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, 1997, 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: (973) 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 X No .
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, 1997: $637,177.
As of January 9, 1998, the aggregate market value of the Common Stock (based
upon the average sales price on such date) of the Registrant held by
nonaffiliates was $8,520,678.
Number of Shares of Common Stock Outstanding at January 9, 1998: 1,420,113.
Transitional Small Business Disclosure Format:
Yes ___ No X
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND OF THE COMPANY
The Company is a New Jersey corporation. It currently operates through
three separate wholly-owned 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"). Present management joined the Company on March 26, 1996, when the
Company acquired all of the outstanding stock of DWTS and began, through DWTS,
to engage in the computer and electronic commerce business.
The Company was incorporated in 1979 under the name Seahawk Oil
International, Inc. Based upon Company records available to present management
of the Company, it appears that the Company initially engaged, or attempted to
engage, in the oil exploration business. In November, 1989 the Company changed
its name to Seahawk Capital Corporation. According to the Company's public
filings with the Commission, during the period from approximately 1992 through
1994, the Company engaged in two activities: First, the Company, through a
subsidiary named Eurohawk Corporation, owned an interest in a business that was
primarily engaged in production and marketing of frozen potato products through
a processing facility located in Scotland. Second, the Company owned
approximately 73% of the stock of Seahawk Overseas Exploration Corporation. The
Company disposed of its stock in Seahawk Overseas Exploration Corporation on
December 31, 1994, and disposed of its stock in Eurohawk Corporation in February
of 1996. Upon the disposition of the Eurohawk Corporation stock in February of
1996, the Company had no business operations. Then, on March 26, 1996, the
Company acquired DWTS.
Because in March of 1996 the Company had no operations but was a
publicly-traded reporting company, Messrs. Vanechanos, who then controlled DWTS,
concluded it would be advantageous for DWTS to be acquired by the Company.
Although structured legally as an acquisition of DWTS by the Company, after the
acquisition the former DWTS shareholders owned approximately 80% of the
Company's Common Stock, the management of DWTS assumed exclusive control of the
Company's Board of Directors and executive offices, and the sole business of the
Company became that of DWTS.
Later in 1996, the new management of the Company decided it would be
advantageous to combine with Megascore. Megascore had an established business in
the accounting software field. Megascore, like DWTS, had been founded by Steve
Vanechanos, Sr. and Steven L. Vanechanos, Jr. and was controlled by them. It was
believed that the Megascore business would provide a foundation on which to
attempt to build the EC software business that now is the Company's primary
emphasis. Accordingly, in November 1996 the Company acquired all of the
outstanding stock of Megascore in exchange for the issuance of additional shares
of the Company's Common Stock to Megascore's shareholders.
At that same time, the Company became acquainted with the owner of Software
Associates, Kenneth Konikowski. Software Associates was actively conducting an
electronic commerce service bureau. Management believed that the business of
Software Associates would be a natural complement to the software product --
NetCat -- that had been developed by DWTS. Accordingly, in November 1996 the
Company acquired all of the outstanding stock of Software Associates in exchange
for the issuance of additional shares of the Company's Common Stock to Kenneth
Konikowski. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Acquisition
of Software Associates and Megascore" for additional information regarding the
terms of those acquisitions.
The description of the Company's business contained in this Report relates
exclusively to the electronic commerce software and service business conducted
through DWTS, Software Associates, and Megascore. Further, the financial
information contained in this Report represents the combined operations of DWTS
and Megascore for all periods presented and those of Software Associates (which
was acquired by the Company on November 30, 1996) from December 1, 1996. The
basis for such presentation is discussed in Note A to the Company's financial
statements.
1
INTRODUCTION
The Company is engaged in the business of developing, marketing and
supporting year 2000-compliant software products and services that enable
businesses to engage in electronic commerce utilizing the Internet and
traditional Electronic Data Interchange ("EDI") technologies.
Electronic commerce ("EC") involves the automation of business transactions
using telecommunications and computers to exchange and process commercial
information and transactional documents. EDI, a form of EC, is the
application-to-application transmission of business documents such as purchase
orders and invoices using industry-standard formats. Businesses utilizing
electronic commerce have found EDI to be a vital component of their enterprises.
EDI differs 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. The Internet is a worldwide communications system that allows users
to transmit and receive messages and information over telephone and other
communications lines using terminals and computers.
Electronic commerce has traditionally involved the use of a third-party or
private value-added computer network ("VAN") to perform EDI, e-mail, and
electronic funds transfers and to provide services related to electronic forms,
bulletin board and electronic catalogues. Users of private or third-party VANs
may also have access through the VAN to directories or on-line information
services. 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 major operators of VANs include Harbinger Corporation, GEIS,
Sterling Commerce, IBM/Advantis, MCI, AT&T and Kleinschmidt. The Company's
products and services work with all major VAN 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 costs. 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 is to focus upon 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 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 ("EDI
outsourcing").
- 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 and exchange information
over the Internet to the general public.
The Company has four principal software and service packages for the
markets and customers described above:
ECBRIDGENET SERVICE(SM) -- ECbridgeNET is the Company's electronic commerce
service bureau. ECbridgeNET is a service provided by the Company that
allows for the transfer of information between trading partners. The
service includes EDI mapping and the translation and routing of business
documents between third party EDI (VAN) networks, the Internet and the
private computer networks maintained by 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.
2
EDIXCHANGE PROGRAM(SM) -- The Company's EDIxchange Program is a combination
of ECbridgeNET service and NetCat(TM) software. NetCat 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. 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, ECbridgeNET.
This product allows businesses which do not have in-house EDI capability to
communicate electronically with 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. The ShipTrac
software receives an electronic purchase order into a database, and the
shipper then can print bar-coded shipping compliance labels. ShipTrac
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.
ECINTEGRATOR(TM) -- The Company has developed application interface modules
for two third party mid-range accounting software systems, RealWorld and
Synchronics. Designed for businesses using those systems, EC Integrator
allows a business to import and export business documents electronically
from those software applications. Generally, the Company sells this product
through distributors of Real World and Synchronics software.
All of the foregoing products and services currently have somewhat limited
applications and are continuing to be developed by the Company, although there
can be no assurance that such development will be successful. See "Product
Development."
OVERVIEW OF ELECTRONIC COMMERCE AND ELECTRONIC DATA INTERCHANGE
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 is occurring, 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 transmitting
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 by requiring that
information be manually entered only once.
- To improve customer support and service levels by reducing data entry
errors by requiring that information be manually entered only once.
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 acting as hub companies with their trading
partners, requesting or requiring that they transmit business documents using
EDI.
3
Typical EDI Transactions. 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. VANs receive documents for subsequent delivery to the
intended trading partner (the "receiving partner"), 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 need the same
software applications or hardware.
EDI Industry Standards. EDI has been further promoted through the adoption
of EDI standards within various industries and trading communities. 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 various proprietary formats agreed to by
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. 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.
INTERNET STRATEGY
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 continued and
expanded acceptance of the Internet as 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. See "RISK FACTORS -- Risks
Associated with Encryption Technology."
4
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, modifications to those businesses'
computer systems, dedicated proprietary VANs, and resources required to maintain
EDI. The industry, and more importantly, EDI-enabled suppliers and retailers,
have continued to look for solutions to lower existing EDI-related costs and 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 on which the Company intends
to focus 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 software 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 NetCat, 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, by expanding
the number of "spoke" companies. This can be accomplished primarily by reaching
a Hub company's smaller suppliers 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-enabled 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. That outsourcing is one of the services
historically provided by Software Associates and which the Company intends to
market. This market includes presently EDI-enabled businesses, as well as
businesses that do not presently conduct electronic commerce. 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 is marketed
to EDI-capable suppliers, which become mandated by their customers to use
bar-coded shipping labels and to send EDI standard documents such as advance
shipping 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 RealWorld or the Synchronics accounting systems
software products, but are not EDI capable. The Company will target those
businesses to use the Company's existing products to begin electronic commerce.
5
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.
As of the date of this Report, the Company's EDIxchange customers include
Southern New England Telecommunications Corporation, Linens N' Things
(EDI-enabled purchasers), and Great American Knitting Mills, makers of Goldtoe
socks, and ICXpress (both EDI-enabled sellers). Customers using the Company's
ECbridgeNET Service include Church & Dwight, manufacturers of Arm & Hammer
baking soda, Royal Dalton, makers of fine china, and Kings Supermarket, a
supermarket chain in the Northeast United States.
During the fiscal year ended September 30, 1997, one customer accounted for
approximately 18% of the Company's sales. The Company provided systems
integration services to that customer, Unique Music, a retailer of recorded
music. If the Company were to lose that customer, it would not be expected to
have a material adverse effect on the Company, because the Company's business
plan focuses on its EDI business rather than on the general computer consulting
business.
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 whose trading partners lack EDI capability. Additionally, the
Company will focus its marketing efforts for EDI outsourcing on EDI-capable
suppliers, which the Company believes often do not have sufficient resources in
their management information system ("MIS")/EDI group to respond to customers'
requests on a sufficiently timely basis.
Certain of the Company's marketing strategies are discussed below.
IDENTIFY KEY BUSINESS PARTNERS -- The Company 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.
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 -- The Company plans to
expand the number of sales people it employs, by adding up to six additional
sales people through the end of fiscal 1998, and possibly more thereafter.
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 warrant
participation. The Company has joined 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.
6
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 the use of
a VAN. The Company is working on modifications to its NetCat software and the
EDIxchange System, which would allow these products to interface with the
Templar product from Premenos Technology Corp. and permit 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 capable of creating a wider variety of
presentation graphics, and on increasing the efficiency of NetCat's order
processing.
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
which would allow suppliers to 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 ECIntegrator.
Presently, 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 additional accounting
systems. The new product would be Windows-based and would function with the
Company's EDI service bureau ECbridgeNET.
The Company's final major initiative at present involves an upgrade of the
Company's ECbridgeNET communications network. Presently, the Company administers
its own communications network relating to ECbridgeNET, 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.
The Company has budgeted $475,000 to complete the above five product
development initiatives, to be funded from the proceeds of this Offering. Each
of the foregoing product development initiatives is subject to risk. The Company
cannot predict when any of them will 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, services, or product enhancements discussed, or that
they will find market acceptance if developed. The Company's cost estimates to
complete the above product development initiatives are subject to the risks and
uncertainties of complex technical development projects.
COMPETITION
The electronic commerce and EDI network services and computer software
markets are highly competitive. The principal competitors in EDI and
specifically in the delivery of EDI over the Internet are, at present, Harbinger
Corporation, Sterling Commerce, GEIS, Netscape, Open Market, Premenos, Icat,
7
Interworld Technology Ventures, Elcom International, Broadvision, Connect, IBM,
Microsoft, EDS, and MCI, each of which has announced plans to design and develop
software products and to provide services that facilitate electronic commerce
over the Internet.
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
CommerceNet, a consortium 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 the Company
expects them to enhance their services in the future to include certain aspects
of electronic commerce.
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 to exchange useful business documents.
The application layer is distinguished from the "core" or "infrastructure"
layer, which addresses the 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.
Further, the Company intends to market products that require the EDI
trading partners to have only a standard Web browser with standard enhancements
or "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.
