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 December 31, 2000; 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 10039
eB2B COMMERCE, 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.)
757 Third Avenue
New York, NY 10017
(Address of Principal Executive Offices)
Registrant's Telephone Number: (212) 703-2000
Securities registered under Section 12(b) of the Exchange Act:
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 in this form, 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. [X]
Issuer's revenues for fiscal year ended December 31, 2000: $5,468,000.
As of April 9, 2001, the aggregate market value of our company's common stock
(based upon the average sales prices on such date) of the Registrant held by
nonaffiliates was $10,547,000.
Number of shares of our company's common stock outstanding at April 9, 2001:
15,687,212.
Transitional Small Business Disclosure Format: Yes No X
----- -----
PART I
Item 1. Description of Business
General
eB2B Commerce, Inc. ("our Company") utilizes proprietary software to provide
services that create more efficient business relationships between trading
partners (i.e. buyers and suppliers). Our technology platform allows trading
partners to electronically automate the process of business document
communication and turn-around, regardless of what type of computer system the
partners utilize. Through our service offerings, our technology platform has the
capability of receiving business documents in any technology format, translating
the document into any other format readable by the respective trading partners
and transmits the document to the respective trading partner. We do not allow
our customers to take delivery of our proprietary software. We provide access
via the Internet to our proprietary software, which we maintain on our hardware
and on hosted hardware.
The business relationship between a buyer and a supplier is not created within
our platform; it is one which already exists. Our services enhance the
previously existing relationship as documents can be transmitted between a buyer
and a supplier in an electronic automated format utilizing our technology
platform. These documents include, but are not limited to, purchase orders,
purchase order acknowledgments, advanced shipping notices and invoices. Our
customers utilize our services for business documents primarily in the direct
goods area, which encompasses purchasing of finished goods for ultimate sale to
an end user, be that a consumer or a business.
In many cases the automation of the exchange of business documents is occurring
between a large buyer or supplier and their smaller trading partners. In the
past, these trading partners communicated with each other via phone, fax or
mail. Our services permit efficiencies among trading partners by significantly
reducing or eliminating the process of manual communications. This electronic
automation allows each trading partner to leverage their investment in
technology (hardware and software) by integrating business document transactions
directly into their back-end systems. These technologies include, but are not
limited to, Electronic Data Interchange ("EDI"), Point of Sale, Enterprise
Resource Planning, Accounting, Inventory, Supply Chain and/or Order Management.
The resulting efficiencies often reduce cost of staffing and cuts error rates
typically associated with manual processing of the respective business
documents.
In addition to the integration and automation capabilities of our services,
buyers and suppliers can also exchange documents and conduct business via a
catalog-based environment. This environment supports the needs of both buyer and
supplier throughout the trading life cycle. These include requisitions, order
management, fulfillment and settlement. This is especially useful to support the
trading needs of specific business partners in order to ensure products are
ordered and delivered in the most efficient and least expensive means available.
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Our Company also provides professional services to the same client base, as well
as to businesses that wish to build, operate or outsource the transaction
management of their business-to-business trading partner relationships and
infrastructure.
In addition, our Company provides authorized technical education, and also
designs and delivers custom computer and Internet-based on-line training
seminars.
History and Organization
eB2B Commerce, Inc. ("eB2B") was incorporated in the state of Delaware on
November 6, 1998.
On February 22, 2000, eB2B completed its acquisition of Netlan Enterprises, Inc.
and subsidiaries ("Netlan").
On April 18, 2000, eB2B merged with and into DynamicWeb Enterprises, Inc., a New
Jersey corporation and an SEC registrant ("DWeb"), with the surviving company
using the name "eB2B Commerce, Inc." (the "Company"). Pursuant to the Agreement
and Plan of Merger between eB2B and Dweb (the "Merger"), the shareholders of
DWeb retained their shares in DWeb, while the shareholders of eB2B received
shares, or securities convertible into shares, of common stock of DWeb
representing approximately 89% of the equity of the Company, on a fully diluted
basis.
