SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended September 30, 1996, or
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to ____________.
Commission File Number 0-10039.
DYNAMICWEB ENTERPRISES, INC.
(Name of Small Business Issuer in its Charter)
New Jersey 22-2267658
(State or Other Juris- (I.R.S. Employer
diction of Incorporation) Identification No.)
Fairfield Commons
271 Route 46 West
Building F
Suite 209
Fairfield, New Jersey 07004
(Address of Principal Executive Offices)
Registrant's Telephone Number: (201) 244-1000
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
- - ------------------- ---------------------
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value .0001 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes No. X .
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for fiscal year ended September 30, 1996: $460,067.
As of April 30, 1997, the aggregate market value of the Common Stock (based upon
the average sales price on such date) of the Registrant held by nonaffiliates
was $3,877,601.
Number of Shares of Common Stock Outstanding at April 30, 1997: 7,667,270.
Transitional Small Business Disclosure Format:
Yes ___ No X
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
DynamicWeb Enterprises, Inc. ("DynamicWeb" or the "Company") develops,
markets and supports software products and other services that enable businesses
to engage in electronic commerce utilizing the Internet.
The Company is a New Jersey corporation. It currently operates through
three separate subsidiaries: DynamicWeb Transaction Systems, Inc., a Delaware
corporation ("DWTS"), Software Associates, Inc., a New Jersey corporation
("Software Associates"), and Megascore, Inc., a Delaware corporation
("Megascore"). The acquisition by the Company of DWTS is described in the
Company's Form 10-QSB dated June 30, 1996. The acquisition by the Company of
each of Software Associates and Megascore is described in the Company's Form 8-K
dated November 30, 1996. As a result of those transactions, the Company has
combined the previously-separate operations of DWTS, Software Associates, and
Megascore into a holding company.
Readers of this Report should note that the description of the Company's
business contained in Item 1 of this Report reflects the present and planned
operations of the Company as of the date of this Report, May 15, 1997. The
description of the Company's business therefore reflects the combined operations
of DWTS, Software Associates, and Megascore, even though Software Associates was
not acquired until after the end of the Company's September 30, 1996, fiscal
year. The Company believes that a description of the Company's business taking
into account the combined operations of DWTS, Software Associates, and Megascore
is more meaningful to an understanding of the Company than a discussion of the
business of the Company as conducted prior to those acquisitions. Further, it
should be noted that the financial information contained in Items 6 and 7 of
this Report represent the combined operations of DWTS and Megascore for the two
fiscal years ending September 30, 1996. The basis for such presentation is
discussed in Note A to the financial statements contained in Item 7 of this
Report.
Readers of this Report also should note that the description of the
Company's business contained in this Report relate exclusively to the electronic
commerce software and service business conducted through DWTS, Software
Associates, and Megascore. Prior to March 26, 1996, however, the Company was
named Seahawk Capital Corporation. Seahawk Capital Corporation had, from time to
time, other operations having no relationship to the Company's present business
and management. Those prior operations were disposed of the by the Company.
Immediately prior to March 26, 1996, the Company conducted no operations. March
26, 1996, was the date upon which the Company acquired all or the outstanding
stock of DWTS. The history of Seahawk Capital Corporation and the disposition of
those other operations are more fully described in the Company's Form 10-KSB for
the year ended December 31, 1995, and Form 8-K dated March 26, 1996.
BUSINESS
INTRODUCTION
The Company is engaged in the business of developing, marketing and
supporting software products and other services that enable businesses to engage
in electronic commerce utilizing the Internet and traditional Electronic Data
Interchange ("EDI") technologies. The Company offers electronic commerce
solutions in EDI and Internet-based transaction processing. The Internet is a
worldwide
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communications system that allows users to transmit and receive messages and
information over telephone and other communications lines using terminals and
computers.
Electronic commerce ("EC") involves the automation of business
transactions using telecommunications and computers to exchange and process
commercial information and transactional documents. EDI is the direct,
application-to-application transmission of business documents such as purchase
orders, invoices, and remittance advice. Businesses immersed in electronic
commerce have found EDI to be a vital component of their enterprise. EDI
differs, however, from more elementary forms of communication because it
provides for truly integrated information flow. For example, manufacturers of
goods can create electronic catalogues of their products and prices such that
their customers will have the ability to electronically enter purchase orders
and complete the purchase, payment and other documentation of a purchase
transaction.
Electronic commerce has typically involved the use of a third-party or
private value-added computer network ("VAN") to perform EDI, e-mail, electronic
funds transfer, electronic forms, and bulletin board and electronic catalogue
services. Users of private or third-party VANs may also have access through the
VAN to directories or on-line information services. The major operators of VANS
include Harbinger Corporation, General Electric, Sterling Commerce's Ordernet,
IBM/Advantis, AT&T and Kleinschmidt. A VAN is, in effect, an electronic post
office which electronically receives and delivers mail, in this case commercial
documents, to the intended recipient. The Company's products and services work
with all major value-added network providers.
EDI can create commercial advantages for its users, including one-time
data entry, reduced clerical workload and the elimination of paper records. EDI
also allows for the rapid, accurate and secure exchange of business data, and
reduced operating and inventory carrying cost. EDI facilitates uniform
communications with different trading partners, including customers, suppliers,
common carriers, and banks or other financial institutions.
The Company's present business strategy emphasizes the following types of
markets and customers:
- EDI-enabled suppliers of goods, such as manufacturers, that want to
engage in electronic commerce with customers which are not
EDI-enabled.
- EDI-enabled purchasers, such as retailers or distributors of goods,
that want to engage in electronic commerce with their suppliers
which are not EDI-enabled.
- Any businesses that want to engage outside service providers to
manage or to assist in the management of their EDI function.
- Businesses or groups of businesses that want to create "electronic
storefronts" for goods and services on the World Wide Web. (The
"World Wide Web" or "Web" is a series of computers called servers,
which allow individuals, groups and businesses to publish
information over the Internet to the general public. There are now
some interactive applications allowing the public to respond or
leave a message for the entity which publishes the information on
the Web (the "Web Page" or "Web Site").)
The Company has five principal software and service packages for those
markets and customers:
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EDIBRIDGENET SERVICE (SM) - This is the name of DynamicWeb's electronic
commerce service bureau. EDIbridgeNET is a service provided by the Company
that allows for the transfer of information between trading partners. The
service includes EDI mapping (substantive translation of data which
preserves the meaning and substance of the data), and the translation and
routing of business documents between third party EDI (VAN) networks, the
Internet and private computer networks of the parties to the business
transaction. Generally referred to as "EDI outsourcing", this service
offers businesses cost-effective alternatives to investing in an in-house
EDI System. The Company's clients can opt for EDI outsourcing through
EDIbridgeNET Service, allowing DynamicWeb to handle EDI mapping,
translation and EDI standards maintenance.
NETCAT(TM): This is the Company's software program which allows a seller
of goods to create an electronic catalogue on the World Wide Web to offer
and sell products electronically. NetCat allows a customer to browse
through the catalogue, to place an order, and to be billed for, or to pay
for, the order (through the use of Cybercash, a third-party credit card
verification software licensed to the Company). This process is sometimes
referred to as "order management." It is expected to be utilized
predominantly in a business-to-business context. NetCat is used as part of
the Company's EDIxchange Program.
EDIXCHANGE PROGRAM(SM) - This is a combination of the Company's
EDIbridgeNET service and NetCat software. The EDIxchange Program provides
a seamless and cost effective way for EDI-enabled suppliers or retailers
to conduct electronic commerce with their non-EDI trading partners.
EDIxchange bridges the Internet with traditional EDI networks such as VANs
by using the Company's service bureau, EDIbridgeNET. Combined with NetCat,
the Company's order management software described above, this product
allows businesses which do not have in-house EDI capability to communicate
electronically with their larger, EDI-enabled business partners, using
only Internet access and a standard Web browser (a Web browser, such as
Netscape or Internet Explorer, allows Internet users to access various Web
Sites on the Internet).
SHIPTRAC(TM) - ShipTrac is the Company's Windows-based software
application designed for manufacturers and suppliers of goods. It
electronically creates a shipping manifest or list of products that are
being shipped to a particular customer or distribution center. ShipTrac
receives an electronic purchase order into a database, and a client then
can print bar-coded shipping compliance labels. The system generates EDI
standard advanced shipping notice documents (the manifest) which are sent
electronically to a supplier's customers. When the goods are received, the
bar codes on the products can be verified against the advanced shipping
notice which has been electronically forwarded by ShipTrac.
ELECTRONIC COMMERCE (EC) INTERFACE SOFTWARE FOR ACCOUNTING SYSTEMS -
DynamicWeb has developed application interface modules for two mid-range
accounting software systems, RealWorld and Synchronics. Designed for
businesses using those systems, the EC Interface allows a business to
import and export business documents electronically from those software
applications. Generally, the Company sells this product through
distributors of the Real World and Synchronics software.
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ELECTRONIC COMMERCE AND ELECTRONIC DATA INTERCHANGE
Some aspects of electronic commerce ("EC") and electronic data interchange
("EDI") are discussed below:
TRADING COMMUNITIES. Groups of companies that regularly trade with each
other generate significant repetitive business transactions. These existing
trading communities are natural prospects for implementation of EDI. Certain
trading communities are defined by trading standards, protocols, rules or
procedures adopted through trade organizations. The adoption of EDI as an
accepted means of transmitting business documents and data has occurred, in
part, because many trade organizations or groups and many large companies within
a trading community increasingly recommend or require their member organizations
or trading partners to adopt and use EDI as the primary method of communicating
business documents. Large companies within a trading community often are
described as "hubs" and their trading partners as "spokes." A hub company and
its trading partners communicate through electronic networks, generally either
third party networks or a private network owned and operated by the hub company.
Hub companies decide to implement EDI generally for one or more of the following
reasons:
- To enable a reduction in inventories by reducing the time required
to notify vendors and replenish stocks.
- To reduce the administrative handling costs of documents that they
send or receive from their suppliers or customers.
- To improve customer support and service levels by eliminating data
entry errors.
For the above stated reasons, a hub company often adopts as a stated
business objective that all of its trading partners use EDI as the principal
means of transferring business documents. Spoke companies, in turn, often expand
the electronic commerce community by also requesting or requiring their trading
partners to transmit business documents using EDI. This expanding number of
trading partners adopting EDI results in the establishment of distinct trading
communities comprising potential software customers and network subscribers for
EDI services.
EDI TRANSACTION FLOW. In a typical EDI transaction, a trading partner (the
"sending partner") first creates with its computer, either manually or
electronically, the business data used for the completion of a particular set of
documents, described by EDI standards as a transaction set. Transaction sets
include requests for quotes, quotes, purchase orders, invoices, shipping
notices, and other related documents and messages. Second, a translation
software program on the sending partner's computer converts the document or
transaction set into a standard EDI format. Third, this information is
electronically transmitted through telecommunications links from the sending
partner's computer to either the receiving partner's computer or to a central
computer system (similar to a mailbox at a post office) that serves as a
value-added network shared by many trading partners. Value-added networks
receive documents for subsequent delivery to the intended trading partner (the
"receiving partner"), and connect many types of computer hardware and
communications devices, convert multiple transaction sets from one industry
standard to another, and maintain security by reducing the possibility of one
trading partner accessing another's computer. EDI partners use VAN services
because it eases the burden of having to install and maintain communication
configurations for each trading partner. The connection to a VAN is a single
connection no matter how many trading partners the recipient has. The VAN
"normalizes" the issues of protocols, time zones, hardware and software
differences in that all participants in the EDI transaction do not have to have
the same software applications or hardware.
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EDI INDUSTRY STANDARDS. EDI has been further promoted through the adoption
of EDI standards within various industries. These standards define the content
and format of business documents, such as the data required to be included in
purchase orders, invoices, shipping notices, and other business documents.
Before these standards were adopted, electronic document transmission was based
on proprietary formats agreed to by two trading partners. However, incompatible
computer systems and differing proprietary formats limited widespread adoption
of EDI.
EXISTING VAN SERVICES. The Company does not operate a VAN and does not
intend to operate a VAN for the foreseeable future. The Company's products and
services are designed both to interface with existing VAN's and also to operate
without a VAN (point to point EDI over the Internet without the need for a VAN
as a midpoint) thereby permitting EDI-enabled trading partners to conduct
electronic commerce with their non-EDI-enabled trading partners.
The major operators of VANs include Harbinger Corporation, GE, Sterling
Commerce Ordernet, IBM/Advantis, AT&T and Kleinschmidt. The Company's products
and services work with all major VAN providers.
INTERNET STRATEGY
One of the Company's principal strategies is delivering electronic
commerce solutions to business customers, which utilize the Internet. The
Company's Internet strategy focuses on using the Internet to complement existing
VANs and proprietary EDI networks, or possibly to replace the use of VANs and
proprietary EDI networks with point to point EDI over the Internet. The Company
believes that EDI-enabled companies can reach a much wider range of their
trading partners by using an Internet-based approach, as a result of the
increasing availability and general use of the Internet and the cost advantages
of an Internet-based approach over VANs and proprietary EDI networks. The
success of that strategy will depend, among other things, upon the Internet
becoming an accepted vehicle for electronic commerce and communication among
businesses.
The Internet is an interconnected global network of computer networks
linked together through a common protocol. Unlike other public
telecommunications networks, the Internet is not managed by a single
corporation, government agency or other entity. The market for software to
access the Internet and related services is rapidly emerging and standards and
technologies for communicating information over the Internet are constantly
evolving. Businesses can exchange documents and electronic mail, access a wide
range of commercial information, and establish a presence on the World Wide Web.