The Company hopes 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
facilitation. When combined with the Company's service bureau, the Company can
offer customers a complete, turnkey electronic commerce solution that is
compatible with their existing EDI system.
8
The Company may, in order to acquire new technology, additional products,
market share or other business opportunity, enter into strategic joint ventures
or mergers or make strategic acquisitions. Such transactions may be funded by
using the proceeds of this Offering, issuing stock of the Company, incurring
debt, or any combination of the foregoing. The Company is not presently
negotiating any such transactions, nor does it have any commitments to do so.
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. The Company has filed an
application for a patent covering its NetCat software, which is presently
pending before the United States Patent and Trademark Office ("PTO"). The
Company also has filed federal trademark registration applications for its
DynamicWeb, NetCat, EDIxchange and ECbridgeNet trademarks. Those trademark
registration applications are presently pending before the PTO.
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, 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.
The Company currently has in place confidentiality and non-competition
agreements with certain of its employees. The Company has adopted a policy of
requiring that all future employees sign appropriate confidentiality agreements
and, where appropriate, non-competition agreements.
The Company currently licenses proprietary data encryption and
authentication software of RSA Data Security ("RSA"). The RSA software is
incorporated in certain other software licensed to the Company from Community
Connexion related to the Web server utilized by the Company. The RSA software 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 Cybercash software, which is credit card
verification software, on a non-exclusive basis.
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
9
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.
GOVERNMENTAL REGULATIONS
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; as could potential
governmental actions outside of the United States. Management believes that the
Company is in material compliance with all applicable regulations.
EMPLOYEES
As of December 22, 1997, the Company had 24 employees. Approximately seven
are technical personnel engaged in maintaining or developing the Company's
products or performing related services, approximately five are marketing and
sales personnel, approximately six are engaged in customer support and
operations, and approximately six are involved in administration and finance.
None of the Company's employees are represented by a union.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of December 30,
1997, are as follows:
NAME AGE POSITION
Steven L. Vanechanos, Jr.(1) 43 Chairman of the Board,
Chief Executive Officer
James D. Conners 58 President and Chief
Operating 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.
STEVEN L. VANECHANOS, JR. became President and Chairman of the Board of
Directors of the Company on March 26, 1996. On August 26, 1997, he assumed the
office of Chief Executive Officer and Mr. Conners became the President. Mr.
Vanechanos 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, New Jersey Campus. In 1981, he
received a Certificate in Computer Programming and in 1982, he received a
Certificate in Data Processing from The Institute for the Certification of
Computer Professionals.
JAMES D. CONNERS became President and Chief Operating Officer of the
Company on August 26, 1997. Prior to joining the Company, Mr. Conners served as
the Vice President of Strategic Planning of Sterling Commerce in 1996 and the
Vice President of its Internet Business Unit in 1997. Prior to joining Sterling
Commerce, Mr. Conners spent 15 years at General Electric Information Services
(GEIS) in various sales and marketing positions, most recently as the General
Manager in charge of the Ameritech Alliance. Mr. Conners graduated from the
University of Detroit with a BS degree in Mathematics with a minor in Physics.
STEVE 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, which he founded in 1985. Software Associates
is currently a wholly-owned subsidiary of the Company. See "CERTAIN
TRANSACTIONS."
LEGAL PROCEEDINGS
The Company is not a party to any material pending litigation.
10
RECENT DEVELOPMENTS
Interim Financings
On April 30, 1997, the Company completed a $600,000 private placement in
which H.J. Meyers & Co., Inc., the Representative, acted as the Company's
placement agent on a "best efforts" basis (the "April 1997 Financing"). That
private placement involved the sale of 24 units, each consisting of a
subordinated unsecured 8% promissory note of the Company having a principal
amount of $25,000 and 3,115 shares of Common Stock. Also, on August 27, 1997,
the Company completed a $500,000 private placement in which H.J. Meyers & Co.,
Inc. acted as placement agent on a "best efforts" basis (the "August 1997
Financing"). The August 1997 Financing involved the sale of 20 units, each
consisting of a subordinated unsecured 8% promissory note of the Company with a
principal amount of $25,000 and 3,333 shares of Common Stock.
Contribution Of Stock By Certain Shareholders
On December 24, 1997, certain of the Company's existing shareholders, who
in the aggregate held approximately 79% of the issued and outstanding Common
Stock of the Company, contributed 40% of their Common Stock to the capital of
the Company in exchange for Warrants to purchase an aggregate of 125,000 shares
of Common Stock (the "Contribution of Stock"). The total number of shares
contributed will be 654,597 shares, representing approximately 32% of the issued
and outstanding Common Stock at the time of contribution. The effect of the
Contribution of Stock transaction was to reduce the outstanding number of shares
of Common Stock from 2,074,710 to 1,420,113.
Proposed Public Offering ("The Offering")
The Company intends to raise additional equity through a proposed public
offering of stock. On February 1, 1997, the company signed a letter of intent
with an underwriter with respect to such contemplated public offering. The
Company expects to sell 1.2 million shares of common stock at $6.00 per share.
Such offering is expected to be completed within 30 days of the filing of this
Report.
Reverse Stock Split
At the Company's Annual Meeting held on June 12, 1997, the Company's
shareholders approved an Amendment and Restatement of the Company's Certificate
of Incorporation (the "Amendment and Restatement") which, among other things,
effected a 0.2608491-for-one reverse stock split of the Company's Common Stock
(the "Reverse Stock Split"). The Amendment and Restatement became effective on
January 9, 1998. Pursuant to the Reverse Stock Split, each share of Common Stock
outstanding on January 9, 1998 was converted into 0.2608491 of one share, except
that no fractional shares were issued and shareholders who would otherwise
receive a fractional share as a result of the Reverse Stock Split were entitled
to receive cash in lieu thereof. Unless otherwise noted, all references to the
Company's Common Stock contained in this Report give effect to the Reverse Stock
Split.
The effect of the Reverse Stock Split on the aggregate number of shares of
the Common Stock as of the effective date of the reverse split is set forth in
the table below. The numbers below give effect to the Contribution of Stock.
PRIOR TO AFTER
REVERSE STOCK SPLIT REVERSE STOCK SPLIT
------------------- -------------------
Number of Shares of Common Stock:
Authorized............................................ 50,000,000 50,000,000
Issued and Outstanding, Net of Treasury Stock......... 5,444,194 1,420,113
Available for issuance................................ 44,555,806 48,579,887
Par value per share................................... $0.0001 $0.0001
11
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.
Continuous Net Losses; Auditors' Report Going Concern Considerations. The
Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company entered its present business
only in March of 1996, when it acquired DWTS. The Company has incurred
continuous and substantial net losses. 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 or acquire rights
to supporting software from third parties; 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. The auditors' opinion on the
Company's financial statements as of September 30, 1997, a copy of which is
attached to this Report, calls attention to substantial doubts as to the ability
of the Company to continue as a going concern as of the date of those financial
statements. As of September 30, 1997, the Company had an accumulated deficit of
$3,577,989.
Anticipated Operating 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 hires a substantial number of additional employees and
makes other significant expenditures to further develop its technology, increase
its marketing activities, create and expand the distribution channels for its
products and services, and broaden its customer support capabilities.
Accordingly, the Company expects to incur losses for the foreseeable future. No
assurance can be given that the Company's products and 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 products and services. No assurance can be given that the Company will ever
be able to achieve or sustain operating profitability.
Early Stage of Market Development; Unproven Acceptance of the Company's
Products and Services. The Company's products and 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
computer 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 products and 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 and services over existing products and services. There can be no
assurance that the Company will be able to market its products and services
successfully or that its current or future products and services will be
accepted in the marketplace. As a result of the Company's recent introduction of
its products and services into the market and their limited use to date, there
can be no assurance that the Company's products and services will achieve market
acceptance or will produce substantial revenues.
12
Dependence on the Internet and on Internet Infrastructure Development. The
use of the Company's products and 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, problems with reliability, lack of acceptable levels
of security, or lack of timely development of complementary products, such as
high speed modems. The Internet suffers from many problems related to
performance, reliability, congestion and delay. Customers may experience
frustration waiting for transactions to be processed. Consequently, they may
forego using the Company's products and services.
Further, there can be no assurance that the Internet will retain its
current pricing structure, which is generally flat-rate, independent of volume,
and independent of the time of day. Federal regulation of access fees to the
Internet may cause an increase in costs to the businesses utilizing the
Company's products and services.
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.
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 and services are compatible with existing and apparently
emerging security and verification products, 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 and services
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 if the Company's products and 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."
Ability to Respond to Rapid Change. The Company's future success will
depend significantly on its ability to enhance its current products and services
and develop or acquire and market new products and services 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 or service
enhancements or new products or services to address changing technologies and
customer requirements adequately, that it will introduce such products or
services on a timely basis, if at all, or that any such product or service
enhancements will be successful in the marketplace. The Company's delay or
failure to develop or acquire technological improvements or to adapt its
products or services to technological change would have a material adverse
effect on the Company's business, financial condition, prospects, and operating
results. 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, financial condition, prospects, and operating
results. See "Reliance on Limited Number of Products."
13
Reliance on Limited Number of Products and Services. The Company expects
that substantially all of its revenues will be derived from its EDIxchange
product and service, its ECbridgeNet service, and (to a lesser extent) its
ECIntegrator product. If these products and services are not successful, whether
as a result of technological change, competition or any other factors, the
Company's business, financial condition, prospects and operating results will be
adversely affected. Although the Company is continuing to develop its existing
products, it presently has no plans to develop or produce additional products
and services for the foreseeable future. See "BUSINESS -- Introduction."
Technological Change. The market for the Company's proposed services is
characterized by rapidly changing technology and evolving industry standards.
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 Company's proposed services are now designed around certain
technical 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 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. In the event that services or technologies developed by others render
the services of the Company impracticable, noncompetitive or obsolete, or the
industry in which the Company hopes to compete develops and adopts a proprietary
standard to which the Company does not have access, or the
14
Company is not able to respond to technological developments or emerging
industry standards, there could be a material adverse effect on the Company's
business, financial condition, prospects and operating results.
Risks of Defects and Development Delays. The Company has not sold a
material amount of its services or products. Products and services based on
sophisticated software and computing systems often encounter development delays
and the underlying software most often contains undetected errors, bugs, 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 development delays, which could result in delays in
the market acceptance of its products and 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 EC and EDI markets are intensely competitive and subject
to rapid technological change and evolving industry standards. The Company does
and will compete with many companies that have substantially greater financial,
marketing, technical and human resources than the Company. Among the principal
competitors in EDI and specifically in the delivery of EDI over the Internet
are, at present, Harbinger Corporation, Sterling Commerce, GEIS, Netscape, Actra
(which is a joint venture of GEIS and Netscape), Open Market, Premenos, Icat,
Interworld Technology Ventures, Elcom International, Broadvision, Connect, IBM,
Microsoft, EDS, and MCI, each of which has announced plans to design and develop
software products and to provide services that facilitate electronic commerce
over the Internet. Some of those competitors operate VANs. Several of these
companies utilize the same encryption technology from RSA that the Company
incorporates in its products. 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,
any demand the Company is able to create for its products and services may be
substantially reduced, and the ability of the Company to broaden the utilization
of its products and 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. It should be noted that companies that historically have produced
text, audio, video, graphics, art and animation ("multimedia" companies), and
companies that historically have owned various forms of communication media such
as cable, broadcasting, and telecommunications ("cross-media" companies) are
encroaching upon and entering into each other's historic businesses. This may
signal a further expansion by those integrated companies into the EDI and
related fields. If the market becomes congested with competition, the Company
may not be able to compete effectively in its intended marketplace.