The transaction was accounted for as a reverse acquisition, a "purchase business
combination" in which eB2B was the accounting acquirer and DWeb was the legal
acquirer. The management of eB2B remained the management of the Company. As a
result of the reverse acquisition, (i) the financial statements of eB2B are
the historical financial statements of the Company; (ii) the results of the
Company's operations include the results of DWeb after the date of the Merger;
(iii) the acquired assets and assumed liabilities of DWeb were recorded at
their estimated fair market value at the date of the Merger; (iv) all references
to the financial statements of the "Company" apply to the historical financial
statements of eB2B prior to the Merger and to the consolidated financial
statements of the Company subsequent to the Merger; (v) any reference to
eB2B applies solely to eB2B Commerce, Inc., a Delaware corporation, and its
financial statements prior to the Merger, and (vi) the Company's year-end is
December 31, that of the accounting acquirer, eB2B.
Industry Background
Businesses are increasingly seeking to improve their operating efficiency with
other businesses through electronically automated and integrated business to
business solutions. EDI is a specific form of business to business electronic
commerce, consisting of a standard protocol for electronic transmission of data
between a company and a third
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party. EDI has existed for over twenty years. It is a very expensive technology
to both implement and maintain and is, therefore, typically utilized by the
largest companies. In an EDI transaction, the computers of the buyer and the
supplier communicate and exchange the relevant information using an agreed-upon
or standard format. Until very recently, companies that wanted to conduct
business electronically were required to have a special type of computer network
called a value-added computer network or "VAN". For a significant fee, a VAN,
often managed by a separate third party, was responsible for the guaranteed
exchange of business documents between trading partners.
The emergence of the Internet as an alternative means of managing the
transactional flow of business to business document exchange has revolutionized
the way businesses operate and interact with their trading partners. The
Internet coupled with a new breed of software solutions has created technology
that supports highly efficient channels of communication and collaboration. The
Internet gives small and medium-sized buyers and suppliers access to the same
efficiencies associated with traditional EDI systems. In addition, the
combination of the Internet and these new software technologies enables buyers
and suppliers of all sizes to electronically exchange business documents and
interact with a greater number of potential trading partners.
Business Overview
Our Company utilizes proprietary software to provide a technology platform for
large buyers and large suppliers to transfer business documents via the Internet
to their small and medium-sized trading partners. These documents include, but
are not limited to, purchase orders, purchase order acknowledgements, advanced
shipping notices and invoices. We do not allow our customers to take delivery of
our proprietary software. We provide access via the Internet to our proprietary
software, which we maintain on our hardware and on hosted hardware.
Our technology platform has the capability of integrating trading partners,
electronically automating the exchange of business documents between trading
partners and supporting the collaboration of information across an enterprise's
trading partner community. Integration encompasses the ability to translate
documents from the buyer's required format to the supplier's required format
(or vice versa). This "any to any" capability insures each organization is able
to leverage their existing technology environment while supporting the specific
needs of their trading partners. Automation allows trading partners to
communicate with each other regardless of the type of computer system, hardware
and software, each partner is utilizing. Collaboration supports the ability for
trading partners to not only exchange business documents but unlock the
potential the information these business documents provide. This includes, for
example, product movement information and vendor performance.
Many large retailers and large suppliers transfer business documents between
each other via EDI. Our platform, utilizing the Internet as a delivery
mechanism, allows these large
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EDI enabled companies to transfer documents to companies that are otherwise not
EDI capable. Additionally, our services permit the transmission of documents
between two trading partners even when neither is EDI capable.
We estimate that currently only 4% of all transactions between businesses in the
United States of America are done with document transfer via EDI. The other 96%
of transactions and the related transfer of documents are conducted via phone,
fax and mail. This is our target market. Our Company provides services to
automate currently existing business relationships. The simplicity of doing
electronic automated transactions using our services can help create additional
business among the trading partners, but it is not intended as a marketplace
solution in that we do not intend to create new relationships for trading
partners through our technology platform.
