items to ensure the safety of persons and property, and Tenant will be responsible for all associated costs and expenses. Written notice of intent to move such items must be given to Landlord at least twenty-four (24) hours before the time of the move.
4. All deliveries (other than of small hand-carried parcels) must be made through the freight elevators. Passenger elevators are to be used only for the movement of persons. Delivery vehicles are permitted only in areas designated by Landlord for deliveries to the Building. No carts or dollies are allowed through the main entrances of the Building or on passenger elevators without the prior written consent of Landlord.
5. After-hours removal of hand-carried items must be accompanied by an "Equipment Removal Form" or "Property Pass" provided by Landlord or by a letter signed by an authorized representative of a tenant on the tenant's letterhead. Each tenant must give landlord a list of persons authorized to sign the Equipment Removal Form or Property Pass.
6. Landlord must approve the proposed weight and location of any safes and heavy furniture and equipment, which must in all cases stand on supporting devices approved by Landlord in order to distribute the weight.
7. Corridor doors that lead to common areas of the Building (other than doors opening into the elevator lobby on floors leased entirely to a tenant) must be kept closed at all times.
8. Each tenant must cooperate with Landlord to keep its premises neat and clean. No tenant may employ any person for the purpose of cleaning other than the Building's cleaning and maintenance personnel.
9. All freight elevator lobbies are to be kept neat and clean. The disposal of trash or storage of materials in these areas is prohibited.
10. No birds, fish, or other animals may be brought into or kept in, on, or about the Building (except for seeing-eye dogs).
11. Tenants may not tamper with or attempt to adjust temperature control thermostats in their premises. Landlord will adjust thermostats as required to maintain the Building standard temperature. Each tenant must use reasonable efforts to keep all window blinds down and tilted at a 45 degree angle toward the street to help maintain comfortable room temperatures and conserve energy.
12. Each tenant will comply with all security procedures during business hours, after hours, and on weekends. Landlord will give each tenant prior notice of the security procedures.
13. Tenants must lock all office doors leading to corridors and turn out all lights at the close of their working day.
14. All requests for overtime air conditioning or heating must be submitted in writing to Landlord by an authorized representative of the tenant. Each tenant must give Landlord a list of persons authorized to request overtime services. Any such request must be made by 2:00 p.m. on the day desired for weekday requests, by 2:00 p.m. Friday for weekend requests, and by 2:00 p.m. on the preceding business day for holiday requests. Requests made after that time may result in an additional charge to such tenant, if acted upon by Landlord, but Landlord will have no obligation to act on untimely requests.
15. No flammable or explosive fluids or materials may be kept or used within the Building except in areas approved by Landlord, and each tenant must comply with all applicable building and fire codes.
16. No machinery of any kind other than normal office equipment may be operated by any tenant in its premises without the prior written consent of Landlord.
17. Canvassing, peddling, soliciting, and distribution of hand bills in the Building (except for activities within a tenant's premises that involve only the tenant's employees) is prohibited. Tenants will notify Landlord if such activities occur.
18. A "Tenant Contractor Entrance Authorization" form supplied by Landlord is required for the following:
(a) Access to Building mechanical, telephone or electrical rooms (e.g., Southwestern Bell Telephone employees).
(b) After-hours freight elevator use.
(c) After-hours building access by tenant contractors. Tenants will be responsible for contacting Landlord in advance for clearance of tenant contractors.
19. Tenants must refer all contractors, contractors' representatives, and installation technicians tendering any service to them to Landlord for Landlord's supervision, approval, and control before the performance of any contractual services. This provision applies to all work performed in the Building (other than work under contract for installation or maintenance of security equipment or banking equipment), including but not limited to, installations of telephones, telegraph equipment, electrical devices and attachments, and any and all installations of every nature affecting floors, walls, woodwork, trim, windows, ceilings, equipment, and any other portion of the Building.
20. Smoking is not permitted in the restrooms, stairwells, elevators, public lobbies or public corridors.
21. Each tenant is responsible for removal of trash resulting from large deliveries or move-ins. Such trash must be removed from the Building, and Building facilities may not be used for dumping. Each tenant is responsible for compliance with this rule by its contractors. If trash is not promptly removed, Landlord may cause it to be removed at the tenant's sole cost plus a building standard charge to be determined by Landlord to cover Landlord's administrative costs.