Dependence on Third-Party Intellectual Property Rights. The Company
currently licenses certain proprietary and patented technology from third
parties. Most of the Company's planned services incorporating data encryption
and authentication is based on proprietary software of RSA Data Security
("RSA"). The RSA software is incorporated in certain other software licensed to
the Company from Community Connexion
15
related to the Web server utilized by the Company. The RSA software 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 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, if 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, if at
all. The Company bears the risk that all third party technology supplied to the
Company is actually owned by the party supplying the technology and does not
infringe upon the rights of others. Any threat of infringement or
misappropriation against these third parties may in turn cause substantial
interference with the Company's right to utilize that technology. The loss of or
inability to maintain any of those software licenses could result in delays in
introduction of the Company's products and 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 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 business, financial
condition, prospects and operating results. 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
programming 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 PERL, which could have a material adverse effect
on the Company's business, financial condition, prospects, and operating
results.
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 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. 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.
16
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 with the United States Patent and Trademark Office 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. The Company's patent, if
issued by the United States Patent and Trademark Office, would offer no
protection outside of the United States. The Company's patent, if issued, may be
subsequently challenged. If the patent is challenged the counsel and other fees
in defending the patent, together with loss of management's time, could be
substantial. Those adverse consequences also could occur with respect to the
trademarks, trade secrets, or other intellectual property rights of the Company.
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 common. 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 are the problems and risks associated with exchanging
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
cryptography technology or other algorithms used by the Company to protect
customer transaction data. 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.
Liability and Availability of Insurance. The Company is responsible for the
electronic transmission of commercial transaction data for its customers,
including, but not limited to, 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's
standard agreements with its customers contain provisions which attempt to limit
the liability of the Company for such matters, including the customer's lost
data, lost profits, or other incidental or consequential damages arising out of,
or in connection with, the customer's use or inability to use the Company's
software or services, or the negligence of the Company. In addition, in May,
1997 the Company purchased general liability and professional liability
insurance policies that are intended to cover the foregoing liabilities. The
general liability policy provides coverage of $1 million per claim and $2
million in the aggregate; and the Company has an additional $1 million umbrella
liability policy. The professional liability policy provides coverage of $1
million per claim and $1 million in the aggregate. The Company intends to
maintain such coverage and to evaluate increasing it from time to time, subject
to availability on commercially reasonable terms.
17
Fluctuating 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 products
and services, demand for the Company's products and 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 Steven L. Vanechanos, Jr., co-founder of the Company and Chairman
of the Board, James D. Conners, President of the Company, and Kenneth R.
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's business, prospects, financial condition and operating results. The
Company has a policy that all of the Company's employees must sign
confidentiality agreements, and that certain of its employees also sign
non-competition agreements. The Company presently maintains key man life
insurance on Steven L. 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 at present coverage levels.
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 computer programmers and other
technically skilled employees is highly competitive and other companies with
greater resources can provide 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,
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 areas of
marketing and customer support. 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 unable to manage growth effectively, there could be a
material adverse effect on the Company's business, financial condition,
prospects, and operating results.
Ability to Issue Blank Check Preferred Stock; New Jersey Anti-Takeover
Provisions. Under the Company's Certificate of Incorporation, the Board of
Directors has 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, prohibits 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
18
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 of Incorporation 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 governmental agency, other
than regulations applicable to businesses generally. The laws generally
applicable to business will also be applicable to doing business over the
Internet. Laws relating to advertising, buying and selling goods and services,
contracts, payments, privacy, obscenity, defamation, taxation, export controls,
unfair competition and deceptive trade practices, among other things, will
likely apply to online activities as well, and numerous criminal statutes may
apply. 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
adoption of any laws or regulations governing commerce on the Internet may
result in decreased growth or use 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 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 and Warrants Reserved. Under the Company's 1997
Employee Stock Option Plan, the Company may issue options to purchase up to an
aggregate of 234,764 shares of Common Stock to employees and officers, and, as
of the date of this Prospectus, options to purchase 203,392 shares have been
granted under that plan. Further, under the Company's Stock Option Plan for
Outside Directors, the Company may issue options to purchase up to an aggregate
of 78,254 shares of Common Stock to its outside directors, including certain
mandatory grants, and, as of the date of this Prospectus, options to purchase
15,648 shares have been granted under that plan. In connection with the
contribution of Common Stock by certain existing shareholders of the Company,
the Company has granted Warrants to purchase 125,000 shares of Common Stock at
an exercise price of $6.00 per share. The exercise of such options and warrants
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 and
warrants 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.
ITEM 2. PROPERTIES.
The Company's corporate offices are located at 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 $6,600. 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 and have a mortgage of
approximately $190,000.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material proceedings.
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, 1997.
19
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 during the entire period presented, 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 interdealer prices without retail markup, markdown or
commissions and do not necessarily represent actual transactions. All prices in
the table below are adjusted on a pro forma basis (rounded to the nearest 1/8)
to take into account the 0.2608491-for-one Reverse Stock Split whereby each
share of Common Stock became 0.2608491 of a share as of January 9, 1998. See
"ITEM 1. DESCRIPTION OF BUSINESS -- RECENT DEVELOPMENTS -- Reverse Stock Split."
The prices in the table below are not adjusted to reflect the Contribution of
Stock. See "ITEM 1. DESCRIPTION OF BUSINESS -- RECENT DEVELOPMENTS --
Contribution of Stock By Certain Shareholders." If the prices were adjusted to
reflect the reduction in the number of outstanding shares by 32% in the
Contribution of Stock, the prices set forth below would increase by
approximately 46%.
BID(1)
------------
QUARTER ENDED HIGH LOW
- ------------------------------------------------------------- ---- ---
December 31, 1995............................................ 11 1/2 4
March 31, 1996(2)............................................ 19 1/8 4
June 30, 1996................................................ 17 1/4 16 3/4
September 30, 1996........................................... 15 7/8 14 7/8
December 31, 1996............................................ 14 3/8 11 1/2
March 31, 1997............................................... 13 12
June 30, 1997................................................ 12 1/2 4 1/8
September 30, 1997........................................... 6 3/4 3 7/8
December 31, 1997............................................ 5 1/8 3 6/8
- ---------------
(1) All prices in the table have been adjusted on a pro forma basis to reflect
the Reverse Stock Split. The above prices do not represent actual bid prices
during the periods indicated.
(2) On March 5, 1996, the Company effectuated a one-for-100 reverse stock split
whereby each 100 shares of Common Stock were combined into one share of
Common Stock. The information for the periods preceding March 31, 1996, was
retroactively adjusted to reflect that combination of shares.
As of December 30, 1997, and after giving effect to the Contribution of
Stock by certain of the Company's existing shareholders, there were 1,420,113
shares of the Company's Common Stock outstanding, held by approximately 3,255
holders of record. "RECENT DEVELOPMENTS -- Contribution of Stock By Certain
Shareholders."
The Company did not declare or pay cash dividends on the Common Stock
during 1996 or 1997. 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.
20
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.
FINANCIAL CONDITION
As of September 30, 1997, the Company had cash of $188,270, total current
assets of $309,433 and a working capital deficit of $1,043,923.
The Company had a net loss of $3,162,803 and negative operating cash flow
of $(1,083,279) for the year ended September 30, 1997. The Company funded that
negative cash flow exclusively through its financing activities. Those consisted
of a $250,000 private placement of common stock that closed in November, 1996,
the April 1997 Financing of $600,000, the August 1997 Financing of $500,000,
loans from officers of $117,000, and loans under the Company's two lines of
credit of $14,049.
The net proceeds to the Company from the April 1997 Financing totaled
approximately $492,000. Those net proceeds were used to fund Company operations
from April 1997 through August 1997. $50,000 was used to repay officer loans,
$60,000 was used to pay legal and accounting expenses associated with the
Company's filing of its periodic reports under the Securities and Exchange Act
of 1934 and the holding of its 1997 Annual Meeting of Stockholders, and the
balance, approximately $382,000, was used to fund operating deficits incurred by
the Company during that period. Of those operating deficits, the Company
believes that approximately $150,000 is allocable to the support of the
marketing activities of the Company, approximately $100,000 is allocable to the
compensation of personnel in operations and other costs of services, and the
balance of $132,000 is allocable to the support of the general and
administrative activities of the Company.
The net proceeds to the Company from the August 1997 Financing were
approximately $427,500, which were used for Company operations, including sales
and marketing expense, product development, operations, and working capital.
For financial accounting purposes, the Company has allocated the amounts
raised in each private placement between the Promissory Notes and the shares of
Common Stock included in the units, based upon the fair value of the Common
Stock at the time of issuance of the respective units. In the case of the April
1997 Financing, the Company allocated $450,000 to the shares and the remaining
$150,000 to the notes. In the case of the August 1997 Financing, the Company
allocated $400,000 to the shares and the remaining $100,000 to the notes. The
difference between the face amount of the notes and the aforesaid amounts
allocated to them represents debt discount. Thus, the debt discount for the
April notes is $450,000 and the debt discount for the August notes is $400,000.
The capital resources presently available to the Company are composed of
approximately $65,000, which management believes can be obtained from Steven L.
Vanechanos, Jr. and certain other individuals, all in the form of short-term
loans. Those resources are not adequate to finance the Company's activities
beyond December 31, 1997. The Company is presently experiencing operating cash
flow deficiencies of approximately $160,000 per month. It expects that its
operating cash flow deficiency for the 1998 fiscal year will be materially
greater than in the 1997 fiscal year, as it hires additional personnel and makes
the other expenditures in connection with its business plan which precede the
realization of revenue. The consummation of the public offering is essential to
the continuing viability of the Company.
IMPACT OF INFLATION
Although no assurance can be given, increases in the inflation rate are not
expected to materially adversely affect the Company's business.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standings No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
issued by the Financial Accounting Standards Board ("FASB"), is effective for
financial statements for fiscal years beginning after December 15, 1995. The new
standard establishes new guidelines regarding when impairment losses on
long-lived assets, which include plant and equipment and certain identifiable
intangible assets and goodwill, should be recognized and how impairment losses
should be measured. The adoption of this standard did not have a material effect
on the Company's financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has determined that it will continue to account for
stock-based compensation for employees under Accounting Principles Board Opinion
No. 25 and elect the disclosure-only alternative under SFAS No. 123. The Company
will be required to disclose the pro forma net income or loss and per share
amounts in the notes to the financial statements using the fair-value-based
method beginning in the year ending September 30, 1997. The impact of these pro
forma adjustments for the fiscal year ended September 30, 1997 was to increase
the Company's net loss by approximately $287,000. See Note H to the Company's
financial statements for the fiscal year ended September 30, 1997.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997. It will replace primary earnings per share with "basic"
earnings per share, and contains definitions of "basic" and diluted earnings per
share. SFAS No. 128 will apply to the Company's financial statements beginning
with the first fiscal quarter ending December 31, 1997. The Company does not
expect the adoption of this standard to have a material effect on its
calculation of earnings per share.