The Web is the part of the Internet where information and documents reside in a
standard format thereby enabling them to be easily displayed and linked for
access by other Internet users on the Web. By using a special programming
language called hypertext markup language (HTML), a user can establish a
presence on the Web known as a Web Page or Home Page and can link with other
users of the Web. To date, the Internet has not been accepted as a medium for
processing routine business transactions between organizations, in part due to
perceived or actual security and reliability issues.
CUSTOMERS AND MARKETS
EDI has been used since the mid-1970's. Nevertheless, the Company believes
that the electronic commerce market is still in its early stages, in that
relatively-few companies engage in EC. The Company believes that a significant
barrier for businesses to join the electronic commerce network has been the cost
of maintaining standard translation software, host system modifications,
dedicated proprietary VANs, and resources required to maintain EDI. The
industry, and more importantly, EDI-enabled suppliers and
5
retailers, have continued to look for solutions to lower existing EDI-related
costs, while at the same time spawn increased EDI utilization.
To date, the Company has had a limited number of customers using these new
EDI/Internet technologies. The types of customers the Company intends to focus
on are discussed below.
THE EDI-ENABLED SUPPLIER. The Company believes that a significant number
of suppliers now using EDI would like to increase the utilization of EDI with
their customers. However, a significant investment in hardware and software at
each customer location is required in the proprietary equipment and software
necessary for a customer to link with the supplier either directly or through a
VAN. A smaller customer may not have the resources to make such an investment,
or the investment may not be cost-justified based upon the customer's
transaction volume with the supplier.
The Company's EDIxchange Program Suite provides a cost-effective solution
for this situation. The Company can assist the supplier to create a secure
Web-enabled Internet site with an electronic system for customer orders and
development of an electronic catalog by use of NetCatTM, all using the
supplier's existing EDI system and documents. The system will allow non-EDI
customers to view the supplier's product catalogs, place orders on-line, and
send an EDI Standard purchase order to the supplier. The customer will need only
Internet access and a Web browser to engage in those transactions.
THE HUB MODEL. The Hub Model is similar to the EDI-Enabled Supplier Model,
but is targeted at the purchaser rather than the supplier. The Company believes
that a significant number of wholesalers and retailers which are now using EDI
would like to increase the utilization of EDI with their suppliers, primarily by
reaching its smaller supplier with a cost-justified mechanism for electronic
commerce transactions.
In the Hub Model, the Company's EDIxchange Suite can be configured for a
retailer, effectively reversing the functions of the Supplier Model described
above. The Company can assist the retailer or other purchaser to create a secure
Web-enabled Internet site with NetCat again using the purchaser's existing EDI
system and documents. The system will allow non-EDI suppliers to receive
purchase orders electronically using only a Web browser and Internet access.
THE ELECTRONIC COMMERCE SERVICE BUREAU. The Company believes that a
significant number of businesses may want to "outsource" all or a part of their
electronic commerce functions. This market includes presently EDI-enabled
businesses, as well as businesses that do not presently conduct electronic
commerce. That is one of the services historically provided by Software
Associates, Inc. and which the Company intends to market. Using Software
Associates' experience in that area, combined with the Company's software
products, the Company offers its services as an EC Service Bureau through its
EDIbridgeNET Program.
SUPPLIERS REQUIRED TO SEND ADVANCE SHIPPING NOTICES. ShipTrac will be
marketed to EDI-capable suppliers, which become mandated by their customers to
use UCC128 bar-coded shipping labels and to send EDI standard documents such as
advance ship notices. This process is complex and cumbersome for suppliers to
integrate into their existing systems, and the Company believes ShipTrac will
reduce the complexity for implementing this requirement and complying with the
requests of such trading partners.
BUSINESSES USING REALWORLD OR SYNCHRONICS ACCOUNTING SYSTEMS. A
significant number of businesses use the Real World or the Synchronics
accounting systems, but are not EDI capable. Those businesses can easily use the
Company's existing products to begin electronic commerce.
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To date, the above target markets are undeveloped and largely untested.
Due to the limited sales by the Company to date, there can be no assurance as to
the degree, if any, that these markets and target customers will develop
generally or will be receptive to the Company's products and services.
SALES AND MARKETING
The Company's goal is to establish and expand the number of trading
partners using the Company's service bureau and complimentary electronic
commerce software solutions. To reach this goal, the Company plans to market and
sell its electronic commerce business solutions to enterprises which are
EDI-capable, and which lack EDI compliance with their trading partners.
Additionally, the Company will focus its marketing efforts for EDI outsourcing
to EDI-capable suppliers, which typically have a backlog in their management
information system ("MIS")/EDI group, and have an immediate need to respond to
customers' requests.
IDENTIFY KEY BUSINESS PARTNERS - DynamicWeb has introduced its Business
Partners Program to establish alliances between the Company and key business
partners who specialize in business automation and electronic commerce. Those
key business partners are expected to be VANs, EDI software companies, EC
consultant groups, Web content developers, business re-engineering consultants,
and accounting software providers. See "Strategic Relationships" below.
The objective of the Business Partners Program is to integrate the
Company's products and services with those of its business partners and to
promote Company services along with products and services sold by its business
partners.
EXPAND MARKETING AND SALES EFFORTS NATIONALLY - As of March 1, 1997, the
Company employs five people in sales and marketing, two of whom directly sell
the Company's software and services. Compensation to sales personnel is in the
form of a base salary and commissions. To reach a broader market, the Company
plans to expand the number of sales people it employs.
Lead generation and advertising will focus on national electronic
commerce/EDI trade shows, journal advertisements in national electronic commerce
publications, and public speaking engagements in EDI/Internet forums. The
Company will also evaluate which industry specific trade shows/journals to
participate in. The Company will be joining national electronic commerce/EDI
trade groups such as CommerceNet and DISA, which represent both users and
providers of EDI-related services.
Expansion of sales efforts will be implemented in stages, as market trends
indicate acceptance of the emerging electronic commerce marketplace and as the
Company's capital availability allows.
STRATEGIC RELATIONSHIPS
Since October, 1996, the Company has entered into co-marketing and
strategic alliances with the following companies:
EMJ ("EMJ"), Apex, North Carolina. EMJ is an Internet Web content
developer working with many large businesses in the Raleigh/Durham Research
Triangle Park area. DynamicWeb was chosen as the exclusive Internet-EDI solution
provider for EMJ Internet. EMJ Internet is a division of EMJ America, a $150
million (sales) computer hardware and software distributor.
7
ER Enterprises ("ER"), Columbus, Ohio. ER is an EDI consulting group that
assists retailers in implementing electronic commerce strategies. ER Enterprises
is a sales agent for the Company's EDI outsourcing and Internet-EDI solutions.
AFTEC Corporation ("AFTEC"), Livingston, New Jersey. AFTEC, the developer
of a manufacturing and distribution software package, will build an electronic
commerce interface into their application and offer DynamicWeb's Service Bureau
as a turnkey EC solution for their clients.
ID2000 ("ID2000"), Berlin, New Jersey. ID2000 is a management information
consulting firm offering turnkey information systems solutions to its clients.
ID2000 is a sales agent for the Company's electronic commerce solutions.
PRODUCT DEVELOPMENT
The Company presently has several product development initiatives. One
initiative involves "point-to-point EDI." This technology would permit
electronic document interchange directly over the Internet, avoiding altogether
a VAN. The Company is working on modifications to the NetCat software and the
EDIxchange system to permit the point-to-point EDI.
Another initiative involves an upgrade of NetCat to a "Version 3.0."
Presently, NetCat can use only ASCII files and HTML. The Company is working on
making NetCat compatible with SQL databases (such as Oracle and Sybase), which
would allow NetCat to function with a larger group of customer databases. Also,
the Company is working on making NetCat compatible with the Adobe Acrobat
reader, which would allow NetCat to create a wider variety of graphics.
Another initiative involves an upgrade of the Company's EDIxchange program
suite to permit the creation of an "Integrated UPC Catalogue." Presently, under
the Company's EDIxchange program suite, as utilized in the Hub Model, the Hub
company/purchaser is required to input manually its suppliers' catalogues on the
Hub company's Web Site. The Company is working on an upgrade to that software
under which the suppliers would maintain their own catalogue information,
including the UPC (Universal Product Code) information, electronically on the
Hub company's Web Site, thus permitting the Hub company to browse that database
or catalogue for purchasing.
Another initiative involves the upgrade of the Company's EC Interface
Software for Accounting Systems. Presently, the Company's version of that
software allows for the electronic import and export of business documents from
RealWorld and Synchronics accounting systems only. The Company is working on an
upgrade which would permit interface with other accounting systems. The new
product would be Windows-based and would function with the Company's EDI service
bureau EDIbridgeNET.
The Company's final major initiative at present involves an upgrade of the
Company's EDIbridgeNET communications network. Presently, the Company
administers its own communications network relating to EDIbridgeNET, such as the
modems and other hardware necessary to communicate with its EDI customers. The
Company is evaluating the feasibility of outsourcing that core communication
function to a telecommunications company.
Each of the foregoing product development initiatives is subject to risk.
The Company cannot predict when any of them would be completed, if at all. There
is no assurance that the Company will develop successfully or in a
cost-effective manner any of the products or product enhancements discussed, or
that they will find market acceptance if developed.
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COMPETITION
The electronic commerce and EDI network services and computer software
markets are highly competitive. Aside from the Internet, numerous companies
supply electronic commerce network services, and several competitors target
specific vertical markets such as the pharmaceutical, agribusiness, retail and
transportation industries. Competitors provide software designed to facilitate
electronic commerce and EDI communications. Existing VANs provide network
services and related software products and services. Other competitors provide
PC-based computer programs and network services specifically targeted to
facilitate electronic banking transactions. These competitors include banks and
financial institutions that operate privately-owned computer networks that link
directly to their commercial customers. The Company believes that many of its
competitors have significantly greater financial and personnel resources than
the Company.
Competition from Internet-based competitors is also significant. The
market for Internet software and services is emerging and highly competitive,
ranging from small companies with limited resources to large companies with
substantially greater financial, technical and marketing resources than the
Company. The Company believes that existing competitors are likely to expand the
range of their electronic commerce services to include Internet access, and that
new competitors, which may include telephone companies and media companies, are
likely to increasingly offer services which utilize the Internet to provide
business-to-business data transmission services. A group of computer companies
including some competitors of the Company, and the Company itself, have formed
Commerce Net, a business entity which has announced an intention to explore the
use of the Internet for commercial applications. Additionally, several
competitive network service providers allow their subscribers access to the
Internet, and several major software and telecommunications companies, including
Sprint, MCI, AT&T and Microsoft, either have or are expected to have Internet
access services. Similarly, the major on-line service companies, such as America
On-Line, Compuserve and Prodigy, also offer Internet services and are expected
to enhance the services in the future to include certain aspects of electronic
commerce. If the Internet becomes an accepted method of electronic commerce, the
Company could lose network customers which would reduce recurring revenue from
network services and have a material adverse effect on the Company.
COMPETITIVE STRATEGY
The Company's competitive strategy is to offer electronic commerce
solutions using Internet and EDI technology through designs that can be
customized to fit a customer's specific needs.
The Company intends to apply its Internet and EDI technology products, its
development efforts, and its marketing efforts, at the "application layer" of
electronic commerce. The application layer addresses the customers' immediate
need to work with product catalogues and receive useful business documents. The
application layer is distinguished from the "core" or "infrastructure" layer,
which addresses formatting of EDI documents, communications, data encryption,
and other basic elements of transmitting an EDI document over the Internet. At
the application layer, one assumes that a properly-formatted EDI document can be
securely transmitted over the Internet.
The Company intends to avoid competing at the EC core or basic
infrastructure technology layer. In that regard, it does not intend to compete
in technical and product categories such as encryption and authentication
schemes, secure transport methods, EDI mailboxing services, secure browsers and
servers, or low-level communication protocols.
9
Further, the Company intends to market products that require the EDI
trading partners to have only a standard Web browser with "standard" plug-ins
(like Adobe Acrobat and Sun's Java). The Company will centralize EDI translation
and mapping from its application interface to the EDIbridgeNet outsource service
bureau.
DynamicWeb intends to differentiate itself in the marketplace for
Internet/EDI solutions with NetCat. The Company believes that its existing
competition currently offers generic, form-based software solutions with limited
functionality. In contrast, EDIxchange provides both product catalog and order
management. When combined with the Company's service bureau, the Company can
offer customers a complete, turnkey electronic commerce solution.
There can be no assurance that the Company will be successful in its
effort or that it will not be materially adversely affected by competitive
factors.
INTELLECTUAL PROPERTY RIGHTS
The Company relies primarily on a combination of copyright, patent and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that competitors will not
independently develop similar or superior technology. The Company believes that,
due to the rapid pace of innovation within the electronic commerce, EDI and
related software industries, factors such as the technological and creative
skills of its personnel are more important in establishing and maintaining a
leadership position within the electronic commerce industry than are the various
legal protections of its technology. The Company does not believe that any of
its products infringe the proprietary rights of third parties. There can be no
assurance, however, that third parties will not claim infringement by the
Company with respect to current or future products. From time to time, the
Company has received notices which allege, directly or indirectly, that the
Company's products or services infringe the rights of others. The Company
generally has been able to address these allegations without material cost to
the Company. The Company expects that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in electronic commerce grows and the functionality of products in
different industry segments overlaps. Any such claims, irrespective of their
merit, could be time-consuming, result in costly litigation, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements, or prevent the Company from using certain technologies. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all, which could have a material adverse effect on the
Company.
GOVERNMENTAL REGULATIONS AND INDUSTRY STANDARDS
The Company's network services are transmitted to its customers over
dedicated and public telephone lines. These transmissions are governed by
regulatory policies establishing charges and terms for communications. Changes
in the legislative and regulatory environment relating to on-line services, EDI
or the Internet access industry, including regulatory or legislative changes
which directly or indirectly affect telecommunication costs or increase the
likelihood of competition from regional telephone companies or others, could
have an adverse effect on the Company's business. The Telecommunications Act of
1996 amended the federal telecommunications laws to lift restrictions on
regional telephone companies and others competing with the Company and to impose
certain restrictions regarding obscene and indecent content communicated to
minors over the Internet or through interactive computer services.