Our Company is positioned to utilize the Internet to streamline business
processes related to transmitting documents from one business to another.
Utilizing our hosted infrastructure as their technology platform, companies
previously unable to afford the high cost and complexity of doing business with
EDI, can now electronically transact business among their trading partners in a
more simple, cost effective manner. The benefits of this approach - integration,
automation and collaboration - allow companies utilizing our services to trade
more efficiently, accurately and inexpensively while complying with the trading
requirements of their partners.
Large EDI enabled retailers can utilize our services as a means to
electronically communicate and transfer business documents to their small and
medium-sized suppliers. Likewise, large EDI enabled suppliers can utilize our
services to electronically communicate and transfer business documents to their
small and medium-sized retailers. Small and medium-sized retailers and suppliers
can transfer business documents even when neither party is EDI enabled.
Utilizing our services reduces manual processing costs from each organization,
thereby creating efficiencies for both trading partners, as this method of
transferring business documents is much less time consuming than transactions
conducted through the phone, fax or mail. Additionally, our technology platform
significantly reduces error rates normally associated with the processing of
manual documents.
Our Company also offers professional services, which provide consulting
expertise to the same client base, as well as to other businesses that prefer to
operate or outsource the transaction management and document exchange of their
business-to-business relationships. As such, our consultants could reside at a
large EDI enabled retailer or supplier with the objective of providing EDI
expertise that does not exist on-site.
Our transaction processing technology platform and professional services make
up one business unit defined as "transaction processing and related services."
We believe that our proprietary software provides the following advantages to
trading partners:
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Benefit to Suppliers
- Significant reduction in order processing costs
- Reduced customer service costs
- Ability to support the transactional and other requirements of their
trading partners
- Increased inventory turnover and order-to-delivery cycle time
- Up-sell and cross-sell opportunities
- Supplier-buyer demand collaboration
- Improved purchasing history and buying pattern information
- Increased ability to project demand cycles
- Access to broader buying community
- Improved customer service
Benefit to Buyers
- Significant reduction in order management costs
- Substantially more convenient and efficient ordering
- Ability to support the transactional and other trading requirements of
their trading partners
- Real-time information exchange, with access order status, shipment
timing and inventory availability
- Improved product information via online catalog access
- Faster delivery and increased inventory turns
- Significant reduction in order error rates
- Buyer-supplier demand collaboration
- Access to broader base of suppliers
Our Company provides a complete solution, tailored for each customer and
designed specifically for their business processes. By leveraging our expertise
in EDI, business to business transaction management and document exchange,
application development, and Internet networking, our Company is able to provide
a suite of services that facilitate the transfer of business documents among
trading partners. Customers can use our services not only to electronically send
business documents to each other, but also to achieve demand chain transparency
by having access, as appropriate, to their trading partners data systems via our
proprietary software. Customers of any size or capability can communicate,
exchange documents and transact business with their trading partners regardless
of the type of integration, connectivity or data format. The ability for each
trading partner to both leverage their existing investment in technology
(hardware and software) while supporting the requirements of their trading
partners is an important cost saving feature.
Our services integrate the entire trading process, from requisition to order
management, to fulfillment and settlement. Automated transaction management
across the trading lifecycle supports the synchronization of product movements
through the demand chain. The higher efficiencies and cost savings are
quantifiable to both sides of the trading equation.
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Our Company is also an authorized provider of technical education to our clients
for products of Citrix, Lotus Development Corporation, Microsoft Corporation,
and Novell Inc. We design and deliver custom technical education for the same
client base and provide education through delivery of custom computer and
Internet-based on-line training seminars. This is our second business unit
defined as "training and client educational services".
Markets and Marketing
The marketing goals of transaction processing and related services have been to
attract and retain buyers and suppliers principally in the following vertical
industries:
- Chain Drug,
- Sporting Goods,
- Toys.
These sizeable industries are characterized by certain operating inefficiencies.
Management believes that increasing margin pressures, a need to increase
technological sophistication, and a low or average penetration of EDI make these
industries attractive vertical markets for their transaction processing and
related services.