21
RESULTS OF OPERATIONS
THE YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1996
The following discussion relates to the combined operations of DWTS and
Megascore for all periods presented, plus Software Associates, Inc. which was
acquired by the Company on November 30, 1996 from December 1, 1996. See
"BUSINESS -- Background of the Company."
SUMMARY
The following table summarizes the Results of Operations of the Company
that are discussed below:
RESULT OF OPERATIONS
SELECTED FINANCIAL DATA
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 % 1996 %
----------------- ------ ----------------- ------
Net Sales:
Systems.............................................. $ 116,106 18.2% $ 147,337 32.0%
Services............................................. 521,071 81.8 312,730 68.0
--------- ------ --------- ------
Total................................................ 637,177 100.0 460,067 100.0
========= ====== ========= ======
Cost of Sales:
Systems.............................................. 40,323 6.3 71,205 15.5
Services............................................. 213,180 33.5 81,194 17.6
--------- ------ --------- ------
Total................................................ 253,503 39.8 152,399 33.1
--------- ------ --------- ------
Expenses:
Selling, general and administrative.................... 1,854,686 291.1 719,443 156.3
Research and development............................... 234,808 36.8 28,990 6.3
--------- ------ --------- ------
Total................................................ 2,089,494 327.9 748,433 162.6
--------- ------ --------- ------
Purchased research and development..................... 713,710 112.0 --
Interest expense....................................... 770,041 120.8 23,271 5.1
Interest income........................................ (5,068) (0.8) (8,806) (1.9)
--------- ------ --------- ------
Total expenses....................................... 3,821,680 599.8 915,297 198.9
--------- ------ --------- ------
Loss before income taxes............................... $(3,184,503) (499.8)% $(455,230) (98.9)%
========= ====== ========= ======
- ---------------
* Expense percentages are based upon a percentage of Total Net Sales.
Net sales increased by $177,110, or 38%, from $460,067 for the fiscal year
ended September 30, 1996 ("fiscal 1996"), to $637,177 for the fiscal year ended
September 30, 1997 ("fiscal 1997"). The increase in net sales was attributable
primarily to sales of EDI outsourcing services offered through Software
Associates, which was acquired by the Company on November 30, 1996, as well as
to increased sales of the Company's EDI/Internet products and royalty payments
the Company received for licensing a propriety list of internet domain names.
Software Associates' EDI outsourcing revenues totaled $179,650. Net sales from
the Company's EDI/Internet products increased by $52,696 or 85% from $61,832 in
fiscal 1996 to $114,528 in fiscal 1997. The Company's royalty revenue was
$33,828 in fiscal 1997 compared to $13,963 in fiscal 1996.
Overall system sales declined $31,231, or 21%, from $147,337 in fiscal 1996
to $116,106 in fiscal year 1997. The decline was attributable to ongoing efforts
to migrate away from some of the Company's historical system integration and
software consulting activities and to focus on the Company's electronic commerce
services. Computer hardware and computer software sales associated with the
Company's system integration business declined by $47,943, or 53%. This decline
was offset by an increase of $21,712 in system sales associated with the
Company's EDI products.
Service sales increased $208,341 or 67%, from $312,730 in fiscal 1996 to
$521,071 in fiscal 1997. The increase was due largely to new revenues of
approximately $115,000 derived from transaction processing through the Company's
new EDI Service Bureau, additional revenues of $71,775 from EDIxchange and
ECbridgeNet, and $19,865 in increased royalty payments for licensing of the
Company's internet domain list.
Cost of system sales was $40,323 for fiscal 1997 for a gross profit
percentage of approximately 65%. This compares to cost of system sales of
$71,205 for a gross profit percentage of 51% for fiscal 1996. The increase in
gross profit percentage on system sales is attributable to sales of higher
margin customized EDI software as part of EDIxchange and ECbridgeNet.
Cost of services was $213,180 for fiscal 1997, for gross profit percentage
of approximately 59%. This compares to cost of services of approximately
$81,194, for a gross profit percentage of approximately 74% fiscal 1996. The
decrease in profit margins on service sales is attributable to increased costs
associated with the hiring of additional employees to increase the Company's
EDI/Internet capabilities, in anticipation of the growth in demand for the
Company's EDI/Internet services. These additional employees are two programmers
acquired through the purchase of Software Associates, and an additional
programmer and an operator for its EDI/Internet services hired in fiscal 1997.
Selling, general, and administrative expenses increased by $1,135,243, from
$719,443 for fiscal 1996 to $1,854,686 for fiscal 1997, an increase of
approximately 158%; $518,604 of the increase, or 46% is attributable to the
higher marketing expenses, salaries and office expenses associated with the
Company's increased effort to market its EDI/Internet services; $290,000, or 25%
of the increase is attributable to a charge for compensation expense in
connection with granting options to employees under the 1997 Employee Plan in
which the fair value of the stock exceeded the exercise price; $155,481, or 14%
of the increase is attributable to the overhead expenses associated with
maintaining eight new employees, $127,206, or 11% of the increase is
attributable to legal, accounting and consulting fees, and $43,952, or 4%, is
attributable to write off of non-performing receivables. The $518,604 increase
in marketing expenses is composed of the expansion of the Company's marketing
and sales staff by three employees, development of a marketing program with
assistance from outside consultants, attendance at nine trade shows, and
implementation of an outreach program consisting of public relations and
services directed at the electronic commerce community. Management expects the
outreach program to provide the Company with access and introductions to talent
and expertise within the electronic commerce community, with a goal of assisting
the Company in its marketing, recruiting, and operations. There is no assurance
that the outreach program will be successful.
Research and development expense increased $205,818 or 710% for fiscal
1997, from $28,990 in fiscal 1996 to $234,808 in fiscal 1997. The increase is
attributable to expanded development of existing services and increased expenses
in the ongoing development of the Company's product development initiatives. See
"BUSINESS -- Product Development." The Company restructured its research and
development staff and hired three full time programmers in fiscal 1997 for its
software development program.
Purchased research and development for fiscal 1997 of $713,710 resulted
from the allocation of a portion of the purchase price for Software Associates.
Interest expense increased from $23,271 for fiscal 1996 to $770,041 for
fiscal 1997. The increase is primarily attributable to the amortization of debt
discount and deferred financing fees of $720,000 and interest expense of
$23,726. Both are related to the April and August 1997 financings.
22
ITEM 7. FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT AUDITORS
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 as at September 30, 1997 and the related
consolidated statements of operations, changes in capital deficiency and cash
flows for the years ended September 30, 1997 and September 30, 1996. 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 as at September 30, 1997 and the results of
their operations and their cash flows for the years ended September 30, 1997 and
September 30, 1996, 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 A, the Company
had a loss of approximately $3,163,000 for the year ended September 30, 1997, a
working capital deficiency of approximately $1,044,000 and a capital deficiency
of approximately $651,000 and a substantial portion of its 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 A. The consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
Richard A. Eisner & Company, LLP
New York, New York
November 11, 1997
With respect to Note F
December 12, 1997
With respect to Note G[6]
December 23, 1997
With respect to Note G[5]
January 9, 1998
23
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT SEPTEMBER 30, 1997
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 188,270
Accounts receivable, less allowance for doubtful accounts of $83,673.......... 100,425
Prepaid and other current assets.............................................. 20,738
------------
Total current assets.................................................. 309,433
Property and equipment (Notes D and E).......................................... 284,512
Patents and trademarks, less accumulated amortization of $4,851................. 21,808
Customer list, less accumulated amortization of $16,667 (Note L)................ 83,333
Deferred financing fees, less accumulated amortization of $129,127
(Notes G[3] and G[4])......................................................... 51,373
Deferred registration costs (Note M)............................................ 128,169
Other assets.................................................................... 9,088
------------
TOTAL................................................................. $ 887,716
============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable.............................................................. $ 182,340
Accrued expenses -- professional fees......................................... 86,250
Accrued expenses -- other..................................................... 79,691
Current maturities of long-term debt (Note E)................................. 7,925
Loan payable -- banks (Note F)................................................ 24,049
Loans from stockholders (Note F).............................................. 117,163
Deferred revenue.............................................................. 15,065
Subordinated notes payable -- interim financing, less unamortized debt
discount of $259,127 (Notes G[3] and G[4])................................. 840,873
------------
Total current liabilities............................................. 1,353,356
Long-term debt, less current maturities (Note E)................................ 185,811
------------
Total liabilities..................................................... 1,539,167
------------
Commitments, contingencies and other matters (Notes K and M)
Capital deficiency (Notes A, G, H, L and M):
Preferred stock -- par value to be determined with each issue; 5,000,000
shares authorized; no shares issued
Common stock -- $.0001 par value; 50,000,000 shares authorized; 2,141,370
shares issued and to be issued............................................. 214
Additional paid-in capital.................................................... 3,530,324
Unearned portion of compensatory stock options................................ (204,000)
Accumulated deficit........................................................... (3,577,989)
------------
Total................................................................. (251,451)
Less treasury stock, at cost -- 66,660 shares................................. (400,000)
------------
Total capital deficiency.............................................. (651,451)
------------
TOTAL................................................................. $ 887,716
============
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
24
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- ----------
Net sales (Note J[3]):
System sales..................................................... $ 116,106 $ 147,337
Services......................................................... 521,071 312,730
--------- ---------
Total.................................................... 637,177 460,067
--------- ---------
Cost of sales:
System sales..................................................... 40,323 71,205
Services......................................................... 213,180 81,194
--------- ---------
Total.................................................... 253,503 152,399
--------- ---------
Gross profit....................................................... 383,674 307,668
--------- ---------
Expenses:
Selling, general and administrative.............................. 1,854,686 719,443
Research and development......................................... 234,808 28,990
--------- ---------
Total.................................................... 2,089,494 748,433
--------- ---------
Operating (loss)................................................... (1,705,820) (440,765)
Purchased research and development (Note L)........................ (713,710)
Interest expense (including amortization of debt discount and
deferred financing fees of $720,000 for the year ended September
30, 1997 (Notes G[3] and G[4])).................................. (770,041) (23,271)
Interest income.................................................... 5,068 8,806
--------- ---------
(Loss) before income tax benefit................................... (3,184,503) (455,230)
Income tax benefit -- deferred..................................... 21,700
--------- ---------
NET (LOSS)......................................................... $(3,162,803) $ (455,230)
========= =========
Net (loss) per common share (Note C[7])............................ $ (1.59) $ (.27)
========= =========
Weighted-average number of shares outstanding...................... 1,984,507 1,667,202
========= =========
Pro forma net (loss) per common share (Note C[7]).................. $ (2.28) $ (.39)
========= =========
Pro forma weighted-average number of shares outstanding............ 1,386,383 1,158,905
========= =========
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
25
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
(NOTES A, G, H, L AND M)
COMMON STOCK -- RETAINED
PAR VALUE $.0001 ADDITIONAL UNEARNED PORTION EARNINGS TREASURY STOCK
----------------- PAID-IN OF COMPENSATORY (ACCUMULATED -------------------
SHARES AMOUNT CAPITAL STOCK OPTIONS DEFICIT) SHARES AMOUNT TOTAL
--------- ------ ---------- ---------------- ------------ ------- --------- -----------
Balance -- October 1, 1995..... 1,620,804 $162 $ 228,958 $ 40,044 $ 269,164
Issuance of common stock, net
of $52,250 of costs (Note