10
The Telecommunications Act of 1996 imposes fines and other criminal liability on
any entity that knowingly uses a telecommunications device or interactive
computer service to send obscene or indecent material to minors or permits any
telecommunications facility under such entity's control to be used for such a
purpose. Litigation has been filed in federal court challenging the
constitutionality of those provisions of the Act. A temporary restraining order
has been issued by a federal court enjoining the US Attorney General from
enforcing the Act's "indecency" prohibition. The Company cannot predict the
impact, if any, that this Act and future court opinions, legislation,
regulations or regulatory changes may have on its business. Management believes
that the Company is in compliance with all material applicable regulations.
The Company has not adopted a specific intention with respect to
compliance with ISO 9000 standards for software development and maintenance
services. The Company does not believe that failure to adopt ISO 9000 compliance
has had, or in the future will have, a material adverse effect on its business.
However, the Company will continue to assess ISO 9000.
EMPLOYEES
As of April 30, 1997, the Company had 17 full-time employees, of whom
approximately 6 are technical personnel engaged in maintaining or developing the
Company's products or performing related services, approximately 5 are marketing
and sales personnel, approximately 3 are customer support and operations
personnel, and approximately 3 are involved in administration and finance.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of April 30, 1997,
are as follows:
NAME AGE POSITION
Steve L. Vanechanos, Jr.(1) 43 Chairman of the Board,
Chief Executive Officer
Steve Vanechanos, Sr.(1) 67 Director, Treasurer and
Secretary
Kenneth R. Konikowski 50 Director and Executive
Vice President
(1) Mr. Vanechanos, Sr. is the father of Mr. Vanechanos, Jr.
STEVE L. VANECHANOS, JR. became President and Director of the Company on
March 26, 1996. He has been President of DynamicWeb Transaction Systems, Inc.
since its inception in 1995. He also was a founder of Megascore, Inc. in 1981.
He has a Bachelor of Science in Finance and Economics from Fairleigh Dickinson
University, Rutherford Campus.
STEVE VANECHANOS, SR. became Secretary, Treasurer and Director of the
Company on March 26, 1996. He was a founder of Megascore, Inc. in 1981 and
DynamicWeb Transaction Systems, Inc. in 1995. He attended Newark College of
Engineering in Newark for two years. He continued his education with
certifications from PSI Programming Institute in New York City and with courses
in principles of accounting at ABA Institute, Hudson County Chapter.
11
KENNETH R. KONIKOWSKI became a Director and the Executive Vice President
of the Company on November 1, 1996. Prior to that date, Mr. Konikowski was
President of Software Associates.
12
INVESTMENT CONSIDERATIONS
The following factors are important and relevant considerations in
evaluating the business of the Company and a potential investment in the
Company's securities.
LIMITED OPERATING HISTORY; NO ASSURANCE OF SUCCESSFUL OPERATIONS. The
Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company has incurred net losses and
no assurance can be made that the Company will become profitable in the near
future, if at all. The Company's prospects are subject to all of the risks
encountered by a company in an early stage of development, particularly in light
of the uncertainties relating to the new and evolving markets in which the
Company intends to operate. To address these risks, the Company must, among
other things, further develop supporting software from third parties or develop
such software; commercially offer its services; successfully implement its
marketing strategy; respond to competitive developments; attract, retain and
motivate qualified personnel; and develop, upgrade, and protect its technology.
No assurance can be given that the Company will succeed in addressing any or all
of these issues and the failure to do so would have a material adverse effect on
the Company's business, prospects, financial condition and operating results.
ANTICIPATED LOSSES. The Company anticipates realizing only limited revenue
for the foreseeable future. The Company's ability to generate meaningful revenue
thereafter is subject to substantial uncertainty. The Company anticipates that
its operating expenses will increase substantially in the foreseeable future as
it further develops its technology and attempts to market its services,
increases its marketing activities, creates and expands the distribution
channels for its services and broadens its customer support capabilities.
Accordingly, the Company expects to incur losses for the foreseeable future. No
assurance can be given that the Company's services will be developed, marketed,
expanded, or rendered successfully or on a timely basis, if at all, or that the
Company will be successful in obtaining market acceptance of its services. No
assurance can be given that the Company will ever be able to achieve or sustain
operating profitability.
NEED FOR SUBSTANTIAL ADDITIONAL CAPITAL. During April of 1997, the Company
raised $600,000 in gross proceeds through the private placement of units
composed of promissory notes and Common Stock. The proceeds from that offering
are expected to permit the Company to operate only through June 30, 1997. The
Company anticipates only limited revenues will be available to fund its
operations without substantial additional capital. Further, although the Company
has signed a Letter of Intent with an underwriter for a proposed $6,000,000
public offering of Common Stock, there can be no assurance that the public
offering will be successfully completed, if at all, or that the Company will
receive adequate financing from the proposed public offering. The Company has no
other current options to fund its continued existence in the event the public
offering does not occur or does not occur within a reasonable time. If the
proposed public offering does not occur on a timely basis, the Company may be
unable to fund its business plan and may be forced to cease to operate. The
auditor's opinion to the financial statements of the Company included at Item 7
of this Report have been prepared assuming the Company will continue as a going
concern.
CONTROL BY EXISTING MANAGEMENT. As of April 30, 1997, the existing
management of the Company controls approximately 59% of the shares of Common
Stock eligible to vote and will therefore be able to elect all of the members of
the Board of Directors and control the outcome of any issues which may be
subject to a vote of the Company's stockholders.
13
PUBLIC MARKET FOR COMPANY'S COMMON STOCK. Some portion of the Company's
Common Stock currently trades on the NASD's OTC Bulletin Board. See "Common
Stock Eligible for Resale," below. If the Company proceeds with the planned
public offering, the Company intends to apply to list the Common Stock on the
NASD's Small Cap Market. There can be no assurance that a market for the Common
Stock will develop or be sustained. The investment community could show little
or no interest in the Company in the future. As a result, purchasers of the
Company's securities may have difficulty in selling such securities should they
desire to do so. Further, if the proposed public offering is not consummated,
the interest of the investment community in the stock is likely to be reduced
and purchasers may be unable to sell their securities.
COMMON STOCK ELIGIBLE FOR RESALE. Of the 7,667,266 shares of Common Stock
presently outstanding, over 7,000,000 shares are "restricted securities" and
under certain circumstances may be sold in compliance with Rule 144 adopted
under the Securities Act. Future sales of such shares are likely to depress the
market price of the Company's Common Stock, which would have an adverse effect
on the value of the securities included in the Units.
EARLY STAGE OF MARKET DEVELOPMENT; UNPROVEN ACCEPTANCE OF THE COMPANY'S
PROPOSED PRODUCTS AND SERVICES. Most of the Company's services are designed to
facilitate electronic commerce. A major focus of the Company's products and
services is the Internet, which is a worldwide communications system that allows
users to transmit and receive messages and information over telephone and other
communications lines using terminals or computers. See "Dependence on the
Internet and on Internet Infrastructure Development," below. The market for the
Company's services is at an early stage of development, is evolving rapidly, and
is characterized by an increasing number of market entrants who have introduced
or are developing competing products and services. As is typical for a new and
rapidly evolving industry, demand and market acceptance for recently introduced
products and services are subject to a high level of uncertainty. Market
acceptance will depend, in large part, upon the ability of the Company to
demonstrate the advantages and cost effectiveness of its products over existing
products. There can be no assurance that the Company will be able to market its
products successfully or that its current or future products will be accepted in
the marketplace. As a result of the Company's recent introduction of its
products into the market and their limited use to date, there can be no
assurance that those products will achieve market acceptance or will produce
substantial revenues.
DEPENDENCE ON THE INTERNET AND ON INTERNET INFRASTRUCTURE DEVELOPMENT. The
use of the Company's services is dependent upon the continued development of an
industry and infrastructure for providing Internet access and carrying Internet
traffic. The commercial market for products and services for use with the
Internet and the World Wide Web has only recently begun to develop. The Internet
may not prove to be a viable commercial marketplace or communications network
because of many factors, including inadequate development of the necessary
capacity, a reliable network, acceptable levels of security or timely
development of complementary products, such as high speed modems. Further, there
can be no assurance that the Internet will retain its current pricing structure,
which is flat-rate, independent of volume, and independent or the time of day.
The adoption of the Internet for commerce and as a means of communication,
particularly by those individuals and enterprises that historically have relied
upon traditional means of commerce and communication, will require a broad
acceptance of new methods of conducting business and exchanging information.
Enterprises that already have invested substantial resources in other methods of
conducting business may be reluctant or slow to adopt a new strategy that may
limit or compete with their existing business. Individuals with established
patterns of purchasing goods and services and effecting payments may be
reluctant to alter those patterns.
14
Thus far, significant commercial use of the Internet has not developed, in
part, because of the lack of security and verification processes. Although the
Company's products have been designed to address security and verification
issues, there can be no assurance that widespread commercial use of the Internet
for electronic commerce will develop, or that even if such use does develop,
that the Company's products will achieve market acceptance. If the Company's
market fails to develop or develops more slowly than expected, or if the
infrastructure for the Internet is not adequately developed or the Company's
services do not achieve market acceptance by a significant number of individuals
and businesses, the Company's business, financial condition, prospects and
operating results will be materially and adversely affected. See "BUSINESS -
Electronic Commerce and Electronic Data Interchange" and "Risks Associated with
Encryption Technology."
RELIANCE ON LIMITED NUMBER OF PRODUCTS. The Company expects that
substantially all of the Company's revenues will be derived from its EDIxchange
product and service, its EDIbridgeNet service, and (to a lesser extent) its
NetCat product. If these products are not successful, whether as a result of
technological change, competition or any other factors, the Company's business,
results of operations and financial condition would be adversely affected. The
Company presently has no plans to develop or produce additional products in the
foreseeable future.
DEVELOPMENT OF NEW SERVICES, INDUSTRY ACCEPTANCE AND TECHNOLOGICAL CHANGE.
A substantial portion of the Company's anticipated revenue will be derived from
fees charged to businesses and individuals for transactions effected through the
Company. Accordingly, broad acceptance of the Company's services by these
businesses and individuals is critical to the Company's success. Further, the
Company will likely be required to design, develop, test, introduce and support
new services and enhancements on a timely basis that meet changing customer
needs and respond to technological developments and emerging industry standards.
The market for the Company's proposed services is characterized by rapidly
changing technology and evolving industry standards. The Company's proposed
services are designed around certain technical standards with respect to data
encryption; and therefore current and future sales of the Company's services
will be dependent on industry acceptance of such standards. While the Company
intends to provide compatibility with the standards promulgated by leading
industry participants and groups, widespread adoption of a proprietary or closed
standard could preclude the Company from effectively marketing or developing its
products or services. No assurance can be given that the Company's services will
achieve market acceptance; that the Company will be successful in developing and
introducing its proposed services or new services that meet changing customer
needs; that the Company will be able to respond to technological changes or
evolving industry standards in a timely manner, if at all; or that the standards
upon which the Company's services are or will be based will be accepted by the
industry. In addition, no assurance can be given that services or technologies
developed by others will not render the Company's services noncompetitive or
obsolete. Those could include the elimination or replacement of EDI. The
inability of the Company to respond to changing market conditions, technological
developments, evolving industry standards or changing customer requirements, or
the development of competing technology or products that renders the Company's
services noncompetitive or obsolete, would have a material adverse effect on the
Company's business, financial condition, prospects and operating results. See
"BUSINESS - Marketing and Sales."
RISKS OF DEFECTS AND DEVELOPMENT DELAYS. The Company has not sold a
material amount of its services or products. Services based on sophisticated
software and computing systems often encounter development delays and the
underlying software may contain undetected errors or failures when introduced or
when the volume of services provided increases. The Company may experience
delays in the development of the software and computing systems underlying the
Company's proposed products and services. In addition, there can be no assurance
that, despite testing by the Company and potential customers, errors will not be
found in the underlying software, or that the Company will not experience
15
development delays, which could result in delays in the market acceptance of its
services and could have a material adverse effect on the Company's business,
financial condition, prospects and operating results.
See "BUSINESS - Product Development."
COMPETITION. The EDI market is intensely competitive and subject to rapid
technological change, evolving industry standards and regulatory developments.
The Company does and will compete with many companies that have substantially
greater financial, marketing, technical and human resources than the Company.
The principal competitors in EDI and in the delivery of EDI over the Internet
are, at present, Harbinger Corporation, Sterling Commerce and GEIS, each of
which has announced plans to design and develop software products and to provide
services that facilitate electronic commerce over the Internet. Virtually all of
the Company's current and potential competitors have longer operating histories,
greater name recognition, larger installed customer bases and significantly
greater financial, technical and marketing resources than the Company. Such
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to potential
customers. In addition, many of the Company's current or potential competitors,
such as Netscape, Microsoft and AT&T have broad distribution channels that may
be used to bundle competing products directly to end-users or purchasers. If
such competitors were to bundle products that compete with the Company for sale
to their customers, the demand for the Company's services may be substantially
reduced, and the ability of the Company to broaden the utilization of its
services would be substantially diminished. No assurance can be given that the
Company will be able to compete effectively with current or future competitors
or that such competition will not have a material adverse effect on the
Company's business, financial condition, prospects and operating results. See
"BUSINESS - Competition."