22. Tenants may not install, leave, or store equipment, supplies, furniture, or trash outside their premises.
23. Each tenant must provide Landlord with names and telephone numbers of individuals who should be contacted in an emergency.
24. Tenants must comply with the Building's life safety program established by Landlord, including without limitation, fire drills, training programs, and fire warden staffing procedures, and must use reasonable efforts to cause all tenant employees, invitees, and guests to comply with such program.
25. No ice, mineral or other water, towels, newspapers, or other products may be delivered to any premises except by persons appointed or approved by Landlord in writing.
26. If a tenant requires telegraphic, telephonic, annunciator, or other communication service, Landlord will direct the electricians where and how wires are to be introduced and placed, and none may be introduced or placed except as Landlord may approve. Electrical current may not be used for space heaters, cooking, or heating devices or similar appliances without Landlord's prior written permission.
27. Nothing may be swept or thrown into corridors, halls, elevator shafts, or stairways.
28. No portion of any tenant's premises may be used or occupied as sleeping or lodging quarters, nor may personnel occupancy loads exceed limits reasonably established by Landlord for the Building.
29. All communications to Landlord in connection with these rules may be addressed to Landlord's property manager, and any approvals required of Landlord under these rules may be obtained from or through Landlord's property manager.
IF THERE IS A CONFLICT BETWEEN ANY OTHER PROVISIONS OF THE LEASE AND THESE BUILDING RULES, THE OTHER PROVISIONS OF THE LEASE CONTROL.
Rider 4
TAX CONTEST RIGHTS - TEXAS
Tenant waives all present and future rights provided by Law, including all present and future rights arising under the TEXAS PROPERTY TAX CODE, to (a) receive notice from Landlord of any change in the amount of the assessment or rate of taxation of the Property for purposes of any ad valorem real or personal property taxes included in Tax Costs, or (b) to file, appear in, or pursue any judicial or administrative protest, appeal or other challenge of the amount of the assessment or the rate of taxation of the Property for purposes of any ad valorem real or personal property taxes included in Tax Costs. Notwithstanding anything to the contrary contained in the Lease, the filing of appearance in, or pursuit of any such judicial or administrative protest, appeal, or other challenge of the amount of the assessment or rate of taxation of the Property by or on behalf of Tenant will immediately constitute a Tenant Default. Tenant acknowledges that it has been advised to have the provisions of this Rider reviewed by an attorney of its own choosing and that it has done so or knowingly elected not to do so. The provisions of this Rider have been knowingly, intentionally, and willingly agreed to by Tenant.
FIRST AMENDMENT TO LEASE AGREEMENT
THIS FIRST AMENDMENT TO LEASE AGREEMENT (the "First Amendment") is made as of July 31, 1998, by and between MACK-CALI TEXAS PROPERTY, L.P., as successor in interest to Patriot Saint James II Investors, L.P., (hereinafter "Landlord"), with an address of 3030 LBJ Freeway, Suite 1000, Dallas, Texas 75234, and Houston Interweb Design, Inc., (hereinafter "Tenant").
A. Tenant occupies the Leased Premises under the terms of that certain Lease dated October 15, 1997 (the "Lease") between Landlord and Tenant for 1,274 square feet of Rentable Area contained in Suite 515 on the fifth floor of the Building known as Saint James II, 1770 St. James Place, Houston, Harris County, Texas.
B. Landlord and Tenant desire to add additional space to the Leased Premises and make other related changes to the Lease.
NOW THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows:
1. ADDITIONAL SPACE. Effective July 10, 1998 (the "Additional Space Commencement Date"), Suite 420 containing 5,369 square feet of Net Rentable Area (the "Additional Space"), as shown on Exhibit A attached hereto, shall be added to the Leased Premises for the remainder of the Lease Term. After this addition, the Leased Premises shall contain a total of 6,643 square feet of Net Rentable Area.
2. BASE RENT. Effective on the Additional Space Commencement Date, the Base Rent shown on the Basic Lease information page of the Lease shall be modified to read as follows:
"$7,196.59 PER MONTH BEGINNING ON THE ADDITIONAL SPACE COMMENCEMENT DATE
THROUGH OCTOBER 19, 2000".