G[1])...................... 89,604 9 447,741 447,750
Net (loss)................... (455,230) (455,230)
--------- ---- ---------- ----------- -----------
Balance -- September 30,
1996......................... 1,710,408 171 676,699 (415,186) 261,684
Issuance of common stock
(Note G[2])................ 65,212 7 249,993 250,000
Issuance of common stock to
acquire subsidiary (Note
L)......................... 224,330 22 859,978 860,000
Shares issuable with the
interim financings (Notes
G[3] and G[4])............. 141,420 14 849,986 850,000
Payable to stockholders for
fractional shares.......... (332) (332)
Contribution from
officers/stockholders (Note
G[4])...................... 400,000 400,000
Treasury stock acquired at
cost (Note G[4])........... 66,660 $(400,000) (400,000)
Unearned portion of
compensatory stock options
(Note H[2])................ 494,000 $ (494,000)
Compensation expense for
stock options (Note
H[2])...................... 290,000 290,000
Net (loss)................... (3,162,803) (3,162,803)
--------- ---- ---------- --------- ----------- ------ --------- -----------
BALANCE -- SEPTEMBER 30, 1997.. 2,141,370 $214 $3,530,324 $ (204,000) $(3,577,989) 66,660 $(400,000) $ (651,451)
========= ==== ========== ========= =========== ====== ========= ===========
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
26
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED
SEPTEMBER 30,
-------------------------
1997 1996
----------- ---------
Cash flows from operating activities:
Net (loss)............................................................... $(3,162,803) $(455,230)
Adjustment to reconcile net (loss) to net cash (used in) operating
activities:
Depreciation and amortization.......................................... 46,742 23,644
Stock issued for compensation.......................................... 10
Stock options issued for compensation.................................. 290,000
Purchased research and development..................................... 713,710
Deferred income taxes.................................................. (21,700)
Amortization of debt discount and deferred financing fees.............. 720,000
Changes in operating assets and liabilities:
Decrease in accounts receivable...................................... 88,239 3,739
(Increase) decrease in prepaid expenses and other current assets..... 2,242 (6,923)
Increase in accounts payable......................................... 144,455 7,801
Increase in accrued expenses......................................... 92,101 15,293
Increase in deferred revenue......................................... 3,735 122
----------- ----------
Net cash (used in) operating activities........................... (1,083,279) (411,544)
----------- ----------
Cash flows from investing activities:
Acquisition of property and equipment.................................... (79,033) (23,838)
Proceeds from sale of equipment.......................................... 1,954
Acquisition of patents and trademarks.................................... (2,997) (21,220)
Cash acquired upon acquisition of subsidiary............................. 15,235
----------- ----------
Net cash (used in) investing activities........................... (64,841) (45,058)
----------- ----------
Cash flows from financing activities:
Payment of long-term debt................................................ (10,556) (11,909)
Proceeds from issuance of common stock................................... 250,000 597,750
Proceeds from loans -- banks............................................. 14,500
Repayment of loans -- banks.............................................. (451)
Loans from officer/stockholder........................................... 199,163
Payment of officer/stockholder loan...................................... (82,000)
Proceeds from sale of units consisting of notes and common stock......... 1,100,000
Payment of deferred registration costs................................... (128,169)
Payment of deferred financing fees....................................... (180,500)
----------- ----------
Net cash provided by financing activities......................... 1,161,987 585,841
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................. 13,867 129,239
Cash and cash equivalents, beginning of year............................... 174,403 45,164
----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR..................................... $ 188,270 $ 174,403
=========== ==========
Supplemental schedule of noncash investing and financing activities:
On November 30, 1996 the Company acquired Software Associates, Inc. as
described in Note L
In connection with the August 27, 1997 interim financing as described
in Note G[4], certain officers/stockholders contributed 66,660 shares
of common stock to the Company valued at $400,000 which the Company
then placed in treasury
Supplemental disclosure of cash flow information:
Cash paid for interest during the year................................... $ 27,016 $ 21,271
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
27
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
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.
DynamicWeb Transactions Systems, Inc. ("DWTS") and Software Associates, from the
date of its acquisition (November 30, 1996) (Note L) (collectively the
"Company"). All significant intercompany balances and transactions have been
eliminated.
On March 26, 1996 DWTS was acquired by Seahawk Capital Corporation
("Seahawk"), a publicly held corporation which subsequently changed its name to
DynamicWeb Enterprises, Inc.; it had 114,759 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
1,281,716 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, 191,724 shares were issued to a finder and 19,563 shares were
issued for legal fees. At the conclusion of this transaction, there were
1,607,762 shares outstanding.
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 13,042
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.
The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The company had a
loss of approximately $3,163,000 for the year ended September 30, 1997, a
working capital deficiency of approximately $1,044,000 and a capital deficiency
of approximately $651,000. A substantial portion of its resources may be
depleted before the Company markets and derives significant revenues from its
products and services. These factors raise substantial doubts about the
Company's ability to continue as a going concern. The Company is planning to
raise additional equity through a proposed public offering of stock (Note M).
There is no assurance that the Company's products and services will be
commercially successful.
(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 entities 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.
Software Associates, Inc. is a 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.
28
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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 to
purchasers of its product and such revenues are recognized when services are
provided. The Company enters into contracts with customers whereby revenues are
earned based upon a per transaction fee.
Deferred revenue represents revenue billed in advance for consulting
support services.
[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] Intangible assets:
a) 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.
b) Customer list:
Customer list had been valued in connection with the acquisition of
Software Associates, Inc. (Note L) and is being amortized over five years.
The Company evaluates its long-lived assets for impairment based upon
undiscounted cash flows. When an impairment occurs, the Company would write down
its assets.
[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 for the expected future tax benefit to be
derived primarily from net operating loss carryforwards 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 and shares issuable. Contingent shares issuable in
connection with the acquisition of Software Associates, Inc. (Note L) are
excluded from the weighted average shares outstanding. Pro forma net loss
per share gives retroactive effect to the shares contributed to the Company in
exchange for warrants, see Note G[6].
29
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE C) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
[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 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] 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.
[10] Recently adopted 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 ("SFAS 121"), and
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 121 requires, among other things, that entities
identify events or changes in circumstances which indicate that the carrying
amount of a long-lived asset may not be recoverable.
SFAS 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 adoption of SFAS 121 and SFAS 123
did not have a material impact on the Company's 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.
[11] Recently issued accounting pronouncements:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per Share".
SFAS 128 is effective for financial statements issued for interim and annual
periods ending after December 15, 1997; after the effective date, all prior
period earnings per share data is required to be restated. The Company believes
that adoption of SFAS 128 will not have a material impact on its financial
statements.
30
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE D) -- PROPERTY AND EQUIPMENT:
Property and equipment are as follows at September 30, 1997:
ESTIMATED
USEFUL
LIFE
-------------------
Office facility condominium............................. $156,600 20 years
Office equipment........................................ 31,047 5 years
Computer equipment (includes a capitalized lease of
$10,000).............................................. 118,084 5 years
Automobiles............................................. 16,221 5 years
Leasehold improvements.................................. 38,125 Shorter of life of
-------- lease or useful
life of asset
360,077
Accumulated depreciation and amortization............... 116,965
--------
243,112
Land.................................................... 41,400
--------
$284,512
========
(NOTE E) -- LONG-TERM DEBT:
Long-term debt consists of the following at September 30, 1997:
*Mortgage payable -- due July 2015; payable in varying monthly
installments at an interest rate at the lower of prime (8.5% at
September 30, 1997) plus 2% or 14.25%................................... $187,285
Auto loan -- due June 1999 payable in monthly installments of $334 and
5.9% interest........................................................... 6,246
Other..................................................................... 205
--------
Total indebtedness................................................... 193,736
Less current maturities................................................... 7,925
--------
Noncurrent portion................................................... $185,811
========
Maturities of long-term debt for the next five years at September 30, 1997
are as follows:
YEAR ENDING
SEPTEMBER 30,
-------------
1998............................................................ $ 7,925
1999............................................................ 6,526
2000............................................................ 4,000
2001............................................................ 4,000
2002............................................................ 4,000
Thereafter...................................................... 167,285
--------
Total................................................... $193,736
========
- ---------------
* Collateralized by an office facility condominium and land with a net book
value of approximately $179,800 at September 30, 1997 and is guaranteed by the
Chief Executive Officer and the Vice President of the Company.
31
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE F) -- OTHER DEBT:
[1] Lines of credit:
The Company has two lines of credit aggregating $97,500 which are
personally guaranteed by an officer of the Company and have interest rates of 2%
and 4 3/4% above the bank's lending rate (10.5% and 13.25%, respectively). The
Company borrowed $24,049 as at September 30, 1997 and subsequently borrowed
$73,000 in November, 1997.
[2] Loans from stockholders:
In February and March 1997, the Company received a loan from its Chief
Executive Officer ("CEO") of $50,000 which the Company repaid from the net
proceeds of the private placement described in Note G[3]. The Company received
additional loans from its Company's CEO and Vice President aggregating $149,163
bearing interest at 8% of which $32,000 was paid back to the CEO. On December
18, 1997, the Company received an additional loan of $25,000; the loan balance
of approximately $142,000 is expected to be repaid from the net proceeds of the
Company's proposed public offering described in Note M.
(NOTE G) -- STOCKHOLDERS' EQUITY AND INTERIM FINANCING:
[1] On March 26, 1996, the Company completed a stock offering under
Regulation S, whereby it sold 89,604 shares of its common stock for $500,000
less fees in connection with such offering of $52,250 for net proceeds of
$447,750.
[2] On November 21, 1996, the Company sold 65,212 shares of its common
stock for $250,000.
[3] On April 30, 1996, 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 received a fee and nonaccountable expense allowance
aggregating $78,000 or 13% of the private placement offering. Deferred financing
fees in this transaction were approximately $108,000. Each unit consists of a
$25,000 subordinated promissory note bearing interest at 8% and 3,115 shares of
the Company's common stock. The notes are due at the earlier of the closing of
the proposed public offering referred to in Note M; when the Company obtains an
aggregate financing of $2,000,000 excluding expenses or March 31, 1999. The
3,115 shares of common stock in each unit, issued on November 6, 1997, aggregate
to 74,760 shares of common stock.
The common stock was valued at a fair value of $450,000 and $150,000 was
allocated to the notes. Debt discount of $450,000 and deferred financing fees of
$108,000 are amortized over the expected completion of the Company's public
offering of securities. At September 30, 1997 $465,000 of amortization was
expensed and the remaining balance of $93,000 will be charged to operations
through October 31, 1997. The effective interest rate was approximately 191%.
[4] On August 27, 1997, pursuant to Regulation D, the Company completed a
private placement whereby it sold 20 units for an aggregate amount of $500,000.