NEW MARKET ENTRANTS. In addition to existing competitors, there are many
companies that may enter the market in the future with new technologies,
products and services that may be competitive with services offered or to be
offered by the Company. Because there are many potential entrants to the field,
many of which are likely to have substantially greater resources than the
Company, it is extremely difficult to assess which companies are likely to offer
competitive products and services in the future, and in some cases it is
difficult to discern whether an existing product or service is competitive with
the Company's services. The Company expects competition to persist and intensify
in the future. If the market becomes congested with competition, the Company may
not be able to compete in its intended marketplace, if at all.
DEPENDENCE ON THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS. The Company
currently licenses certain proprietary and patented technology from third
parties. All of the Company's planned services incorporating data encryption and
authentication is based on proprietary software of RSA Data Security ("RSA")
incorporated in certain other software from Community Creations related to the
Web server utilized by the Company, which is available on a non-exclusive basis.
No assurance can be given that the encryption software presently available to
the Company will continue to be available to the Company on commercially
reasonable terms, or at all. Additionally, there is no assurance that if a new
encryption technology develops, that it will be available to the Company on
commercially acceptable terms, if at all.
The Company also licenses Gentran software from Sterling Commerce. Gentran
is EDI translator software which translates electronic documents for Standard
EDI format to a more useful form. This is licensed on a non-exclusive basis. No
assurance can be given that Gentran will continue to be available to the Company
on commercially reasonable terms, or at all, although there is other
commercially available EDI transfer software. The lack of availability of EDI
translator software could have a material adverse effect on the Company's
business, financial condition, prospects, and operating results.
16
The Company also licenses Cybercash software, which is credit card
verification software, on a non-exclusive basis. No assurance can be given that
Cybercash will continue to be available to the Company on commercially
reasonable terms, or at all. The lack of availability of credit card
verification software could have a material adverse effect on the Company's
business, financial condition, prospects, and operating results.
No assurance can be given that the Company's third party licenses will
continue to be available to the Company on commercially reasonable terms, or at
all. The loss of or inability to maintain any of those software licenses could
result in delays in introduction of the Company's services until equivalent
software, if available, is identified, licensed and integrated into the
Company's planned services, which could have a material adverse effect on the
Company's business, financial condition, prospects and operating results. See
"BUSINESS - Intellectual Property Rights."
Because certain of the Company's products incorporate software developed
and maintained by third parties, the Company is to a certain extent dependent
upon such third parties' ability to enhance their current products, to develop
new products on a timely and cost-effective basis and to respond to emerging
industry standards and other technological changes. There can be no assurance
that the Company would be able to replace the functionality provided by the
third party software currently offered in conjunction with the Company's
products in the event that such software becomes obsolete or incompatible with
future versions of the Company's products or is otherwise not adequately
maintained or updated. The absence of or any significant delay in the
replacement of that functionality could have a material adverse effect on the
Company's sales. See "BUSINESS - Competitive Strategy."
RELIANCE ON PERL. The Company's proprietary software is written in
Practical Extraction and Reporting Language ("PERL"), which is the computer
program language utilized for Internet applications. Because the Internet is not
controlled or supervised by any one person or group, the evolution and continued
utilization of PERL cannot be controlled or predicted. Changes in or the
elimination of PERL could cause the Company to have to assume responsibility for
support and development of that software, which could have a material adverse
effect on the Company's business, financial condition, prospects, and operating
results.
ABILITY TO RESPOND TO RAPID CHANGE. The Company's future success will
depend significantly on its ability to enhance its current products and develop
or acquire and market new products which keep pace with technological
developments and evolving industry standards as well as respond to changes in
customer needs. The market for EDI products and Internet software products is
characterized by rapidly changing technology, evolving industry standards and
customer demands, and frequent new product introductions and enhancements. The
Company will be required to manage effectively its strategic position in a
rapidly changing environment. There can be no assurance that the Company will be
successful in developing or acquiring product enhancements or new products to
address changing technologies and customer requirements adequately, that it will
introduce such products on a timely basis, or that any such products or
enhancements will be successful in the marketplace. The Company's delay or
failure to develop or acquire technological improvements or to adapt its
products to technological change would have a material adverse effect on the
Company's business, results of operations and financial condition. The failure
of the Company's management team to respond effectively to and manage rapidly
changing technological and business conditions as well as the growth of its own
business, should it occur, could have material adverse impact on the Company's
business, results of operations and prospects. See "Reliance on Limited Number
of Products," above.
DEPENDENCE ON DISTRIBUTION AND MARKETING RELATIONSHIPS. The Company has
few sales and marketing employees and does not have established distribution
channels for its services. In order to
17
generate substantial revenue, the Company must achieve broad distribution of its
services to businesses and individuals and secure general adoption of its
services and technology. No assurance can be given that the Company will be able
to generate sufficient demand for its services and the inability of the Company
to do so would have a material adverse effect on the Company's business,
financial condition, prospects and operating results. A key element of the
Company's current business and its future business strategy is to maintain and
develop relationships with leading companies that market software products and
EDI-related services.
The Company has entered into value added-reseller ("VAR"), distribution,
co-marketing and other agreements with a number of companies. See "BUSINESS -
Strategic Relationships." Many of these agreements are nonexclusive, and many of
the companies with which the Company has agreements also have similar agreements
with the Company's competitors or potential competitors. The Company believes
that its success in penetrating markets for its EDI products and services
depends in large part on its ability to maintain these relationships, to add the
Company's EDIxchange products and services to such arrangements, to cultivate
additional relationships and to cultivate alternative relationships if
distribution channels change. There can be no assurance that the Company's VAR
partners, distributors and comarketers, most of whom have significantly greater
financial and marketing resources than the Company, will not develop and market
products in competition with the Company in the future, discontinue their
relationships with the Company or form additional competing arrangements with
the Company's competitors. See "BUSINESS - Marketing and Distribution."
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISK OF INFRINGEMENT. The
Company's success and ability to compete are dependent in part upon its
proprietary technology relating to its NetCat software. The Company has applied
for a patent covering that software, but to date no patent has been granted.
There can be no assurance that the applied-for patent will be granted, or, if
granted, will be effective to protect the Company's rights in its NetCat
technology. In addition, the software and electronic commerce industries are
characterized by the existence of a large number of patents, and litigation
based on allegations of patent infringement is not uncommon. From time to time,
third parties may assert exclusive patent, copyright, trademark and other
intellectual property rights to technologies that are important to the Company.
Although the Company believes that it is not infringing on the rights of any
third parties, there can be no assurance that third parties will not assert
infringement claims against the Company, that any such assertion of infringement
will not result in litigation or that the Company would prevail in such
litigation or be able to license any valid and infringed patents of third
parties on commercially reasonable terms. See "BUSINESS - Proprietary
Information."
RISKS ASSOCIATED WITH ENCRYPTION TECHNOLOGY. A significant barrier to
Internet commerce is the ability to exchange financial information securely over
public networks. The Company relies on encryption and authentication technology
licensed from third parties to provide the security and authentication necessary
to effect the secure exchange of financial information over the Internet,
including public key cryptography technology licensed from RSA. No assurance can
be given that advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments will not result in a compromise or
breach of the RSA or other algorithms used by the Company to protect customer
transaction data. In August and September 1995, certain RSA algorithms used by
Netscape were compromised. There can be no assurance that the Company's security
will not likewise be compromised. If any such compromise of the Company's
security were to occur, it could have a material adverse effect on the Company's
business, financial condition, prospects and operating results. In addition, no
assurance can be given that existing security systems of others will not be
penetrated or breached, which could have a material adverse effect on the market
acceptance of Internet security services, which in turn could have a material
and adverse effect on the Company's business, financial condition, prospects and
operating results.
18
LIABILITY AND AVAILABILITY OF INSURANCE. The Company is responsible for
the electronic transmission of commercial transaction data for its customers,
including, without limitation, purchase orders, payments, invoices, and advance
ship notices. If the Company were unable to fulfill its contractual obligations
to its customers, whether due to failure of its software, to failure of the
Internet, EDI or telecommunications services to function properly, to failure of
its employees, contractors, agents or representatives, or for any other reason,
the Company could be subject to claims for the value of the lost business to its
customers. The liability could be substantial. If the Company incurs substantial
liability to its customers due to its breach, it may materially and adversely
affect the Company's ability to complete its plan of operation. The Company has
no insurance to cover those types of liability.
FLUCTUATING QUARTERLY RESULTS; CYCLICAL BUSINESS. The Company's future
revenues and operating results may fluctuate materially as a result of, among
other things, the timing of the introduction of, or enhancements to, the
Company's services, demand for the Company's services, the timing of
introduction of products or services by the Company's competitors, market
acceptance of Internet commerce, the timing and rate at which the Company
increases its expenses to support projected growth, the budgeting and purchasing
practices of its customers, the length of the customer product evaluation
process for the Company's products, the size and timing of customer orders,
competitive conditions in the industry, and other factors inherent in a new,
developing business. Fluctuations in revenues and operating results may cause
volatility in the Company's stock price.
DEPENDENCE UPON KEY PERSONNEL. The Company's success will depend in part
upon the retention of key senior management and technical personnel,
particularly Steve Vanechanos, Jr., co-founder of the Company and Chairman of
the Board, and Kenneth Konikowski, Executive Vice President of the Company. The
loss of the services of any of the Company's key personnel could have a material
adverse effect on the Company. Several, but not all, of the Company's employees
have signed confidentiality and non-competition agreements. The Company
presently maintains key man life insurance on Steve Vanechanos, Jr. in the
amount of $3,000,000. There can be no assurance that the Company will be able or
willing to continue to maintain such insurance.
ABILITY TO ATTRACT QUALIFIED PERSONNEL. The Company believes that its
future success also depends upon its ability to attract and retain additional
highly skilled technical, professional services, management and sales and
marketing personnel. The market for skilled programmers and other technically
skilled employees is highly competitive and other companies with greater
resources can pay higher salaries and greater benefits. To attract quality
personnel, the Company may be required to offer Common Stock or stock options,
which will dilute investors' interests. The market for these individuals has
historically been, and the Company expects that it will continue to be,
intensely competitive. The Company's inability to attract and retain qualified
employees could have a material adverse effect on the Company's business,
financial condition, prospects, and operating results.
MANAGEMENT OF GROWTH. If the Company experiences a period of rapid growth,
that a significant strain may be placed on the Company's financial, management
and other resources. The Company's future performance will depend in part on its
ability to manage change in its operations and will require the Company to hire
additional management and technical personnel, particularly in the marketing and
customer support arm. In addition, the Company's ability to manage its growth
effectively will require it to continue to improve its operational and financial
control systems and infrastructure and management information systems, and to
attract, train, motivate, manage and retain key employees. If the Company's
management were to become unable to manage growth effectively, that would have a
material adverse effect on the Company's financial condition, prospects, and
operating results.
19
ABILITY TO ISSUE BLANK CHECK PREFERRED STOCK; NEW JERSEY ANTI-TAKEOVER
PROVISIONS. The Company's Board of Directors has proposed, subject to
shareholder approval, an amendment to its Certificate of Incorporation (the
"Certificate Amendment") to provide that the Board of Directors shall have the
authority to issue up to 5,000,000 shares of preferred stock and to determine
the price, rights, preferences and privileges of those shares without any
further vote or action by the stockholders. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
shares of preferred stock, while potentially providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no present
intention to issue shares of preferred stock.
In addition, the Company is subject to the anti-takeover provisions of the
New Jersey Shareholder Protection Act, which, among other things, will prohibit
it from engaging in a "business combination" with an "interested stockholder'
for a period of five years after the date of the transaction in which the person
became an interested stockholder (the "Stock Acquisition Date"), unless the
business combination is approved by the Company's Board of Directors prior to
the Stock Acquisition Date. The application of such Act also could have the
effect of delaying or preventing a change-in-control of the Company.
Furthermore, certain provisions of the Certificate Amendment, if approved by the
Company's shareholders, and the Company's Bylaws, including provisions that
provide for the Board of Directors to be divided into three classes to serve for
staggered three-year terms, as well as certain contractual provisions could
limit the price that certain investors might be willing to pay in the future for
shares of the Common Stock and may have the effect of delaying or preventing a
change-in-control of the Company. These provisions may also reduce the
likelihood of an acquisition of the Company at a premium price by another person
or entity.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company is not
currently subject to direct regulation by any federal or state government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to, or commerce
on, the Internet. If the Internet becomes more generally accepted, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet. Such laws may address user privacy, pricing and characteristics
and quality of products and services, among other things. The recently enacted
Telecommunications Reform Act of 1996 imposes criminal penalties on anyone who
distributes obscene, lascivious or indecent communications on the Internet. The
adoption of any laws or regulations governing commerce on the Internet may
result in decreased growth of the Internet, which could have an adverse effect
on the Company's business, financial condition, prospects and operating results.
Moreover, the applicability to the Internet of existing laws governing issues
such as property ownership, libel and personal privacy is uncertain.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock is likely to be highly volatile and could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new software or services by the
Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors, many of which are beyond the Company's
control. In addition, the stock market has experienced significant price and
volume fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
to the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In the
past, following periods of volatility in the market price for a company's
securities, securities class action litigation has often been instituted. Such
litigation could
20
result in substantial costs and a diversion of management attention and
resources, which could have a material adverse effect on the Company's business,
financial condition, prospects or operating results.
SUBSTANTIAL OPTIONS RESERVED. Under the Company's 1997 Employee Stock
Option Plan (which has been approved by the Board of Directors and which will be
presented to the shareholders at the annual meeting for their approval), the
Company may issue options to purchase up to an aggregate of 900,000 shares of
Common Stock to employees and officers. Further, under the Company's 1997 Stock
Option Plan for Outside Directors (which has been approved by the Board of
Directors and which will be presented to the shareholders at the annual meeting
for their approval), the Company may issue options to purchase up to an
aggregate of 300,000 shares of Common Stock to its outside directors. Any such
options may further dilute the net tangible book value of the Common Stock and
an investor's interest in the Company. Further, the holders of such options may
exercise them at a time when the Company would otherwise be able to obtain
additional equity capital on terms more favorable to the Company.