3. IMPROVEMENT ALLOWANCE. Landlord shall provide an allowance of $1,500.00 to provide for the construction of permanent improvements to the Leased Premises (the "Allowance"). The Allowance must be utilized by December 29, 1998 or such Allowance shall no longer be available to Tenant.
4. BASE YEAR. The Base Year shall remain unchanged from the Lease as Base Year 1997.
5. STORAGE SPACE. Tenant also leases from Landlord Suite B02 which contains 276 square fee of Net Rentable Area in the basement of the Building, as shown on Exhibit A-1 attached hereto, for use as storage space. Tenant shall pay to landlord the sum of no/100 Dollars as rental for the basement storage space. This amount shall be invoiced to Tenant in addition to the monthly Base Rent shown in paragraph 2 above.
6. PARKING. Landlord shall furnish to Tenant parking in accordance with Exhibit B, attached hereto.
7. CONTROLLING PROVISIONS: This First Amendment amends the Lease and in the event of conflict between the First Amendment and the Lease, the terms of the First Amendment to Lease shall control. Except as expressly amended hereby, all terms and provisions of the Lease remain unchanged, and as amended, the Lease continues in full force and effect. Terms used and not otherwise defined in this Amendment have the same meanings as in the Lease itself.
LANDLORD TENANT
MACK-CALI TEXAS PROPERTY, L.P. HOUSTON INTERWEB DESIGN, INC.
THROUGH ITS GENERAL PARTNER,
MACK-CALI SUB XVII, INC.
By: /s/ James L. Mertz, Jr. By: /s/ Harry White
----------------------------- -----------------------------
Name: James L. Mertz, Jr. Name: Harry White
Title: Vice President Title: President
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[FLOOR PLAN]
EXHIBIT A-1
Floor Plan of Storage Space
[FLOOR PLAN]
EXHIBIT B
PARKING
1. Tenant is authorized to park (a) 23 vehicles in the general parking area designated by Landlord in the parking facility on the Property (the "Facilities"), and (b) 3 vehicles in the reserved parking area designated by Landlord in the Facilities. No specific parking spaces in the Facilities will be assigned to Tenant other than the three (3) spaces in the reserved parking area designated in 1(b) above. Landlord will issue a parking sticker and/or card for each vehicle of Tenant authorized to be parked in the Facilities, or Landlord will provide a reasonable alternate means to identify authorized vehicles. Landlord may designate the area of the Facilities within which each authorized vehicle may be parked, and Landlord may change such designations from time to time.
2. As part of each Monthly Rent Installment payable under this Lease, Tenant
must pay Landlord a "MONTHLY PARKING CHARGE" equal to the sum of (a) $0.00
per month (plus any applicable sales tax) times the number of vehicles
authorized to be parked in the general parking area of the Facilities, plus
(b) $_____ per month (plus any applicable sales tax) times the number of
vehicles authorized to be parked in the reserved parking area of the
Facilities.
3. If parking in the Facilities cannot be provided for the full number of vehicles authorized in this Rider owing to fire or other casualty, condemnation or sale in lieu thereof, or any other cause beyond the reasonable control of Landlord, this Lease will continue without abatement of Rent, and Landlord will use reasonable efforts to make available to Tenant replacement unassigned surface or garage parking spaces within a reasonable distance from the Property, as determined by Landlord, until the full number of vehicles authorized in this Rider can again be parked in the Facilities. The replacement parking spaces will be provided to Tenant without change in the Monthly Parking Charge.
4. Landlord or the operator of the Facilities may make, modify, and enforce reasonable rules relating to the parking of vehicles in the Facilities. Tenant must abide by such rules and exercise reasonable efforts to cause its employees, agents, contractors, customers, and visitors to abide by such rules.
5. Landlord may alter the size of the Facilities, restripe parking spaces in the Facilities, and designate or assign parking spaces in the Facilities or elsewhere on the Property for visitor parking, reserved parking, or other purposes.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 1 to the registration statement on Form SB-2 (File No. 333-67871) of our report dated September 8, 1998, on our audits of the financial statements of Houston InterWeb Design, Inc.
MANN FRANKFORT STEIN & LIPP, P.C.
Houston, Texas
March 16, 1999