The placement agent received a fee and nonaccountable expense allowance
aggregating $65,000 or 13% of the private placement offering. Deferred financing
fees in this transaction were approximately $72,500. Each unit consists of a
$25,000 subordinated promissory note bearing interest at 8% and 3,333 shares of
the Company's common stock. In connection with this transaction, two officers of
the Company agreed to contribute 66,660 shares of common stock valued at
$400,000 and the Company placed such shares in treasury. The notes are due at
the earlier of the closing of the proposed public offering referred to in Note
M; when the Company obtains an aggregate financing of $2,000,000 excluding
expenses or September 30, 1999. The 3,333 shares of common stock in each unit,
issued on November 6, 1997, aggregate 66,660 shares of common stock.
The common stock was valued at a fair value of $400,000 and $100,000 was
allocated to the notes. Debt discount of $400,000 and deferred financing fees of
$72,500 are amortized over the expected completion of the
32
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE G) -- STOCKHOLDERS' EQUITY AND INTERIM FINANCING: (CONTINUED)
Company's public offering of securities. At September 30, 1997, $255,000 of
amortization was expensed and the remaining balance of $217,500 will be charged
to operations through October 31, 1997. The effective interest rate was
approximately 525%.
[5] On March 7, 1997, the Board of Directors 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 of preferred stock. On June 12, 1997, the
shareholders approved such transaction which was completed on January 9, 1998.
Cash is to be issued to the shareholders for any fractional shares. The
accompanying financial statements give retroactive effect to this transaction.
[6] On December 23, 1997, certain of the Company's existing shareholders
agreed to contribute 654,597 shares of the Company's common stock in exchange
for 125,000 warrants. The warrants expire on December 23, 2007; the
warrantholders can purchase the Company's common stock at $6.00 per share. The
Company valued the 654,597 shares received at its market value of $3,606,829.
Also, contingent shares issuable in connection with the acquisition of Software
Associates, Inc. (Note L) were reduced from 297,367 shares to 178,420 shares.
(NOTE H) -- STOCK OPTION PLANS:
[1] Director stock option plan:
On April 28, 1997, the Board of Directors 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 78,254 shares of the
Company's common stock. The Director Plan was approved by the shareholders on
June 12, 1997. Pursuant to the Director Plan, directors are to be granted
options to purchase 3,912 shares of the Company's common stock at each 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. On September 30, 1997,
15,648 options were granted to directors to purchase the Company's common stock
pursuant to the Director Plan; such options expire on October 31, 2007 and are
exercisable immediately.
[2] Employee stock option plan:
On March 7, 1997, the Board of Directors 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 234,764 shares of the Company's common
stock. The Plan was approved by the shareholders on June 12, 1997. 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. On August
8, 1997, the Company granted 99,054 options to its employees including 6,521 to
employees of Software Associates, Inc. to purchase the Company's common stock
which had a fair value of $6.23 per share at the date of grant and expire on
August 7, 2007. See Note H[3] with respect to exercise price.
33
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE H) -- STOCK OPTION PLANS: (CONTINUED)
[2] Employee stock option plan: (continued)
The Company recorded approximately $494,000 of compensation relating to
options issued to its employees in which the fair value exceeded the exercise
price, of which $290,000 was charged to operations in 1997 and $204,000 is to be
charged over the vesting periods as follows:
YEAR ENDING
SEPTEMBER 30,
-------------
1998.................................................... $115,000
1999.................................................... 70,000
2000.................................................... 19,000
--------
Total........................................... $204,000
========
Additionally, on September 11, 1997, the Company granted 104,338 options to
purchase the Company's common stock at $3.83 per share to its President. See
Note K[2].
[3] Accounting for stock based compensation:
As indicated in Note C[10], the Company elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Pro forma information regarding net loss and loss per share is presented
below as if the Company had accounted for its employee stock options under the
fair value method of that statement; such pro forma information is not
necessarily representative of the effects on reported net income for future
years due to, among other things: (1) the vesting period of the stock options
and the (2) fair value of additional stock options in future years.
Had compensation cost for the Company's stock option plans been determined
based upon the fair value at the grant date for awards under the plans
consistent with the methodology prescribed under SFAS No. 123, the Company's net
loss for the year ended September 30, 1997 would have been approximately
$(3,449,803) or $(1.74) per share and $(2.49) per share as adjusted to reflect
the contribution of shares by certain stockholders in exchange for warrants, see
Note G[6]. The weighted average fair value of the options granted during the
years ended September 30, 1997 are estimated as $3.06 on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
the year ended September 30, 1997: expected dividend yield of 0%, expected
volatility of .5%, risk free interest rates of 6.08%, 6.11% and 6.34% and
estimated life of seven years and ten years.
Additional information with respect to stock option activity is summarized
as follows:
YEAR ENDED
SEPTEMBER 30, 1997
--------------------
WEIGHTED
AVERAGE
SHARES PRICE
------- --------
Balance outstanding -- September 30, 1996................ -0-
Options granted.......................................... 219,040 $ 3.06
------- -----
Balance outstanding -- September 30, 1997................ 219,040 $ 3.06
======= =====
Options exercisable -- September 30, 1997................ 77,723 $ 2.16
======= =====
34
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE H) -- STOCK OPTION PLANS: (CONTINUED)
[3] Accounting for stock based compensation: (continued)
The following table summarizes information about stock options outstanding
at September 30, 1997:
WEIGHTED-
AVERAGE WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER
EXERCISE OF OPTIONS REMAINING EXERCISE OF OPTIONS
PRICE OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE
-------- ----------- --------------- -------- -----------
$ 6.23 9,388 9.9 $ 6.23
4.55 15,648 10.0 4.55 15,648
3.83 104,338 9.9 3.83
1.56 89,666 9.9 1.56 62,075
----- ------- ---- ----- ------
219,040 77,723
======= ======
(NOTE I) -- INCOME TAXES:
[1] The Company has a federal and state net operating loss carryforward of
approximately $1,850,000 at September 30, 1997 which expires through 2012
including federal and state net operating loss carryovers of $50,000 and $29,000
attributable to Megascore, Inc. and Software Associates, Inc. which may be used
to offset income earned by those companies. The tax benefits of these deferred
tax assets are fully reserved since the likelihood of realization of the benefit
cannot be established.
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, 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 at September 30, 1997:
Asset:
Federal and state operating loss carryforwards................ $ 740,000
Debt discount and deferred financing fees..................... 230,000
Compensation expense -- stock options......................... 116,000
Accounts receivable allowance................................. 34,000
Accrued expenses.............................................. 4,000
Accrual basis to cash basis adjustments....................... 6,000
------------
Total................................................. 1,130,000
Valuation allowance............................................. (1,130,000)
------------
Net deferred tax asset.......................................... $ -0-
============
The increase in the valuation allowance from September 30, 1996 to
September 30, 1997 was approximately $969,000.
35
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE I) -- INCOME TAXES: (CONTINUED)
The differences between the statutory Federal income tax rate and the
effective (benefit) are as follows:
SEPTEMBER 30,
---------------
1997 1996
----- -----
Statutory rate (benefit)..................................... (34.0)% (34.0)%
Nondeductible items.......................................... 8.0
Valuation allowance.......................................... 25.3 34.0
------ ------
Effective tax rate (benefit)................................. (.7)% 0%
======= =======
(NOTE J) -- 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 18% of net sales for the
year ended September 30, 1997 and two customers that accounted for 16% and 10%
of net sales for the year ended September 30, 1996.
(NOTE K) -- COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
[1] Leases:
On October 1, 1996, the Company signed an operating lease for office space
which expires in October 2001. In addition, a subsidiary occupies office space
which is described in Note L. The following are minimum annual rental payments:
YEAR ENDING
SEPTEMBER 30,
-------------
1998.................................................... $ 80,000
1999.................................................... 82,000
2000.................................................... 84,000
2001.................................................... 86,000
2002.................................................... 52,000
--------
Total........................................... $384,000
========
Rent expense for the year ended September 30, 1997 was approximately
$67,600.
36
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE K) -- COMMITMENTS, CONTINGENCIES AND OTHER MATTERS: (CONTINUED)
[2] Employment contract:
On August 26, 1997, the Company entered into a three-year employment
contract with its President for an annual salary of $160,000. Upon expiration of
the employment contract, the term shall be automatically renewed for one year
unless either party gives written notice prior to ninety days before the
expiration date. In connection with this contract, on September 11, 1997, the
Company granted options to purchase 104,338 shares of common stock at $3.83 per
share which expire in ten years and vest over a three-year period. The fair
value of the stock at the date of grant was $4.55 per share. Included in Note
H[2] is the estimated compensation expense for the option grant.
[3] Late filings and annual report:
The Company was required to file with the Securities and Exchange
Commission Form 10-KSB for September 30, 1996, Form 10-QSB for the quarter ended
March 31, 1997 and December 31, 1996 and an amended Form 8-K for the acquisition
of Megascore, Inc. and Software Associates, Inc. The Company did not distribute
its year ended September 30, 1996 annual report to its shareholders within 120
days after year end. Management believes that the Company has subsequently
complied with all of its filing requirements and has distributed its year ended
September 30, 1996 report to the shareholders.
[4] Stockholders' equity (capital deficiency):
In connection with the acquisition of Software Associates, Inc., as
described in Note L, the Company agreed to issue up to 297,367 additional shares
(134,590 shares after the contribution of shares by certain stockholders, see
Note G[6]) of its common stock in the event that the average closing bid price
of the Company's common stock does not equal $12.939 per share (after the
contribution of shares by certain stockholders, see Note G[6], the price was
adjusted to $21.565 per share) for five trading days immediately prior to
January 30, 2000.
(NOTE L) -- ACQUISITION AND RELATED PARTY TRANSACTION:
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. The Company exchanged 224,330 (134,598 shares after
contributions of shares by certain stockholders, see Note G[6]) 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 297,367 (178,420
shares after contributions of shares by certain stockholders, see Note G[6])
additional shares of its common stock in the event that the average closing bid
price of the Company's common stock does not equal $12.939 per share (after the
contribution of shares by certain stockholders, see Note G[6], the price was
adjusted to $21.565 per share) for the five trading days immediately prior to
January 30, 2000. In connection with this transaction, the Company incurred
approximately $25,000 of professional fees.
The SA Agreement also required the Company to issue options for the
purchase of 6,521 shares of its common stock to employees of Software
Associates, Inc., which were issued in August 1997.
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.
Software Associates, Inc., occupies its office space through December 31,
2002 from a partnership whose partners are the Executive Vice President of the
Company and his wife. The lease provides for an annual increase of three percent
and requires the Company to pay condominium maintenance fees. The partnership
and Software Associates, Inc. are jointly liable on the mortgage which was
approximately $246,000 as at September 30, 1997, the debt is being paid by the
partnership, and matures in August 2019. The Company is informed that the
partnership's mortgage balance is current.
37
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE L) -- ACQUISITION AND RELATED PARTY TRANSACTION: (CONTINUED)
The purchase price was recorded as follows at November 30, 1996:
Current assets.................................................... $133,381
Fixed assets...................................................... 5,167
Purchased research and development................................ 713,710
Customer list..................................................... 100,000
Current liabilities............................................... (67,258)
--------
$885,000
========
Purchased research and development was charged to operations upon
acquisition. The acquisition was recorded as a purchase.