DIFFICULTY OF TRADING "PENNY STOCKS." The Company's securities may be
subject to rules that imposes additional sales practice requirements on
broker-dealers who sell lower-priced securities to persons other than
established customers (as defined in such rules) and accredited investors
(generally, institutions and, for individuals, an investor with assets in excess
of $1,000,000 or annual income exceeding $200,000 or $300,000 together with such
investor's spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transaction prior to the
purchase. Consequently, many brokers may be unwilling to engage in transactions
in the Company's securities because of the added disclosure requirements,
thereby making it more difficult for purchasers in this Offering to resell the
Common Stock in the secondary market.
ITEM 2. PROPERTIES.
The Company recently moved its corporate offices to 271 Route 46 West,
Building F, Suite 209, Fairfield, New Jersey. It has entered into two leases for
approximately 5,400 square feet for its executive and administrative staff at an
aggregate monthly rental of $6,400. The Company believes that such space will be
sufficient for its needs for the foreseeable future and that alternative space
is available at rental rates which would not materially adversely affect the
Company.
The Company owns its former offices (at 1033 Route 46 East, Clifton, New
Jersey, which it acquired in its acquisition of Megascore in November of 1996).
It has vacated those premises, which are listed for sale. Those premises are
mortgaged with an approximately $190,000 mortgage.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material proceedings. From time to time,
the Company is involved in various routine legal proceedings incidental to the
conduct of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended September 30, 1996.
21
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
A portion of the Company's common stock which is not restricted is traded
on the National Association of Securities Dealers ("NASD") Over the Counter
("OTC") Bulletin Board Service under the symbol "DWEB."
The range of high and low bid quotations for the Company's Common Stock
for the two most recently completed fiscal years and the current fiscal year to
date were obtained from the NASD and are provided below. The volume of trading
in the Company's Common Stock has been limited and the bid prices reported may
not be indicative of the value of the Common Stock or the existence of an active
trading market. These over-the-counter market quotations reflect inter-dealer
prices without retail markup, markdown or commissions and may not necessarily
represent actual transactions.
Bid
-------------------
Quarter Ended High Low
- - ------------- ------ ------
December 31, 1994 $ 0.01 $ 0.01
March 31, 1995 0.01 0.01
June 30, 1995 0.01 0.01
September 30, 1995 0.01 0.01
December 31, 1995 $ 0.01 $ 0.01
March 31, 1996* 5 4 1/2
June 30, 1996 4 3/8 4 1/2
September 30, 1996 4 1/8 3 7/8
December 31, 1996 3 3/4 3
March 31, 1997 3 3/8 3 1/8
- - --------------
* On March 5, 1996, the Company effectuated a 100 for one reverse stock
split whereby each 100 shares of Common Stock were combined into one share
of Common Stock. The information in the above table was not retroactively
adjusted on account of that combination of shares.
At April 30, 1997, there were 7,667,270 shares of the Company's common
stock outstanding held by approximately 3,255 holders of record.
The Company did not declare or pay cash dividends on the Common Stock
during 1995 or 1996. The Company currently intends to retain any earnings for
use in the business and does not anticipate paying any cash dividends in the
foreseeable future.
22
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the financial statements included in this Report and in conjunction with the
description of the Company's Business under Item 1 of this Report. It is
intended to assist the reader in understanding and evaluating the financial
position of the Company.
This discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainty. The Company's
actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Investment Considerations" as well as
those discussed elsewhere in this Report.
It should be noted also that the discussion in this Item 6 relates to the
combined operations of DWTS and Megascore for the two fiscal years ending
September 30, 1996. Prior to March 26, 1996, however, the Company was named
Seahawk Capital Corporation. Seahawk Capital Corporation had, from time to time,
other operations having no relationship to the Company's present business and
management. Those prior operations were disposed of by the Company. The history
of Seahawk Capital Corporation and the disposition of those other operations are
more fully described in the Company's Form 10-KSB for the year ended December
31, 1995 (then filed under the name Seahawk Capital Corporation) and Form 8-K
dated March 26, 1996.
FINANCIAL CONDITION
As of September 30, 1996, the Company had cash of $174,403 and total
current assets of $276,989.
The Company had a net loss of $455,230 for the year ended September 30,
1996, and negative cash flow from operations of $411,544. The Company funded its
activities during the fiscal year primarily through the private sale of equity
securities which raised $597,750. The balance of cash remaining from such
activities is the $174,403.
Those capital resources are not believed to be adequate to finance the
Company's activities for the full year ended September 30, 1997. As a result,
the Company engaged in a private placement of $250,000 of Common Stock and
another private placement of $600,000 of units consisting of promissory notes
and Common Stock. Further, the Company expects to engage in one or more other
public or private sales of equity securities in order to provide additional
capital for its operations. Readers of this Report should pay close attention to
the opinion of the Company's auditors as it pertains to the Company's financial
condition, and also to the Investment Considerations discussed in Item 1 of this
Report.
RESULTS OF OPERATIONS
THE YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1995
For the fiscal year ended September 30, 1996 ("fiscal 1996"), the Company
recognized net sales of approximately $460,000 compared to fiscal year ended
September 30, 1995 ("fiscal 1996") of approximately $640,000. The decrease of
net sales of approximately $180,000 was attributable the Company's change in
focus of its core business and it needed to market its new products and
services; EDIxhange Suite (a web-based, EDI order facilitation, and catalog
system) and EDIbrideNET Services
23
(a full line of EDI and Internet outsourcing services). The decrease is also due
to a decline in hardware systems due to anticipated future declining profit
margins.
System sales decreased to approximately $147,000 for fiscal 1996 from
approximately $297,000 in fiscal 1995. The decrease is due a change in the
Company's focus of its core business and a need to market its EDI products. The
Company also is anticipating declining profit margins of its hardware sales.
System sales includes sales of hardware and software to customers
Service sales decreased to approximately $313,000 for fiscal 1996 from
approximately $343,000 in fiscal 1995. The decrease is due to the shift in the
Company's marketing of its services in the electronic commerce industry. Service
sales includes customer set-up fees, training cost, EDI charges and consulting,
maintenance and support fees, consulting fees.
Cost of system sales was approximately $71,000 or a gross profit of 52%
for fiscal 1996 as compared to approximately $159,000 or a gross profit of 46%
for fiscal 1995. The increase in gross profit was attributable to selling more
software then hardware products. Cost of systems includes the cost of computer
hardware and sublicensed software.
Cost of services was approximately $81,000 for fiscal 1996 or a gross
profit of 74% for fiscal 1996 as compared to approximately $84,000 or a gross
profit of 75% for fiscal 1995. There was no significant change for the fiscal
year.
Selling, general and administrative increased approximately $354,000 to
approximately $719,000 in fiscal 1996 as compared to approximately $365,000. The
increase is attributable to higher marketing expenses, salaries and office
expenses in the Company's effort to market its new products and services.
Research and development expense was approximately $29,000 for fiscal 1996
as compared to approximately $12,000 for fiscal 1995. The increase is due to the
Company's developing an order processing software for the internet.
Interest expense was approximately $23,000 for the fiscal years 1996 and
1995 which represents the expense of financing the Company's office condominium
and automobiles.
Interest income increase by approximately $6,000 to approximately $9,000
in fiscal 1996 as compared to $3,000 in fiscal 1995 as a result of the Company's
investing its excess cash form private placements.
Net loss for fiscal 1996 was approximately $455,000 or .07 per share as
compared to nil for fiscal 1995 as the Company is marketing and directing its
attention in expanding its internet product and services.
24
ITEM 7. FINANCIAL STATEMENTS.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
DynamicWeb Enterprises, Inc.
Fairfield, New Jersey
We have audited the accompanying consolidated balance sheet of DynamicWeb
Enterprises, Inc. and subsidiaries (formerly Seahawk Capital Corporation) as at
September 30, 1996 and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years ended September 30,
1996 and September 30, 1995. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the financial position of DynamicWeb
Enterprises, Inc. and subsidiaries (formerly Seahawk Capital Corporation) as at
September 30, 1996 and the results of their operations and their cash flows for
the years ended September 30, 1996 and September 30, 1995, 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 discussed in Note B, a substantial
portion of the Company's resources may be depleted before it is able to market
and derive significant revenues from its products and services. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note B. The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
/s/ Richard A. Eisner & Company, LLP
New York, New York
April 7, 1997
With respect to Note J[8]
April 30, 1997
25
DYNAMICWEB ENTERPRISES, INC.
(formerly Seahawk Capital Corporation)
CONSOLIDATED BALANCE SHEET
AS AT SEPTEMBER 30, 1996
A S S E T S
Current assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . $ 174,403
Accounts receivable, less allowance for doubtful accounts
of $34,328 . . . . . . . . . . . . . . . . . . . . . . . 70,518
Prepaid and other current assets . . . . . . . . . . . . . 32,068
---------
Total current assets . . . . . . . . . . . . . . . . 276,989
Property and equipment (Notes D and E) . . . . . . . . . . . . 239,889
Patents and trademarks, less amortization of $2,166 . . . . . 19,299
---------
T O T A L . . . . . . . . . . . . . . . . . . . . . $ 536,177
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 34,581
Accrued expenses and other . . . . . . . . . . . . . . . . 18,487
Current maturities of long-term debt (Note E) . . . . . . . 12,434
Deferred revenue . . . . . . . . . . . . . . . . . . . . . 11,330
---------
Total current liabilities . . . . . . . . . . . . . 76,832
Long-term debt, less current maturities (Note E) . . . . . . . 197,661
---------
Total liabilities . . . . . . . . . . . . . . . . . 274,493
---------
Commitments (Notes I and J)
Stockholders' equity (Notes A, F and J):
Common stock - $.0001 par value; 50,000,000 authorized,
6,548,511 issued and outstanding . . . . . . . . . . . 655
Additional paid-in capital . . . . . . . . . . . . . . . . 676,215
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (415,186)
---------
Total stockholders' equity . . . . . . . . . . . . . 261,684
---------
T O T A L . . . . . . . . . . . . . . . . . . . . . $ 536,177
=========
Attention is directed to the foregoing accountants' report and
to the accompanying notes to financial statements.
26
DYNAMICWEB ENTERPRISES, INC.
(formerly Seahawk Capital Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
September 30,
-------------------------------
1996 1995
----------- -----------
Net sales:
System sales (Note H[3]) ............. $ 147,337 $ 296,763
Services (Note H[3]) ................. 312,730 342,980
----------- -----------
T o t a l ......................... 460,067 639,743
----------- -----------
Cost of sales:
System sales ......................... 71,205 158,820
Services ............................. 81,194 84,318
----------- -----------
T o t a l ......................... 152,399 243,138
----------- -----------
Gross profit ........................... 307,668 396,605
----------- -----------
Expenses:
Selling, general and administra-
tive ............................... 719,443 364,684
Research and development ............. 28,990 12,000
----------- -----------
T o t a l ......................... 748,433 376,684
----------- -----------
Operating income (loss) ................ (440,765) 19,921
Interest expense ....................... (23,271) (23,350)
Interest income ........................ 8,806 3,140
----------- -----------
NET LOSS ............................... $ (455,230) $ (289)
=========== ===========
Net loss per common share
(Note C[7]) .......................... $ (.07) $ (.00)
=========== ===========
Weighted-average number of shares
outstanding .......................... 6,382,873 6,205,000
=========== ===========
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
27
DYNAMICWEB ENTERPRISES, INC.
(formerly Seahawk Capital Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Notes A, F and J)
Common Stock - Retained
Par Value $.0001 Additional Earnings
---------------- Paid-in (Accumulated
Shares Amount Capital Deficit) Total
--------- --------- -------- --------- --------
Balance - October 1, 1994 ...... 6,205,000 $ 621 $228,499 $ 40,333 $269,453
Net loss ....................... (289) (289)
---------- --------- -------- --------- --------
Balance - September 30, 1995 ... 6,205,000 621 228,499 40,044 269,164
Issuance of common stock, net of
$52,250 of costs ............. 343,511 34 447,716 447,750
Net loss ....................... (455,230) (455,230)
---------- --------- -------- --------- --------
BALANCE - SEPTEMBER 30, 1996 ... 6,548,511 $ 655 $676,215 $(415,186) $261,684
========== ========= ======== ========= ========
Attention is directed to the foregoing accountants' report and
to the accompanying notes to financial statements.
28
DYNAMICWEB ENTERPRISES, INC.
(formerly Seahawk Capital Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
September 30,
-------------------------
1996 1995
--------- --------
Cash flows from operating activities:
Net (loss) ................................................................ $(455,230) $ (289)
Adjustment to reconcile net (loss) to net cash (used in) operating activities:
Depreciation and amortization ............................................ 23,644 5,614
Stock issued for compensation ............................................ 10
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ............................. 3,739 (24,810)
(Increase) decrease in prepaid expenses
and other current assets ............................................. (6,923) 18,023
Increase (decrease) in accounts payable ................................ 7,801 (1,910)
Increase (decrease) in accrued expenses ................................ 15,293 (2,368)
Increase (decrease) in deferred revenue ................................ 122 (1,549)
--------- --------
Net cash (used in) operating activities .............................. (411,544) (7,289)
--------- --------
Cash flows from investing activities:
Acquisition of property and equipment ...................................... (23,838) (6,900)
Acquisition of patents and trademarks ...................................... (21,220) (245)
--------- --------
Net cash (used in) investing activities .............................. (45,058) (7,145)
--------- --------
Cash flows from financing activities:
Payment of long-term debt .................................................. (11,909) (13,772)
Proceeds from issuance of stock ............................................ 597,750
--------- --------
Net cash provided by (used in)
financing activities ............................................... 585,841 (13,772)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH ..................................... 129,239 (28,206)
EQUIVALENTS
Cash and cash equivalents, beginning of year ................................. 45,164 73,370
--------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ....................................... $ 174,403 $ 45,164
========= ========
Supplemental schedule of noncash investing
and financing activities:
During the year ended September 30, 1995,
the Company financed $31,316 of property
and equipment
Supplemental disclosure of cash flow information:
Cash paid for interest during the year ..................................... $ 21,271 $ 23,350
Attention is directed to the foregoing accountants' report and
to the accompanying notes to financial statements.