While our sales focus is primarily directed toward specific targeted vertical
markets, our proprietary software was built to operate across many verticals (a
horizontal focus) without requiring significant enhancements. This will allow
us to more easily expand into additional vertical markets in the future.
Key clients in the chain drug vertical include Rite Aid, Duane Reade, Eckerd,
Brooks Pharmacy, Drug Fair and Phar-Mor. In the sporting goods vertical, major
customers include Spalding, Athlete's Foot, Bike Athletic, Golf Galaxy and
Carbite Golf. In the toys vertical, our Company's main customer is Toys R US.
Additionally we have attracted other large customers, including Verizon, Best
Buy and Linens `N Things, which use our transaction processing and related
services.
We market and sell our services through a direct sales force in the United
States of America. To extend our vertical market reach and increase sales
opportunities in the vertical industries we have selected, we participate in
national trade shows and establish relationships with trading partners.
We anticipate that alliances with technology firms and other partnerships will
continue to be integral to our success. To continue to bring the best solution
to market, we plan on further technology partnerships that extend our core
solutions including reseller and other relationships. In order to leverage our
current direct sales force and add new revenue streams, we also expect to
establish alliances with other firms that have an established presence in our
vertical markets. Likely companies for us to partner with would include software
and services firms in our vertical markets and associations that play a key role
in
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influencing buying behavior. For example, joint marketing or sales programs with
alliance partners would be intended to gain access to several large buyers,
enabling our Company to add connections to many of their small and
medium-sized suppliers.
Current partnering examples include the National Association of Chain Drug
Stores alliance completed in 2000 and the February 2001 announcement with
PangeaToyNet.com, a toy community. ChainDrugStore.net, the for-profit subsidiary
of the National Association of Chain Drug Stores, co-markets our services to its
membership base. The PangeaToyNet.com alliance provides for joint marketing
efforts with our Company and offering of our services to its membership base of
toy retailers and suppliers.
As of December 31, 2000, our Company connected approximately 150 retail
organizations and 1,600 supply organizations to their trading partners. As of
April 1, 2001, our Company is processing in excess of 500,000 transactions per
quarter.
Major training and educational services' customers include AOL Time Warner,
Chase Manhattan Bank, PricewaterhouseCoopers and Teachers' Insurance - TIAA -
CREF.
In the year ended December 31, 2000, one customer accounted for approximately
17% of our Company's total revenue.
Revenue Recognition
The Company earns revenue from two business units: (1) transaction processing
and related services; and (2) training and client educational services.
Revenue from transaction processing is recognized on a per transaction basis
when a transaction occurs between a buyer and a supplier. The fee is based
either on the volume of transactions processed during a specific period,
typically one month, or calculated as a percentage of the dollar volume of the
purchase related to the documents transmitted during a similar period. Revenue
from related implementation, if any, and monthly hosting fees are recognized on
a straight-line basis over the term of the contract with the customer. Deferred
income includes amounts billed for implementation and hosting fees, which have
not been earned.
Our Company does not generate revenue from the selling, leasing or licensing of
computer software. We provide access via the Internet to our proprietary
software, which resides within our technology platform.
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For related consulting arrangements on a time-and-materials basis, revenue is
recognized as services are performed and costs are incurred in accordance with
the billing terms of the contract.
Revenues from related fixed price consulting arrangements are recognized using
the percentage-of-completion method. Progress towards completion is measured
using efforts-expended method based upon management estimates. Fixed price
consulting arrangements are mainly short-term in nature and our Company does not
have a history of incurring losses on these types of contracts. If we were to
incur a loss, a provision for the estimated loss on the uncompleted contract
would be recognized in the period in which such loss becomes probable and
estimable. Billings in excess of revenue recognized under the
percentage-of-completion method on fixed price contracts is included in deferred
income.
Revenue from training and client educational services is recognized upon the
completion of the seminar and is based upon class attendance. If a seminar
begins in one period and is completed in the next period, our Company recognizes
revenue based on the percentage of completion method for the applicable period.