The condensed unaudited pro forma and as adjusted (gives effect to the
contribution of stock by certain shareholders in exchange for warrants, see Note
G[6]) information of the Company for the year ended September 30, 1997 and
September 30, 1996 are presented as if the acquisition of Software Associates,
Inc. occurred on October 1, 1996 and October 1, 1995. The pro forma and as
adjusted information are not necessarily indicative of the results that would
have been reported had the acquisition occurred on those dates nor is it
indicative of the Company's future results.
PRO FORMA
YEAR ENDED
SEPTEMBER 30,
-------------------------
1997 1996
---------- ----------
Net sales................................................... $ 764,144 $1,127,447
=========== ==========
Net (loss).................................................. (2,439,569)* (550,940)
=========== ==========
(Loss) per share............................................ $ (1.21) $ (.29)
=========== ==========
Weighted-average shares outstanding......................... 2,021,997 1,891,532
=========== ==========
(Loss) per share as adjusted................................ $ (1.73) $ (.43)
========== ==========
Weighted-average shares outstanding as adjusted............. 1,408,877 1,293,503
========== ==========
- ---------------
* Excludes a charge of approximately $714,000 for purchased research and
development appearing in the historical financial statements for the year
ended September 30, 1997.
(NOTE M) -- CONTEMPLATED PUBLIC OFFERING:
On February 1, 1997, the Company signed a letter of intent with an
underwriter with respect to a contemplated public offering of the Company's
securities. The Company expects to incur significant additional costs in
connection therewith. In the event that the offering is not successfully
completed, such costs will be charged to expense.
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, 1997.
38
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 Board of Directors and the executive officers of
the Company.
NAME AGE POSITION
Steven L. Vanechanos, Jr.(1) 43 Chairman of the Board and Chief Executive
Officer
James D. Conners 58 President and Chief Operating Officer
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 Director
Frank T. DiPalma(3) 51 Director
Robert Droste(2)(3) 43 Director
- --------
(1) Steve Vanechanos, Sr. is the father of Steven L. Vanechanos, Jr. and
Michael Vanechanos. As of December 17, 1997, and after giving effect
to the contribution of certain shares of Common Stock to the capital
of the Company, Michael Vanechanos beneficially owns approximately 7%
of the Company's outstanding Common Stock. See "ITEM 1. DESCRIPTION
OF BUSINESS -- RECENT DEVELOPMENTS -- Contribution of Stock By
Certain Shareholders," "PRINCIPAL STOCKHOLDERS" and "CERTAIN
TRANSACTIONS -- Significant Shareholder."
(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.
STEVEN L. VANECHANOS, JR. became President and Chairman of the Board of
Directors of the Company on March 26, 1996. On August 26, 1997, he assumed the
office of Chief Executive Officer and Mr. Conners became the President. Mr.
Vanechanos 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, New Jersey Campus. In 1981, he
received a Certificate in Computer Programming and in 1982, he received a
Certificate in Data Processing from The Institute for the Certification of
Computer Professionals.
JAMES D. CONNERS became President and Chief Operating Officer of the
Company on August 26, 1997. Prior to joining the Company, Mr. Conners served as
the Vice President of Strategic Planning of Sterling Commerce in 1996 and the
Vice President of its Internet Business Unit in 1997. Prior to joining Sterling
Commerce, Mr. Conners spent 15 years at General Electric Information Services
(GEIS) in various sales and marketing positions, most recently as the General
Manager in charge of the Ameritech Alliance. Mr. Conners graduated from the
University of Detroit with a BS degree in Mathematics with a minor in Physics.
STEVE 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
39
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, which he founded in 1985. Software Associates
is currently a wholly-owned subsidiary of the Company. See "CERTAIN
TRANSACTIONS."
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 became a Director of the Company on June 12, 1997. Mr. 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.
Pursuant to the Company's Amended and Restated Certificate of
Incorporation, the Board of Directors is divided into three classes which shall
be as nearly equal in number as possible. The Directors in each class will hold
office following their initial appointment to office for terms of one year, two
years and three years, respectively and, upon reelection, will serve for terms
of three years thereafter. Each Director will serve until his or her successor
is elected and qualified. Presently, Directors Ahearn, DiPalma and Clark are
Class I Directors to hold office until the annual shareholder election of
Directors in 1998; Directors Konikowski and Vanechanos, Sr. are Class II
Directors to hold office until the annual shareholder election of Directors in
1999; and Directors Droste and Vanechanos, Jr., are Class III Directors to hold
office until the annual shareholder election of Directors in 2000.
Pursuant to the Company's Amended and Restated Certificate of
Incorporation, a Director may be removed by shareholders only upon the
affirmative vote of at least a majority of the votes which all shareholders
would be entitled to cast. The Board of Directors shall have the exclusive power
to fill any vacancy occurring in the Board of Directors, including a vacancy
created by an increase in the number of Directors, by a majority vote of the
Directors then in office. Any Director so elected shall serve until the next
annual meeting of shareholders.
Although Michael Vanechanos is the owner of approximately 7 percent of the
presently-outstanding Common Stock and is related to Steven L. Vanechanos Jr.
and Steve Vanechanos, Sr., Michael Vanechanos does not participate in the
business affairs of the Company, including its operations, financing and
strategy.
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 Report.
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,
1997, its officers, directors, and greater than ten-percent beneficial owners
complied with applicable Section 16(a) filing requirements, except that (i)
F. Patrick Ahearn, Jr, Frank DiPalma, Robert Droste and Denis Clark each
inadvertently failed to file a Form 5 to report stock options for 3,912 of
common stock received under the 1997 Stock Option Plan for Outside Directors;
(ii) Steven Vanechanos Jr. and Steve Vanechanos Sr. each inadvertently failed
to file a Form 5 to report their contribution of 33,330 shares of common stock
of the Company in connection with the August 1997 Financing, and (iii) James
Conners inadvertently failed to file a Form 3 when he became an officer of the
Company, and a Form 5 to report stock options for 104,388 of common stock he
received from the Company.
40
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 Steven L.
Vanechanos, Jr., the Company's President from March 26, 1996 to August 26, 1997
(when he continued in the role of Chief Executive Officer, and James Conners
became President). Jonathan B. Lassers served as the Company's President and
Chief Executive Officer from May 1995 until March 26, 1996.
SUMMARY COMPENSATION TABLE
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION
- ------------------------------------------ ---- ------- ------------
Steven L. Vanechanos, Jr. 1997 $61,000 $ 4,750(1)
Chief Executive Officer 1996(2) $58,762(3) $ 10,300(4)
Jonathan B. Lassers 1996(5) $ 0(6) $ 0(6)
Former President and Chief Executive
Officer
- ---------------
(1) Consists of lease payments totalling $4,750 made by the Company for an
automobile used by Mr. Vanechanos, Jr.
(2) Mr. Vanechanos, Jr. commenced his employment with the Company on March 26,
1996, the date upon which Seahawk Oil International, Inc. acquired
DynamicWeb Transaction Systems, Inc. and changed its name to DynamicWeb
Enterprises, Inc. Prior to such time, he had been President of DWTS.
(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) Consists of (a) lease payments totaling $4,300 made by the Company for an
automobile used by Mr. Vanechanos, Jr., and (b) travel and entertainment
expenses of approximately $6,000 paid by the Company. Mr. Vanechanos, Jr.
did not receive any long-term compensation.
(5) Mr. Lassers terminated his employment with the Company on March 26, 1996,
the date upon which Seahawk Oil International, Inc. acquired DynamicWeb
Transaction Systems, Inc. and changed its name to DynamicWeb Enterprises,
Inc.
(6) Mr. Lassers commenced his employment with the Company in May 1995. Mr.
Lassers has represented to management that he was paid no salary or other
compensation prior to March 26, 1996. The Company did not pay any amounts to
Mr. Lassers after that date.
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 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.
On June 12, 1997, the shareholders of the Company approved the 1997 Employee
Stock Option Plan and the 1997 Stock Option Plan for Outside Directors
(collectively, the "1997 Plans").
Employment Agreements
On December 1, 1996, Kenneth R. Konikowski, Executive Vice President of the
Company, entered into an Employment Agreement with the Company (the "Konikowski
Agreement"). Under the terms of the Konikowski 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 Konikowski 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 use of an
automobile. He is also eligible to participate in the Company's 1997 Employee
Stock Option Plan.
The Konikowski 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 a lump sum 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). The Company is also required to maintain
in full force and effect certain of Mr. Konikowski's employee benefits.
On August 26, 1997, the Company hired James D. Conners as President, and
the Company and Mr. Conners entered into an Employment Agreement (the "Conners
Agreement"). The Conners Agreement provides that he shall serve as President of
the Company for a term of 3 years, with automatic renewal unless either party
gives timely notice of its intent not to renew. The Conners Agreement provides
for a base salary of $160,000, and obligates the Company to grant options to
purchase 104,338 shares of the Company's Common Stock during his employment
period for a price of $3.83 per share, 45,648 of such shares to vest at August
25, 1998, 32,606 to vest at August 25, 1999, and the remaining 26,084 to vest at
August 25, 2000. On September 11, 1997, Mr. Connors was granted 104,338 options
under the 1997 Employee Plan. Further, Mr. Conners is entitled to a $1,000 per
month housing allowance and a $500 per month leased automobile allowance. He is
eligible to participate in the 1997 Employee Plan and the Company's other
employee benefit plans as may be implemented from time to time.
The Conners Agreement provides that if Mr. Conners employment is terminated
other than for "Cause" as defined therein, Mr. Conners is entitled to receive
his base salary, incentive compensation and options for the balance of his
employment period.
41
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of December 1, 1997, for (i) each person
who owns of record or is known by the Company to be the beneficial owner of more
than five percent (5%) of the Common Stock, (ii) each of the Company's current
Directors, (iii) each person named in the Summary Compensation Table set forth
above under "MANAGEMENT," 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.
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1)(2) CLASS(3)
----------------------------------------------- ----------------- ----------
Steven L. Vanechanos, Jr....................... 276,203 19.24%
92 Clarken Drive
West Orange, New Jersey 07052
Steven Vanechanos, Sr.......................... 273,288 19.03%
96 Union Avenue
Rutherford, New Jersey 07082
Kenneth R. Konikowski(4)....................... 134,598 9.37%
36 Pinebrook Road
Towco, New Jersey 07082
Michael Vanechanos............................. 102,133 7.11%
129 S. Telegraph Hill Road
Holmdel, New Jersey 07703
Sierra Growth & Opportunity.................... 71,994(5) 5.01%
551 Fifth Avenue, Suite 605
New York, New York 10017
James D. Conners............................... 0(6) 0%
5506 Carnoustie Court
Dublin, Ohio 43017
F. Patrick Ahearn, Jr.......................... 6,067(7) 0.42%
107 Maple Street
Rutherford, New Jersey 07070
Frank T. DiPalma............................... 10,697(7)(8) 0.75%
179 Claremont Road
Ridgewood, New Jersey 07450
Robert Droste.................................. 6,067(7) 0.42%
24 Summit Road
Clifton, New Jersey 07012
Denis Clark.................................... 3,912(7) 0.27%
8417 Greenside Drive
Dublin, Ohio 43017
All directors and executive officers as a group
(8 in number).................................. 710,832 49.51%
- ---------------
(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 of
the date of this Prospectus. Beneficial ownership may be disclaimed as to
certain of the securities. Steven L. Vanechanos, Jr. and Michael Vanechanos
are brothers, and are the sons of Steve Vanechanos, Sr. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS -- Significant Shareholder." Each of
the foregoing disclaims beneficial ownership of the shares of Common Stock
owned by the others.