29
DYNAMICWEB ENTERPRISES, INC.
(formerly Seahawk Capital Corporation)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Basis of Presentation:
The accompanying financial statements include the accounts of DynamicWeb
Enterprises, Inc. ("DWE") and its wholly owned subsidiaries, Megascore, Inc. and
DynamicWeb Transactions Systems, Inc. ("DWTS") (the "Company"). All significant
intercompany balances and transactions have been eliminated.
DWTS, formerly a division of Megascore, Inc. was established as a separate
legal entity on October 31, 1995. On February 7, 1996 DWTS issued all of its
shares of its common stock to Megascore, Inc. On September 30, 1996, DynamicWeb
Enterprises, Inc. acquired all the common stock of Megascore, Inc. for 50,000
shares of its common stock. The transaction was accounted as a combination of
entities under common control. The accompanying financial statements retain the
historical accounting basis for the net assets of Megascore, Inc, and gives
effect to the operations of Megascore, Inc. for all periods presented.
On March 26, 1996 DWTS was acquired by Seahawk Capital Corporation
("Seahawk"), a publicly held corporation which had 431,369 shares of common
stock outstanding and no assets. Prior to the acquisition, Seahawk distributed
all of its assets to its shareholders. In the acquisition the shareholders of
DWTS received 4,913,631 shares of Seahawk's common stock. The acquisition is
being accounted for as if DWTS were the acquiring entity. The shares of Seahawk
are accounted for as being outstanding for all periods presented. In connection
with the acquisition, 735,000 shares were issued to a finder and 75,000 shares
were issued for legal fees. At the conclusion of this transaction, there were
6,155,000 shares outstanding.
On May 14, 1996, Seahawk changed its name to DynamicWeb Enterprises, Inc.
and concurrently increased the authorized number of shares of its common stock
to 50,000,000 at a $.0001 par value. The accompanying financial statements give
retroactive effect to the above transaction.
On November 30, 1996, the Company acquired Software Associates, Inc. (Note
J[2]).
(NOTE B) - The Company:
DWE is in the business of facilitating electronic commerce transactions
between business entities, developing, marketing and supporting software
products and other services that enable business to engage in electronic
commerce utilizing the Internet and traditional Electronic Data Interchange
("EDI"). DWE offers electronic commerce solutions in EDI and Internet-based
transactions processing.
Megascore, Inc. is a full-service systems integrator specializing in
distribution, accounting and point-of- sale computer software consulting
services for suppliers and retailers.
Although the Company had working capital at September 30, 1996 and has
subsequently raised net proceeds of approximately $772,000 in issuance of stock
and notes (Notes J[1] and J[8]), a substantial portion of its resources may be
depleted before the Company markets and derives significant revenues from its
products and services. The Company is planning to raise additional equity
through a proposed public offering of stock (Note J[4]). There is no assurance
that the Company's products and services will be commercially successful.
30
DYNAMICWEB ENTERPRISES, INC.
(formerly Seahawk Capital Corporation)
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - Summary of Significant Accounting Policies:
[1] Revenue recognition:
Revenues are recognized when products are shipped, provided that no
significant vendor obligations remain and collection of the resulting receivable
is deemed probable by management. The Company provides customer support as an
accommodation to purchasers of its product and revenues are recognized when
services are provided. The Company expects to enter into contracts with
customers whereby revenues will be earned based upon a per transaction fee.
[2] Cash equivalents:
The Company considers all highly liquid investment instruments
purchased with a maturity of three months or less to be cash equivalents.
[3] Depreciation:
Property and equipment are recorded at cost. Depreciation is
provided on an accelerated method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is provided over the shorter of
the lease term or the estimated useful life of the asset.
[4] Patents and trademarks:
Costs to obtain patents and trademarks have been capitalized. The
Company has submitted numerous applications which are currently pending. These
costs are being amortized over five years.
[5] Research and development:
Research and development costs are charged to expense as incurred.
[6] Income taxes:
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). SFAS No. 109 measures deferred income taxes by applying enacted
statutory rates in effect at the balance sheet date to the differences between
the tax bases of assets and liabilities and their reported amounts in the
financial statements. The resulting asset was fully reserved since the
likelihood of realization of the benefit cannot be established.
[7] Loss per share of common stock:
Net loss per share of common stock is based on the weighted average
number of shares outstanding.
[8] 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
31
DYNAMICWEB ENTERPRISES, INC.
(formerly Seahawk Capital Corporation)
NOTES TO FINANCIAL STATEMENTS
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.
[9] Recently issued accounting pronouncements:
In 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of ("FASB 121"), and
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FASB 123"). FASB 121 requires, among other things, that entities
identify events or changes in circumstances which indicate that the carrying
amount of an asset may not be recoverable. FASB 123 encourages companies, among
other things, to establish a fair value based method of accounting for
stock-based compensation plans and requires disclosure thereof on a fair value
basis. The Company believes that adoption of FASB 121 and FASB 123 will not have
a material impact on its financial statements. The Company has elected to
continue to account for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," using intrinsic values with appropriate disclosures using the fair
value based method.
[10] Fair value of financial instruments:
The Company considers its financial instruments and obligations,
which are carried at cost, to approximate fair value due to the near-term due
dates.
(NOTE D) Property and Equipment:
Property and equipment are as follows at September 30, 1996:
Estimated
Cost Useful Life
-------- -----------
Office facility condominium . $156,600 20 years
Office equipment. . . . . . . 17,865 5 years
Computer equipment. . . . . . 80,372 5 years
Automobiles . . . . . . . . . 33,876 5 years
--------
288,713
Accumulated depreciation
and amortization . . . . . 90,224
--------
198,489
Land. . . . . . . . . . . . . 41,400
--------
$239,889
========
32
DYNAMICWEB ENTERPRISES, INC.
(formerly Seahawk Capital Corporation)
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - Long-Term Debt:
Long-term debt consists of the following at September 30, 1996:
*Mortgage payable - due in July 2015;
payable in varying monthly installments
at an interest rate at the lower of
prime plus 2% or 14.25% . . . . . . . . . . . $190,805
Auto loans - due through June 1999 payable in
monthly installments of $767 at interest
of 5.9% and 10.0% . . . . . . . . . . . . . . 19,290
--------
Total indebtedness . . . . . . . . . . 210,095
Less current maturities. . . . . . . . . . . . . 12,434
--------
Noncurrent portion . . . . . . . . . . $197,661
========
*Collateralized by an office facility condominium and land with a net book
value of approximately $188,000.
Maturities of long-term debt for the next five years are as follows:
September 30,
-------------
1997. . . . . . . . . . . . . . . $ 12,434
1998. . . . . . . . . . . . . . . 12,945
1999. . . . . . . . . . . . . . . 7,411
2000. . . . . . . . . . . . . . . 4,500
2001. . . . . . . . . . . . . . . 4,500
Thereafter. . . . . . . . . . . . 168,305
--------
T o t a l . . . . . . $210,095
========
(NOTE F) - Stockholders' Equity:
On March 26, 1996, the Company completed a stock offering under Regulation
S, whereby it sold 343,511 shares of its common stock for $500,000 less fees in
connection with such offering of $52,250 for net proceeds of $447,750.
(NOTE G) - Income Taxes:
[1] The Company has a federal and state net operating loss carryforward of
approximately $400,000 which expires in 2010. The tax benefits of these deferred
tax assets are fully reserved for since the likelihood of realization of the
benefit cannot be established.
33
DYNAMICWEB ENTERPRISES, INC.
(formerly Seahawk Capital Corporation)
NOTES TO FINANCIAL STATEMENTS
The Tax Reform Act of 1986 contains provisions which limits the net
operating loss carryforwards available for use in any given year should certain
events occur, including significant changes in ownership interests. If the
Company is successful in completing a proposed public offering as described in
Note J[4], the utilization of its net operating loss carryover may be limited.
[2] The tax effects of principal temporary differences and net operating
loss carryforwards are as follows as at September 30, 1996:
Asset:
Federal and state operating
loss carryforwards .............. $ 148,000
Accounts receivable ............. 13,000
Valuation allowance ............... (161,000)
Net deferred tax asset ............ $ - 0 -
=========
At September 30, 1995 there was no valuation allowance. The
differences between the statutory Federal income tax rate of 34% are as follows:
September 30,
---------------------
1996 1995
---- ----
Statutory rate (benefit) ......... (34.0)% (34.0)%
Valuation allowance .............. 34.0 34.0
Effective tax rate ............... 0 % 0 %
===== ======
(NOTE H) - Concentration of Credit Risks:
[1] Cash and cash equivalents:
The Company places its cash and cash equivalents at various
financial institutions. At times, such amounts might be in excess of the FDIC
insurance limit.
[2] Accounts receivable:
The Company routinely evaluates the credit worthiness of its
customers to limit its concentration of credit risk with respect to its trade
receivables.
[3] Significant customers:
The Company had one customer that accounted for 23% of net sales for
the year ended September 30, 1995 and two customers that accounted for 16% and
10% of net sales for the year ended September 30, 1996.
34
DYNAMICWEB ENTERPRISES, INC.
(formerly Seahawk Capital Corporation)
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Commitments:
Leases:
On October 1, 1996, the Company signed an operating lease for office space
providing for the following future annual rental payments:
Year Ending
September 30,
-------------
1997. . . . . . . . . . . . . $ 21,400
1998. . . . . . . . . . . . . 36,800
1999. . . . . . . . . . . . . 37,900
2000. . . . . . . . . . . . . 38,600
2001. . . . . . . . . . . . . 39,300
Thereafter. . . . . . . . . . 3,300
--------
T o t a l . . . . . $177,300
(NOTE J) - Subsequent Events:
[1] Private placement:
On November 21, 1996, pursuant to Regulation D, the Company sold
250,000 shares of its common stock for $250,000.
[2] Acquisition:
On November 30, 1996, the Company entered into a stock purchase
agreement with Software Associates, Inc. and its sole shareholder (the "SA
Agreement") whereby the Company acquired all the issued and outstanding common
stock of Software Associates, Inc. Software Associates, Inc. is an EDI service
bureau engaged in the business of helping companies realize the benefits of
expanding their data processing and electronic communications infrastructures
through the use of EDI. The Company exchanged 860,000 shares of its common stock
for all of the issued and outstanding shares of Software Associates, Inc. The
Company further agreed to issue up to 1,140,000 additional shares of its common
stock in the event that the average closing bid price of the Company's common
stock does not equal $3.375 per share for the five trading days immediately
prior to January 30, 1999. In connection with this transaction, the Company
incurred approximately $25,000 of professional fees.
The SA Agreement also requires that the Company issue options for
the purchase of 25,000 shares of its common stock to employees of Software
Associates, Inc.
In connection with the acquisition, the Company entered into a five
year employment contract with the sole shareholder/President of Software
Associates, Inc. The agreement provides for an annual salary of approximately
$136,000 and includes a discretionary bonus as determined by the Company's Board
of Directors.
35
DYNAMICWEB ENTERPRISES, INC.
(formerly Seahawk Capital Corporation)
NOTES TO FINANCIAL STATEMENTS
Software Associates, Inc., leases its office space from a
Partnership whose partner is the Executive Vice President of the Company. Annual
rental payments are approximately $38,000 and the lease expires on June 30,
2018. Software Associates, Inc. has guaranteed the debt of the condominium
office space which was approximately $249,000 as at November 30, 1996; the debt
matures in August 2019.
The assets acquired and liabilities assumed are as follows:
Current assets. . . . . . . . $ 95,000
Fixed assets. . . . . . . . . 6,000
Purchased research and
development . . . . . . . . 714,000
Customer list . . . . . . . . 100,000
Current liabilities . . . . . (26,000)
Other liabilities . . . . . . (4,000)
--------
$885,000
========
The purchased research and development was charged to operations
upon acquisition. The acquisition was accounted for as a purchase.
The condensed unaudited pro forma information of the Company and
Software Associates, Inc. for the year ended September 30, 1996 and September
30, 1995 are as follows as if the acquisition of Software Associates, Inc.
occurred on October 1, 1994. The pro forma information is not necessarily
indicative of the results that would have been reported had the acquisition
occurred on October 1, 1994, nor is it indicative of the Company's future
results.
September 30,
------------------------------
1996 1995
------------ -----------
(Unaudited)
Net sales ............ $ 1,158,000 $ 1,432,000
=========== ===========
Net (loss) ........... $ (570,000) $ (10,000)
=========== ===========
(Loss) per share ..... $ (.08) $ (.00)
=========== ===========
[3] In February and March 1997, the Company received a loan from the
President of $50,000. The Company paid back $40,000 to its President from the
net proceeds of the private placements as described in Notes J[1] and J[8].
[4] On February 1, 1997, the Company signed a letter of intent with an
underwriter with respect to a proposed public offering of the Company's
securities. The Company expects to incur significant additional costs in this
connection therewith. In the event that the offering is not successfully
completed, such costs will be charged to expense.
[5] On March 7, 1997 the Board of Directors, subject to stockholders'
approval, approved a reverse stock split for each share of common stock to be
converted into .2608491 of one share and authorized 5,000,000 shares
36
of preferred stock. Cash is to be issued to the stockholders for any fractional
shares. The accompanying financial statements do not give retroactive effect
thereto until stockholders' approval is obtained.