Deferred income includes amounts billed for training seminars and classes that
have not been completed.
Competition
Business-to-business electronic commerce is a new and rapidly evolving industry,
competition is intense and is expected to increase in the future. Management
believes that our Company provides a unique service in the business-to-business
electronic commerce area, where a small to medium-sized retailer can process
transactions with multiple suppliers, and small to medium-sized suppliers can
process transactions with multiple retailers.
Our Company's direct competition falls into two general categories: direct
vertical and indirect horizontal competitors. Direct vertical competitors are
focused on the demand chain in the Company's vertical markets. Indirect
horizontal competitors are focused on similar products but not in specific or
multiple vertical industries. The Company's major direct vertical competitors
are iCongo.com and Channel-Sports. Major indirect horizontal competitors include
Automated Data Exchange (ADX) (formerly known as The EC Company) and SPS
Commerce. All competitors are privately held businesses and minimal public
information is available on their efforts to date.
Also, our Company believes that competition may develop from four additional
areas: EDI/electronic commerce companies, technology/software development
companies, retailer purchasing organizations, and leading industry
manufacturers. Additionally, large retailers and suppliers can create their own
technology platform to automate the exchange of business documents with their
small and medium-sized trading partners, thereby reducing the number of large
retailers and suppliers in our target markets. However, our Company believes it
will prove to be an inefficient use of resources for these large
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companies to build a technology platform for their internal use as compared to
using our services.
Intellectual Property
Our Company's success depends on its ability to maintain the proprietary aspects
of its technology and operate without infringing the proprietary rights of
others. It relies on a combination of trademarks, patents, trade secrets and
copyright law, as well as contractual restrictions, to protect the proprietary
aspects of its technology. Our Company seeks to protect the source code for its
proprietary software, documentation and other written materials under trade
secret and copyright law.
Our Company also seeks to protect its intellectual property by requiring
employees and consultants with access to proprietary information to execute
confidentiality agreements with our Company and by restricting access to its
source code.
Due to rapid technological change, management believes that factors such as the
technological and creative skills of its personnel and consultants, new product
developments and enhancements to existing services are equally as important as
the various legal protections of its technology to establish and maintain a
technology leadership position.
Government Regulation
Our Company's services enable buyers and suppliers to transmit documents to
their trading partners over dedicated and public telephone lines. These
transmissions are governed by regulatory policies establishing charges and terms
for communications. Management believes that our Company is in compliance with
applicable regulations.
In addition, due to the increasing popularity and use of the Internet, our
Company might be subject to increased regulation. Such laws may regulate issues
such as user privacy, defamation, network access, pricing, taxation, content,
quality of products and services, and intellectual property and infringement.
These laws could expose our Company to liability, materially increase the cost
of providing services, and decrease the growth and acceptance of the Internet in
general, and access to the Internet over cable systems.
Product Development
Our Company's product development efforts for our proprietary software are
directed toward the development of new complementary services and the
enhancement and expansion of the capabilities of existing services. Product
development expenses (exclusive of stock-based compensation) were approximately
$2,698,000 and $572,000 for the years ended December 31, 2000 and 1999,
respectively. During the year ended December 31, 1999,
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eB2B abandoned the use of the product development expenditures capitalized at
December 31, 1998, and recorded a $174,000 write-down.
Our Company continues to make the product development expenditures that
management believes are necessary to rapidly deliver new features and functions.
As of December 31, 2000, 6 employees were engaged in product development
activities. In addition, based on its specific needs to rapidly deliver new
features and functions, our Company hires consultants who take part in product
development activities.
Personnel
As of December 31, 2000, our Company employed 79 full-time employees and 3
part-time employees. Many of our Company's employees are highly skilled, with
advanced degrees. Our Company's continued success depends upon its ability to
continue to attract and retain highly skilled employees. Our Company has never
had a work stoppage, and none of its employees are represented by a labor
organization. Our Company considers its employee relations to be good.