42
(2) Information furnished by the directors and executive officers of the
Company. All numbers of shares reflect the 0.2608491-for-one Reverse Stock
Split and the Contribution of Stock by certain of the Company's existing
shareholders of the Company. See "RECENT DEVELOPMENTS."
(3) Percentages based upon (a) 1,420,113 shares outstanding on December 1,
1997, after giving effect to the Contribution of Stock and the Reverse
Stock Split, plus (b) an additional 15,648 shares issuable within 60 days
of the Offering to the named outside directors under the 1997 Director
Plan. See Footnote (8) below.
(4) Does not include additional shares of Common Stock that may be issuable in
connection with the prior acquisition of Software Associates. See "CERTAIN
TRANSACTIONS -- Acquisition of Software Associates and Megascore."
(5) Based upon information available to the Company, it is believed that a Mr.
John Figliolini exercises sole voting and investment powers over the
Company's Common Stock on behalf of Sierra Growth & Opportunity.
(6) Mr. Conners has been granted options to purchase 104,338 shares on
September 11, 1997 under the 1997 Employee Plan, none of which can be
acquired within 60 days of this Report.
(7) Includes options to purchase 3,912 shares granted in 1997 under the 1997
Director Plan.
(8) All of such shares are held jointly by Mr. DiPalma and his spouse.
43
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ACQUISITION OF SOFTWARE ASSOCIATES AND MEGASCORE
On November 30, 1996, pursuant to a 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
224,330 shares with Mr. Konikowski of the Company's Common Stock for all of the
issued and outstanding capital stock of Software Associates. Accordingly,
Software Associates is presently a wholly owned subsidiary of the Company.
Pursuant to the SA Agreement, Kenneth R. Konikowski was named Executive
Vice President and a director of the Company and his Employment Agreement was
executed. Pursuant to the SA Agreement, as amended by letter agreements dated
April 17, 1997, November 20, 1997, and December 15, 1997 between the Company and
Mr. Konikowski, the Company is obligated to issue to Mr. Konikowski up to
178,420 additional shares of its Common Stock in the event the average closing
bid price of the Common Stock does not equal $21.565 per share for the five
trading days immediately prior to January 30, 2000. If any such additional
shares are issued, the ownership interest of all 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 as of the date of the Closing of this
Offering, Mr. Konikowski would own approximately 5% of the outstanding Common
Stock, and each of Steven L. Vanechanos, Jr. and Steve Vanechanos, Sr. would own
approximately 10% of the outstanding Common Stock, respectively.
On September 30, 1996, pursuant to a Stock Purchase Agreement dated such
date among the Company, Megascore and Megascore's shareholders, the Company
acquired all of the issued and outstanding capital stock of Megascore in
exchange for 13,042 shares of Common Stock. Prior to such acquisition, Steven L.
Vanechanos, Jr. and Steve Vanechanos, Sr. were the President and Vice President,
Treasurer and Secretary, respectively, and collectively owned of record
approximately 86% of the outstanding capital stock of Megascore. Megascore is
presently a wholly-owned subsidiary of the Company. Megascore is a full-service
systems integrator specializing in distribution, accounting and point-of-sale
computer software consulting services for suppliers and retailers. The
consideration paid to the Megascore shareholders was determined by the Company's
Board of Directors, which was at that time composed of Mr. Vanechanos Sr., Mr.
Vanechanos, Jr., Robert Droste, and Patrick Ahearn. The Board of Directors
ascribed a value of $100,000 to Megascore, based upon the Board's evaluation of
the fair value of Megascore's assets. Also, the Board of Directors ascribed a
value of $7.67 per share to the shares of Common Stock of the Company to be
issued to the shareholders of Megascore in that transaction, meaning that the
13,042 shares issued in the transaction had a total value of $100,000. The Board
of Directors made its determination that the shares of the Company's Common
Stock had a value of $7.67 per share by considering the following principal
factors: (a) those shares were not registered under the Securities Act, and
therefore would not be freely tradable, (b) the quoted bid price for the
Company's publicly traded Common Stock during the quarter ended September 30,
1996 was in the range of $14 7/8 to $15 3/4 per share, and (c) in April of 1996
the Company sold 89,601 shares of Common Stock in a private placement
transaction at the price of $5.56 per share. Each of Mr. Vanechanos Sr. and Mr.
Vanechanos, Jr. received 3,912 shares of Common Stock in the Megascore
transaction. Steve Vanechanos, Sr. had paid a total of $12,443.43 for the shares
of Megascore that he exchanged in that transaction, and Steven L. Vanechanos,
Jr. had paid a total of $9,250 for the shares of Megascore that he exchanged in
that transaction.
SIGNIFICANT SHAREHOLDER
As of December 1, 1997 (after giving effect to the contribution of Common
Stock by certain of the Company's existing Shareholders to the capital of the
Company) Michael Vanechanos is the beneficial owner of 102,134 shares of Common
Stock representing approximately 7% of the issued and outstanding Common Stock
of the Company as of such date. He received 85,448 of those shares from the
Company in March, 1996 in exchange for shares he owned in DWTS, as part of the
Company's acquisition of DWTS, and received 71,734 of those shares as a finder's
fee from Berkshire Financial Corp. in connection with the Company's acquisition
of DWTS. He purchased 13,042 of those shares in an open market transaction on
April 30, 1997. Mr. Vanechanos is presently employed as a securities trader at
H.J. Meyers & Co., Inc., the Representative in this Offering and the placement
agent in the Interim Financings. Michael Vanechanos is the brother of Steven L.
Vanechanos, Jr., the Company's Chairman of the Board and Chief Executive
Officer, and is the son of Steve Vanechanos, Sr., the Company's Vice President,
Treasurer, Secretary and a director. See "PRINCIPAL STOCKHOLDERS." Each of the
foregoing individuals disclaims beneficial ownership of the shares of Common
Stock owned by the others.
OFFICE LEASE
The Company leases a portion of its office facility from the Mask Group, a
partnership in which Kenneth R. Konikowski, the Executive Vice President of the
Company and a director, and his wife are partners. The annual rent under such
lease is approximately $40,000, subject to fixed annual increases of 3%, plus
the payment of condominium maintenance fees. The lease expires on December 31,
2002. The Company believes that the rent charged by the Mask Group approximates
fair market rents in the area and is no less favorable to the Company than would
have been obtained from an unaffiliated third party for similar office space.
The Company is jointly obligated with the Mask Group on approximately $246,000
of indebtedness (as of September 1, 1997) to a third party lender to the Mask
Group relating to a mortgage loan on those premises. The Mask Group is making
the payments on that loan, and has informed the Company that the loan is
current.
OFFICER LOANS
Steven L. Vanechanos, Jr. has loaned $102,675 to the Company, $23,000 of
which was advanced on July 11, 1997, $35,000 of which was advanced on July 28,
1997, $875 of which was advanced on August 1, 1997, $16,000 of which was
advanced on August 11, 1997, $2,800 of which was advanced on September 26, 1997,
and $25,000 of which was advanced on December 9, 1997. Steve Vanechanos, Sr. has
loaned $40,000 to the Company, $7,000 of which was advanced on July 23, 1997,
$30,000 of which was advanced on July 28, 1997, and $3,000 of which was advanced
on August 20, 1997. These loans bear interest at 8% per annum.
44
FUTURE TRANSACTIONS
All future transactions between the Company and its officers, directors,
principal shareholders and affiliates will be approved by a majority of the
Board of Directors, including a majority of the independent and disinterested
outside directors on the Board of Directors, and will have terms no less
favorable to the Company than could be obtained from unrelated third parties.
SHAREHOLDINGS OF CERTAIN PRINCIPALS
In connection with August 1997 Financing, the placement agent, H.J. Meyers
& Co., Inc., required that Steven L. Vanechanos, Jr. and Steve Vanechanos, Sr.
make a contribution to the capitalization of the Company. That contribution was
in the form of a relinquishment of a portion of their previously outstanding
Common Stock. In particular, on October 31, 1997, Steven L. Vanechanos, Jr. and
Steve Vanechanos, Sr. each contributed to the Company, for a total of $1.00 paid
to each, 33,330 shares of Common Stock of the Company owned by them. Steven L.
Vanechanos, Jr. and Steve Vanechanos, Sr. also participated in the Contribution
of Stock. See "RECENT DEVELOPMENTS -- Contribution of Stock By Certain
Shareholders."
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).
45
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).
3.1.9 Certificate of Amendment to Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
January 6, 1998.*
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
(incorporated by reference to Exhibit 3.2.3 filed with Registrant's
Annual Report on Form 10-KSB for the year ended September 30, 1996).
4.1 Specimen Stock Certificate (incorporated by reference to Exhibit
filed with the Registrant's Registration Statement No. 333-35579 on
Form SB-2 as amended).
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 (incorporated by reference to Exhibit
10.4 filed with Registrant's Report on Form 10-KSB for the year
ended September 30, 1996).
46
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 (incorporated by reference
to Exhibit 10.11 filed with Registrant's Report on Form 10-KSB for
the year ended September 30, 1996).
10.12 Lock-Up Agreement dated November 30, 1996 among the Registrant,
Steve L. Vanechanos, Jr. and Kenneth R. Konikowski (incorporated by
reference to Exhibit 10.12 filed with Registrant's Report on Form
10-KSB for the year ended September 30, 1996).
10.13 Employment Agreement dated December 1, 1996 between the Registrant
and Kenneth R. Konikowski (incorporated by reference to Exhibit
10.13 filed with Registrant's Report on Form 10-KSB for the year
ended September 30, 1996).
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.
(incorporated by reference to Exhibit 10.16 filed with Registrant's
Report on Form 10-KSB for the year ended September 30, 1996).
10.17 Lease Agreement dated July 1, 1994 between Software Associates, Inc.
and The Mask Group (incorporated by reference to Exhibit 10.17
filed with Registrant's Report on Form 10-KSB for the year ended
September 30, 1996).
10.18 Amendment No. 1 to Lease Agreement between Software Associates,
Inc. and The Mask Group (incorporated by reference to Exhibit 3 to
the Registrant's Form 8-K dated September 9, 1997).
10.19 Employment Agreement dated August 26, 1997, between the Registrant
and James D. Conners (incorporated by reference to Exhibit 1 to
Registrant's Form 8-K dated September 9, 1997).
10.22 Letter of Amendment dated November 20, 1997, amending Stock
Purchase Agreement dated April 7, 1997 between the Registrant and
Kenneth R. Konikowski (incorporated by reference to Exhibit 10.22
filed with the Registrant's Registration Statement No. 333-35579 on
Form SB-2 as amended).
10.23 Letter of Amendment Dated December 15, 1997, amending the Stock
Purchase Agreement dated April 7, 1997 between the Registrant and
Kenneth Konikowski.*
47