[6] On April 28, 1997, the Board of Directors, subject to stockholders'
approval, adopted a stock option plan for outside directors (the "Director
Plan") under which nonqualified stock options may be granted to its outside
directors to purchase up to 300,000 shares of the Company's common stock.
Directors will be granted an option to purchase 15,000 of the Company's common
stock at fair market value at the earlier of the public offering or September
30, 1997 and at each subsequent annual meeting of shareholders at which
directors are elected. Options may be exercised for ten years and one month
after the date of grant and may not be exercised during an eleven-month period
following the date of grant unless there is a change in control, as defined in
the Director Plan or the compensation committee waives the eleven-month
continuous service requirement.
[7] On March 7, 1997, the Board of Directors, subject to stockholders'
approval, adopted the Company's 1997 employee stock option plan (the "Plan"),
amended by the Board of Directors on April 29, 1997, under which incentive stock
option and nonqualified stock options may be granted to purchase up to 900,000
shares of the Company's common stock. Grants to any one employee shall not
exceed 250,000 options during any twelve-month period. Incentive stock options
are to be granted at a price not less than the fair market value, or 110% of
fair market value to an individual who owns more than ten percent of the voting
power of the outstanding stock. Nonqualified stock options are to be granted at
a price determined by the Company's compensation committee.
[8] Private placement:
On April 30, 1997, pursuant to Regulation D, the Company completed a
private placement whereby it sold 24 units for an aggregate amount of $600,000.
The placement agent is entitled to a fee and nonaccountable expense allowance
aggregating $78,000 or 13% of the private placement offering. Each unit consists
of a $25,000 promissory note bearing interest at 8% and 11,943 shares of the
Company's common stock. The notes are due at the earlier of the closing of the
proposed public offering as described in Note J[4] or when the Company obtains
an aggregate financing of $2,000,000 excluding expenses or March 31, 1999. The
11,943 shares of common stock in each unit will be subject to reduction by a
contemplated reverse stock split (Note J[5]) to not less than 3,115 shares. The
number of shares of common stock will increase or decrease in the event that the
offering price of the proposed public offering is not $6.00 per common share.
[9] Late filings and annual report:
The Company is required to file with the Securities and Exchange
Commission Form 10-KSB for September 30, 1996, Form 10-QSB for the quarter ended
December 31, 1996 and an amended Form 8-K for the acquisition of Megascore, Inc.
and Software Associates, Inc. (Notes A and J[2]). The Company has not
distributed its annual report to its shareholders. The Company expects to submit
these late filings and distribute its annual report as soon as possible.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On February 24, 1997, the Issuer retained the services of Richard Eisner &
Company, LLP as the Company's principal independent accountant and auditor
("Eisner"). Eisner's responsibilities include the audit of the Issuer's
financial statements for the two fiscal years ending September 30, 1996.
37
The circumstances of the retention of Eisner are discussed in the
Company's Form 8-K as filed with the Commission dated February 19, 1997, as
amended by the Amendment to Form 8-K dated March 12, 1997.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Directors and Executive Officers. The following table contains certain
information with respect to the nominees for the Board of Directors (which
includes all current directors) and the executive officers of the Company.
NAME AGE POSITION
Steve L. Vanechanos, Jr.(1) 43 Chairman of the Board and President
Steve Vanechanos, Sr.(1) 67 Director, Vice President, Treasurer
and Secretary
Kenneth R. Konikowski 50 Director and Executive Vice President
F. Patrick Ahearn, Jr.(2) 49 Director
Denis Clark 53 Nominee
Frank DiPalma(3) 51 Director
Robert Droste(2)(3) 43 Director
- - ------------------
(1) Steve Vanechanos, Sr. is the father of Steve L. Vanechanos, Jr. and
Michael Vanechanos who, as of March 26, 1997, beneficially owns
7.86% of the Company's outstanding common stock (the "Common
Stock"). See "Item 11. Security Ownership of Certain Beneficial
Owners and Management."
(2) Member of the Audit Committee of the Board of Directors. The Audit
Committee recommends an outside auditor for the year and reviews the
financial statements and progress of the Company. This Committee was
formed in 1997.
(3) Member of the Compensation Committee. The Compensation Committee
meets on an as-needed basis between meetings of the Board of
Directors to discuss compensation related matters. This Committee
was formed in 1997.
STEVE L. VANECHANOS, JR. became President and Chairman of the Board of
Directors of the Company on March 26, 1996. He has been President of DynamicWeb
Transaction Systems, Inc. ("DWTS"), a wholly-owned subsidiary of the Company,
since its incorporation in October 1995. He also was a co-founder of Megascore,
Inc. ("Megascore"), a wholly-owned subsidiary of the Company, in 1981 and has
served as its President since April 1985. He has a Bachelor of Science Degree in
Finance and Economics from Fairleigh Dickinson University, Rutherford Campus.
38
STEVE L. VANECHANOS, SR. became Vice President, Secretary, Treasurer and a
director of the Company on March 26, 1996. He was a co-founder of Megascore in
1981 and of DWTS in 1995. He has served as a Vice President of Megascore since
April 1985 and of DWTS since october 1995. He attended Newark College of
Engineering in Newark for two years. He continued his education with
certifications from PSI Programming Institute in New York City and with courses
in principles of accounting at ABA Institute, Hudson County Chapter.
KENNETH R. KONIKOWSKI became the Executive Vice President and a director
of the Company on December 1, 1996. Prior to that date, Mr. Konikowski was
President of Software Associates, Inc. ("Software Associates"), which he founded
in 1985. Software Associates is currently a wholly-owned subsidiary of the
Company. See "Item 12. Certain Relationships and Related Transactions --
Acquisition of Software Associates and Megascore."
F. PATRICK AHEARN, JR. became a director of the Company on March 26, 1996.
Mr. Ahearn has served as a director of Megascore since 1985 and of DWTS since
February 1996. Since 1993, Mr. Ahearn has served as the Chairman of the Board of
E.C.M. Group, Inc., White Plains, New York. From 1992 to 1995, Mr. Ahearn served
as Managing Director for Continental Bank and the President of 22 of its
subsidiaries. He is also a Colonel in the United States Marine Corps. Mr. Ahearn
has a Bachelor of Arts Degree from the College of Holy Cross.
DENIS CLARK has served as Vice President of Sterling Commerce, Inc. from
1993 to 1996 and was employed by IBM Corporation as a Director of Consulting
from 1991 to 1992 and as a Director of Software Marketing from 1989 to 1991.
FRANK T. DIPALMA became a director of the Company on March 26, 1996. Since
January 1997, Mr. DiPalma has been employed as Vice President of Operations and
Engineering for Energy Corporation of America, Mountaineer Gas Division. Prior
to that time, and during the past five years, he held various management
positions for Public Service Electric and Gas, a public utility located in
Newark, New Jersey. In 1995 and 1996, he was the owner of Palmer Associates, a
management consulting company. Mr. DiPalma graduated from New Jersey Institute
of Technology with a Bachelor of Science in Mechanical Engineering; Fairleigh
Dickinson University with a Masters in Business Administration; and the
University of Michigan's Executive Development Program.
ROBERT DROSTE became a director of the Company on March 26, 1996. Mr.
Droste has served as a director of Megascore since 1985 and of DWTS since
February 1996. During the past five years, Mr. Droste has been the Director of
Administration and Manager of Internal Audit for Russ Berrie & Co., Inc.,
Oakland, New Jersey. He has a Bachelor of Science Degree in Accounting from
Fairleigh Dickinson University, Rutherford, New Jersey.
Compliance With Section 16(a) of the Securities Exchange Act. Section
16(a) of the Securities Exchange Act of 1934 requires the Company's officers and
directors and persons who own more than ten percent of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than ten-percent shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file. The rules of the
SEC regarding the filing of such statements require that "late filings" of such
statement be disclosed in this Information Statement.
Based solely on review of the copies of such forms furnished to the
Company, the Company believes that, during the fiscal year ended September 30,
1996, its officers, directors, and greater than ten-percent beneficial owners
complied with applicable Section 16(a) filing requirements, except that (i)
Steve L. Vanechanos, Jr., Steve Vanechanos, Sr. and Frank DiPalma each
inadvertently failed to file on a timely
39
basis his Form 3; and (ii) F. Patrick Ahearn, Jr. and Robert Droste each
inadvertently failed to file his Form 3 on a timely basis and one Form 4. Each
of Messrs. Ahearn and Droste was required to file a Form 4 to report his
acquisition of 157 shares of Common Stock pursuant to the Company's acquisition
of Megascore, of which Messrs. Ahearn and Droste were shareholders.
ITEM 10. EXECUTIVE COMPENSATION.
General. There were no executive officers of the Company or any of its
subsidiaries whose salary and bonus exceeded $100,000 for the fiscal year ended
September 30, 1996. The following table sets forth the compensation paid to
Steve L. Vanechanos, Jr., the Company's President and Chief Executive Officer
from March 26, 1996 to the present. Jonathan B. Lassers served as the Company's
President and Chief Executive Officer from May 1995 until March 26, 1996.
SUMMARY COMPENSATION TABLE
Name and All Other
Principal Position Year Salary Compensation(1)
- - ------------------ ---- ------ --------------
Steve L. Vanechanos, Jr. 1996(2) $58,762(3) $10,580
President and Chief
Executive Officer
Jonathan B. Lassers 1996(4) (5) (5)
Former President and 1995 (6) (6)
Chief Executive Officer
- - -----------------
(1) Consists of (a) lease payments totaling $4,580 made by the Company for
automobiles used by Mr. Vanechanos, and (b) travel and entertainment
expenses of approximately $6,000 paid by the Company.
(2) Mr. Vanechanos commenced his employment with the Company on March 26,
1996.
(3) This amount includes salary paid by Megascore during the year ended
September 30, 1996. Megascore was acquired by the Company on September 30,
1996.
(4) Mr. Lassers terminated his employment with the Company on March 26, 1996.
(5) Management has been unable to ascertain the amount of compensation paid to
Mr. Lassers during the year ended September 30, 1996.
(6) Mr. Lassers commenced his employment with the Company in May 1995.
Management has been unable to ascertain the amount of compensation paid to
Mr. Lassers during the year ended December 31, 1995. According to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995,
Mr. Lassers' compensation was less than $100,000 for such year.
Stock Options. There were no executive officers of the Company or any of
its subsidiaries who received or exercised stock options, stock appreciation
rights or other stock awards from the Company during the fiscal year ended
September 30, 1996. As of September 30, 1996, except for the Company's 1992
Stock Option Plan, the Company did not have in place any stock option, stock
appreciation right, or similar compensation plan, nor were any options or stock
appreciation rights outstanding and
40
exercisable as of such date under the 1992 Stock Option Plan or otherwise. On
March 7, 1997, the Company terminated the 1992 Stock Option Plan. The Board of
Directors has adopted the 1997 Employee Stock Option Plan and the 1997 Stock
Option Plan for Outside Directors (collectively, the "1997 Plans"), each subject
to shareholder approval.
Employment Agreement. As of September 30, 1996, the Company had no
employment agreements with any of its executive officers. On December 1, 1996,
Kenneth R. Konikowski, Executive Vice President of the Company, entered into an
Employment Agreement with the Company (the "Employment Agreement"). The
Employment Agreement expires on November 30, 2001 and specifies: term; Mr.
Konikowski's position and duties; compensation; benefits; and termination
rights. The Employment Agreement also contains a covenant not to compete, a
proprietary right to inventions provision and confidentiality provisions, which
inure to the benefit of the Company. The Employment Agreement also contains
provisions allowing the Company to terminate Mr. Konikowski's employment for
"Cause," as defined therein.
Under the terms of his Employment Agreement, Mr. Konikowski serves as
Executive Vice President and a member of the Company's Board of Directors and is
entitled to an annual salary of $135,600. The Employment Agreement provides that
this amount may be increased based on annual performance reviews pursuant to the
Company's policies and practices. Mr. Konikowski is also eligible to be paid an
annual bonus based on the Company's to-be-established incentive bonus plan. Mr.
Konikowski also receives certain employee benefits: including $500,000 of life
insurance, disability and health insurance, vacation days, and an automobile. He
is also eligible to participate in the Company's 1997 Employee Stock Option
Plan.
The Employment Agreement provides that if Mr. Konikowski's employment is
terminated by the Company other than for "Cause," "Disability" or "Material
Breach," each as defined therein, or if he terminates his employment for "Good
Reason," as defined therein, Mr. Konikowski is entitled to, in a lump sum, an
amount equal to the commuted value of his base salary in effect or authorized at
the time of termination for the period remaining until November 30, 2001
(determined by discounting all payments at a rate equal to the bond equivalent
yield of the latest two-year Treasury Bill auction), to be paid in cash in the
month next following his termination of employment. The Company is also required
to maintain in full force and effect certain of Mr. Konikowski's employee
benefits.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 26, 1997, for (i) each person
who owns of record or is known by the Board of Directors to be the beneficial
owner of more than five percent (5%) of the Common Stock, (ii) each of the
nominees for election as a director at the Annual Meeting (which includes all
current directors), (iii) each person named in the Summary Compensation Table
set forth herein under "Item 10. Executive Compensation" and (iv) all current
directors and executive officers of the Company as a group, such person's name
and address, the number of shares of Common Stock beneficially owned by such
person, and the percentage of the outstanding Common Stock so owned. Unless
otherwise indicated in a footnote, each of the following persons holds sole
voting and investment power over the shares listed as beneficially owned.