Item 2. Description of Property
Our Company operates out of two offices in New York, New York. The following
table sets forth information on our Company's properties:
Principal Address Square Footage Owned/Leased Purpose
- ----------------------------------------------------------------------------------------
757 Third Avenue 22,600 Leased Corporate Headquarters &
New York, NY 10017 Technology Center
29 West 38th Street 6,400 Leased Training Center
New York, NY 10018
The lease for our premises at 757 Third Avenue expires in April 2007.
Item 3. Legal Proceedings
In October 2000, Cintra Software & Services Inc. ("Cintra") commenced a civil
action against the Company in New York Supreme Court, New York County. The
complaint alleges that the Company acquired certain software from Cintra upon
the authorization of the Company's former Chief Information Officer. Cintra is
seeking damages of approximately $856,000. While the actions are at an early
stage, the Company believes it has meritorious defenses to the allegations made
in the complaint and intends to vigorously defend the action.
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On March 2, 2001, a former employee commenced a civil action against the
Company and two members of its management in the Supreme Court of the State of
New York, County of New York, seeking, among other things, compensatory damages
in the amount of $1.0 million and additional punitive damages of $1.0 million
for alleged defamation in connection with his termination by the Company, as
well as a declaratory judgment concerning his alleged entitlement to stock
options to purchase 75,000 shares of the Company's common stock. The Company has
not yet responded to the Complaint and no discovery has commenced. The Company
disputes these claims and intends to vigorously defend the action.
The Company is not currently a party to any other material legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal year
2000.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock has been quoted on the Nasdaq SmallCap Market under
the symbol "EBTB" since August 15, 2000. Prior to such time, the Company's
common stock was quoted on the Over-the-Counter Bulletin Board maintained by the
National Association of Securities Dealers. The volume of trading in the
Company's common stock has been limited during the period presented until August
15, 2000, the date the Nasdaq SmallCap Market began quoting our common stock and
the closing sale prices reported may not be indicative of the value of the
Company's common stock or the existence of an active trading market prior to
such date.
The following table sets forth the high and low closing sale prices
for the Company's common stock for the periods indicated:
Quarter Ended High Low
------------- ---- ---
March 31, 1999................................................ 9-3/8 3-3/8
June 30, 1999................................................. 9 5-1/4
September 30, 1999............................................ 6 3-9/16
December 31, 1999............................................. 16 2-15/16
March 31, 2000................................................ 18-1/2 9-7/8
June 30, 2000................................................. 14 3-1/4
September 30, 2000............................................ 5-7/16 2-1/16
December 31, 2000............................................. 2-5/32 45/64
As of March 30, 2001, the Company had approximately 3,000 stockholders of
record.
No cash dividends have ever been paid on the Company's common stock and the
Company does not anticipate paying cash dividends in the foreseeable future. The
Company currently intends to retain any future earnings for reinvestment in its
business. Any future determination to pay cash dividends will be at the
discretion of the Company's board of directors and will be dependent upon the
Company's financial condition, results of operations, capital requirements and
other relevant factors.
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Item 6. Management's Discussion and Analysis or Plan of Operation
Restatement
Management determined that the valuation methodology utilized by eB2B in
1999 to ascribe fair value to warrants issued in connection with certain
financing and other transactions, as well as to compensation related to certain
employee stock options, should be revised. Upon further review, management
determined that (i) the Black-Scholes option pricing model should have been used
to estimate the respective fair value of such warrants, and (ii) the options
issued to employees after commencement of the merger discussions with DWeb on
October 27, 1999 should have reflected the 2.66 to 1 exchange ratio in the
Merger. As a result, the financial statements of eB2B as of December 31, 1999
and for the year then ended have been restated to reflect the utilization of the
Black-Scholes pricing model and to give effect to the 2.66 to 1 exchange ratio
in the Merger, where applicable. The effect of the restatement was to increase
additional paid-in capital by $3,568,000, increase unearned stock-based
compensation by $1,502,000, and increase accumulated deficit during the
development stage by approximately $2,066,000, resulting in no change to the
total stockholders' equity as of December 31, 1999; and to increase the net loss
attributable to common stockholders by $2,066,000, a non-cash charge, for the
year ended December 31, 1999. In addition, the disclosures in Note 10 and 11 to
the Company's consolidated financial statements have been revised to reflect the
utilization of the Black-Scholes option pricing model and to give effect to the
2.66 to 1 exchange ratio in the Merger, where applicable. See Note 3 to the
Company's consolidated financial statements.