Name and Address Amount and Nature
of of Beneficial Percent of
Beneficial Owner Ownership(1)(2) Class(3)
- - ---------------- ----------------- ----------
Steve L. Vanechanos, Jr. 1,892,554 24.68%
29 Clarken Drive
41
West Orange, NJ 07052
Steve L. Vanechanos, Sr. 1,872,260 24.42%
96 Union Avenue
Rutherford, NJ 07070
Kenneth R. Konikowski(4) 860,000 11.22%
36 Pinebrook Road
Towaco, NJ 07082
Michael Vanechanos 602,577 7.86%
129 S. Telegraph Hill Road
Holmdel, NJ 07703
Sierra Growth & Opportunity, Inc. 460,000 5.99%
551 Fifth Avenue, Suite 605
New York, New York 10017
F. Patrick Ahearn, Jr. 13,775 0.18%
107 Maple Street
Rutherford, NJ 07070
Frank T. DiPalma 43,356(5) 0.57%
179 Claremont Road
Ridgewood, NJ 07450
Robert Droste 13,775 0.18%
24 Summit Road
Clifton, NJ 07012
Denis Clark (6) 0 0.00%
8417 Greenside Drive
Dublin, Ohio 43017
Jonathan B. Lassers (7) 165,000 2.15%
275 Uxbridge
Cherry Hill, New Jersey 08034
All directors and executive 4,695,720 61.25%
officers as a group (6 in
number)(8)
- - --------------------
(1) The securities "beneficially owned" by an individual are determined
in accordance with the definitions of "beneficial ownership" set
forth in the General Rules and Regulations of the Securities and
Exchange Commission ("SEC") and may include securities owned by or
for the individual's spouse and minor children and any other
relative who has the same home, as well as securities to which the
individual has or shares voting or investment power or has the right
to acquire beneficial ownership within sixty (60) days after March
26, 1997. Beneficial ownership may be disclaimed as to certain of
the securities.
42
(2) Information furnished by the directors and executive officers of the
Company.
(3) Does not reflect 286,632 shares of Common Stock which the Company
sold (but has not yet issued) in April 1997, as part of certain
units (the "Units"), in a private placement pursuant to Section 4(2)
and Regulation D under the Securities Act of 1933, as amended (the
"Private Placement"). The number of such shares to be issued is
subject to adjustment based on (i) a proposed 0.2608491-for-one
reverse stock split and (ii) the provisions of the Units adjusting
the number of shares to equal the quotient of (a) 18,750 divided by
(b) the price at which shares of Common Stock are sold in the
Company's proposed public offering. The Company anticipates that it
will issue such shares on the earlier of (i) concurrently with the
issuance of shares in such proposed public offering, or (ii) October
31, 1997.
(4) Does not include additional shares of Common Stock that may be
issuable in connection with the prior acquisition of Software
Associates. See "Item 12. Certain Relationships and Related
Transactions -- Acquisition of Software Associates and Megascore."
(5) All of such shares are held jointly by Mr. DiPalma and his spouse.
(6) Mr. Clark is not a director of the Company. He has been nominated by
the Board of Directors for election as a director at the Company's
1997 Annual Meeting of Shareholders to fill a current vacancy
thereon.
(7) Mr. Lassers served as President and Chief Executive Officer and a
director of the Company from May 1995 until March 26, 1996. He has
not been affiliated with the Company since such date.
(8) Does not include shares owned by Jonathan B. Lassers. See Footnote
(7) above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Acquisition of Software Associates and Megascore. On November 30, 1996,
pursuant to the Stock Purchase Agreement dated such date among the Company,
Software Associates and Kenneth R. Konikowski, the sole shareholder of Software
Associates (the "SA Agreement"), the Company exchanged 860,000 shares of the
Common Stock for all of the issued and outstanding capital stock of Software
Associates. Software Associates is presently a wholly-owned subsidiary of the
Company. It is engaged in the business of helping companies realize the benefits
of expanding their data processing and electronic communications infrastructures
through the use of Electronic Data Interchange ("EDI").
Pursuant to the SA Agreement, Kenneth R. Konikowski was named Executive
Vice President and a director of the Company, and the Employment Agreement was
executed. The Company further agreed to issue to Mr. Konikowski up to 1,140,000
additional shares of its Common Stock in the event the average closing bid price
of the Common Stock does not equal $3.375 per share for the five trading days
immediately prior to January 30, 1999. If any such additional shares are issued,
the ownership interest of the other holders of Common Stock will be diluted in
favor of Mr. Konikowski. On a pro forma basis assuming all of such shares were
issued to Mr. Konikowski on April 14, 1997, Mr. Konikowski would own 22.7% of
the outstanding Common Stock, and Steve L. Vanechanos, Jr. and Steve Vanechanos,
Sr. would own 21.5% and 21.3% of the outstanding Common Stock, respectively.
Pursuant to a letter agreement dated April 17, 1997 between the Company
and Mr. Konikowski, the 1,140,000 shares and $3.375 per share price are subject
to adjustment pursuant to any stock split, dividend, reclassification or
combination (such as the Company's proposed 0.2608491-for-one reverse
43
stock split pursuant to which such amount and price will be adjusted to 297,368
shares and $12.939 per share, respectively).
On September 30, 1996, pursuant to the Stock Purchase Agreement dated such
date among the Company, Megascore and its shareholders, the Company acquired all
of the issued and outstanding capital stock of Megascore in exchange for 50,000
shares of Common Stock. Prior to such acquisition, Steve L. Vanechanos, Jr. and
Steve Vanechanos, Sr. were the President and Vice President, Treasurer and
Secretary, respectively, and collectively owned of record 76.4% of the
outstanding capital stock, of Megascore. Megascore is presently a wholly-owned
subsidiary of the Company. It is a full-service systems integrator specializing
in distribution, accounting and point-of-sale computer software consulting
services for suppliers and retailers.
Significant Shareholder. As of March 26, 1997, Michael Vanechanos is the
beneficial owner of 602,577 shares of Common Stock (7.86%). He purchased 327,577
of those shares from the Company for $100,000 in January 1996, and received
275,000 of those shares as a finder's fee from Berkshire Financial Corp. in
connection with the Company's acquisition of DWTS. Mr. Vanechanos is presently
employed as a securities trader at H.J. Meyers & Co., Inc. H.J. Meyers & Co.,
Inc. served as placement agent for the Private Placement and, in consideration
therefor, received a fee of $60,000. Michael Vanechanos is the brother of Steve
L. Vanechanos, Jr., the Company's Chairman of the Board, President and Chief
Executive Officer, and is the son of Steve Vanechanos, Sr., the Company's Vice
President, Treasurer, Secretary and a director. See "Item 11. Security Ownership
of Certain Beneficial Owners and Management."
Office Lease. The Company leases a portion of its office facility from the
Mark Group, a partnership in which Kenneth R. Konikowski, the Executive Vice
President of the Company and a director, is a partner. The annual rent under
such lease is $37,500, subject to annual increases of up to 5%.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits.
The Exhibits required in response to this item are as follows:
Exhibit No. Description
3.1.1 Certificate of Incorporation of the Registrant as filed with the
Secretary of State of New Jersey on August 7, 1979 (incorporated by
reference to Exhibit 3.1.1 filed with Registrant's Report on Form
10-K for the Year ended December 31, 1991).
3.1.2 Certificate of Amendment to Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
May 19, 1980 (incorporated by reference to Exhibit 3.1.2 filed with
Registrant's Report on Form 10-K for the Year ended December 31,
1991).
3.1.3 Certificate of Amendment to Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
April 1981 (incorporated by reference to Exhibit 3.1.3 filed with
Registrant's Report on Form 10-K for the Year ended December 31,
1991).
44
3.1.4 Certificate of Amendment of Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
April 24, 1986 (incorporated by reference to Exhibit 3.1.4 filed
with Registrant's Year ended December 31, 1991).
3.1.5 Certificate of Amendment to Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
July 15, 1988 (incorporated by reference to Exhibit 3.1.5 filed with
Registrant's Report on Form 10-K for the Year ended December 31,
1991).
3.1.6 Certificate of Amendment to Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
November 28, 1989 (incorporated by reference to Exhibit 3.1.6 filed
with Registrant's Report on Form 10-K for the Year ended December
31, 1991).
3.1.7 Certificate of Amendment to the Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
August 15, 1994 (incorporated by reference to Exhibit 3.1.7 filed
with the Registrant's Report on Form 10-K for the year ended
December 31, 1994).
3.1.8 Certificate of Amendment to Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
May 14, 1996, changing the name of the Company to DynamicWeb
Enterprises, Inc. (incorporated by reference to Exhibit 3.2.3 filed
with Registrant's Form 10-KSB for December 31, 1995).
3.2.1 Bylaws of the Registrant adopted August 7, 1979 (incorporated by
reference to Exhibit 3.2.1 filed with Registrant's Report on Form
10-K for the Year ended December 31, 1991).
3.2.2 Amendments adopted March 8, 1982 to Bylaws of the Registrant
(incorporated by reference to Exhibit 3.2.2 filed with Registrant's
Report on Form 10-K for the Year ended December 31, 1991).
3.2.3 Amended and Restated Bylaws of the Registrant adopted March 7, 1997.
10.1 Release and Severance Agreement dated February 12, 1993 between
Seahawk Capital Corporation and Robert S. Friedenberg (incorporated
by reference to Exhibit 10.2 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1992).
10.2 Agreement dated February 24, 1995 between the Registrant and
Jonathan B. Lassers as to the purchase of common stock (incorporated
by reference to Exhibit 10.1 to Registrant's Current Report on Form
8-K dated as of May 8, 1995).
10.3 Amendment Agreement dated May 1, 1995 between the Registrant and
Jonathan B. Lassers as to the purchase of common stock and common
stock purchase warrants (incorporated by reference to Exhibit 10.2
to Registrant's Current Report on Form 8-K dated as of May 8, 1995).
10.4 Agreement dated February 29, 1996 between the Registrant and
Jonathan B. Lassers as to the exchange of common stock for his
common stock purchase warrants.
45
10.5 Stock Exchange Agreement dated as of December 31, 1994 among the
Registrant, John C. Fitton and Seahawk Overseas Exploration
Corporation (incorporated by reference to Exhibit 10.4 to
Registrant's Current Report on Form 8-K dated as of May 8, 1995).
10.6 Stock Purchase Agreement dated March 5, 1996 among the Registrant,
DynamicWeb Transaction Systems, Inc. ("DWTS") and the shareholders
of DWTS (incorporated by reference to Exhibit 10.14 to Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 1995).
10.7 Amendment to Stock Purchase Agreement dated May 14, 1996 between the
Registrant and DWTS (incorporated by reference to Exhibit 10.14(A)
to Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 1995).
10.8 Amendment to Stock Purchase Agreement dated June 13, 1996 between
the Registrant and DWTS (incorporated by reference to Exhibit
10.14(B) to Registrant's Form 10-QSB for the period ended March 31,
1996).
10.9 Stock Purchase Agreement dated September 30, 1996 among the
Registrant, Megascore, Inc. and the shareholders of Megascore, Inc.
(incorporated by reference to Exhibit 1 to the Registrant's Current
Report on Form 8-K dated November 30, 1996).
10.10 Stock Purchase Agreement dated November 30, 1996 among the
Registrant, Software Associates, Inc. and Kenneth R. Konikowski
(incorporated by reference to Exhibit 2 to the Registrant's Current
Report on Form 8-K dated November 30, 1996).
10.11 Amendment to Stock Purchase Agreement dated April 7, 1997 between
the Registrant and Kenneth R. Konikowski.
10.12 Lock-Up Agreement dated November 30, 1996 among the Registrant,
Steve L. Vanechanos, Jr. and Kenneth R. Konikowski.
10.13 Employment Agreement dated December 1, 1996 between the Registrant
and Kenneth R. Konikowski.
10.14 DynamicWeb Enterprises, Inc. 1997 Employee Stock Option Plan
(incorporated by reference to Annex B to the Registrant's
Information Statement filed May 15, 1997, pursuant to Section 14(c)
of the Securities Exchange Act of 1934).
10.15 DynamicWeb Enterprises, Inc. 1997 Stock Option Plan for Outside
Directors (incorporated by reference to Annex C to the Registrant's
Information Statement filed May 15, 1997, pursuant to Section 14(c)
of the Securities Exchange Act of 1934).
10.16 Lease Agreement dated November 1, 1996 between Beauty and Barber
Institute, Inc. and DynamicWeb Transaction Systems, Inc.
10.17 Lease Agreement dated July 1, 1994 between Software Associates, Inc.
and The Mask Group.
46
16.1 Letter on change in certifying accountant (R. Andrew Gately & Co.)
(incorporated by reference to Exhibit 16.1 to Registrant's Current
Report on Form 8-K dated February 19, 1997 (to be filed by
amendment)).
16.2 Letter on change in certifying accountant (Allen G. Roth, P.A.)
(incorporated by reference to Exhibit 16.2 to the Registrant's
Current Report on Form 8-K dated February 19, 1997, as amended by
Amendment dated March 12, 1997).
21.1 Subsidiaries of the Registrant.
27.0 Financial Data Schedule.
(b) Reports on Form 8-K.
The Registrant did not file any reports on Form 8-K for the quarter ended
September 30, 1996.
47
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
May 15, 1997 DYNAMICWEB ENTERPRISES, INC.
By /s/ Steve L. Vanechanos, Jr.
-------------------------------
Steve L. Vanechanos, Jr.,
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
/s/ Steve L. Vanechanos, Jr. President and Chief May 15, 1997
- - ----------------------------
Executive Officer, Director
/s/ Steve L. Vanechanos, Sr. Treasurer, Chief Financial May 15, 1997
- - ----------------------------
Officer, and Chief Accounting
Officer, Director
/s/ Frank T. DiPalma Director May 15, 1997
- - ----------------------------
/s/ F. Patrick Ahearn Director May 15, 1997
- - ----------------------------
/s/ Robert Droste Director May 15, 1997
- - ----------------------------
/s/ Kenneth R. Konikowski Director May 15, 1997
- - -------------------------
48