Forward Looking Statements
The following discussion and analysis should be read in conjunction with the
consolidated financial statements included in this report. It is intended to
assist the reader in understanding and evaluating the financial position of the
Company. This report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Words such as
"may", "will", "should", "could", "expects", "plans", "intends", "anticipates",
"believes", "estimates", "potential", or "continue" or the negative of such
terms and other comparable terminology are intended to identify forward-looking
statements. Our actual results could differ materially from the results
discussed in the forward-looking statements. Risk factors that could cause or
contribute to such differences include those discussed in the risk factors
described under the caption "Management's Discussion and Analysis or Plan of
Operation - Certain Trends and Uncertainties" of this document.
Overview
The Company utilizes proprietary software to provide a technology platform for
large buyers and large suppliers to transfer business documents via the Internet
to their small and medium-sized trading partners. These documents include, but
are not limited to, purchase orders, purchase order acknowledgements, advanced
shipping notices and
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invoices. The Company does not allow customers to take delivery of its
proprietary software. The Company provides access via the Internet to its
proprietary software, which is maintained on its hardware and on hosted
hardware. The Company also offers professional services, which provide
consulting expertise to the same client base, as well as to other businesses
that prefer to operate or outsource the transaction management and document
exchange of their business-to-business relationships.
In addition, the Company is an authorized provider of technical education to its
clients for products of Citrix, Lotus Development Corporation, Microsoft
Corporation, and Novell Inc. The Company designs and delivers custom technical
education for the same client base and provides education through delivery of
custom computer and Internet-based on-line training seminars.
Revenue from transaction processing is recognized on a per transaction basis
when a transaction occurs between a buyer and a supplier. The fee is based
either on the volume of transactions processed during a specific period,
typically one month, or calculated as a percentage of the dollar volume of the
purchase related to the documents transmitted during a similar period. Revenue
from related implementation, if any, and monthly hosting fees are recognized on
a straight-line basis over the term of the contract with the customer. Deferred
income includes amounts billed for implementation and hosting fees, which have
not been earned. For related consulting arrangements on a time-and-materials
basis, revenue is recognized as services are performed and costs are incurred in
accordance with the billing terms of the contract. Revenues from related fixed
price consulting arrangements are recognized using the percentage-of-completion
method. Fixed price consulting arrangements are mainly short-term in nature and
the Company does not have a history of incurring losses on these types of
contracts. If the Company were to incur a loss, a provision for the estimated
loss on the uncompleted contract would be recognized in the period in which such
loss becomes probable and estimable. Billings in excess of revenue recognized
under the percentage-of-completion method on fixed price contracts is included
in deferred income.
Revenue from training and client educational services is recognized upon the
completion of the seminar and is based upon class attendance. If a seminar
begins in one period and is completed in the next period, the Company recognizes
revenue based on the percentage of completion method for the applicable period.
Deferred income includes amounts billed for training seminars and classes that
have not been completed.
On February 22, 2000, eB2B completed its acquisition of Netlan. Pursuant to the
Agreement and Plan of Merger (the "Netlan Merger"), Netlan's stockholders
exchanged 100% of their common stock for 46,992 shares of eB2B common stock
(equivalent to 125,000 shares of Company common stock). Additionally, 75,188
shares of eB2B common stock (equivalent to 200,000 shares of Company common
stock) were issued, placed into an escrow account, and may be released to
certain former shareholders of Netlan upon successful completion of escrow
requirements, including continued employment with the Company. The purchase
price of the Netlan Merger was approximately $1.6 million. The Company recorded
approximately $4,896,000 of
II-3
goodwill and approximately $334,000 of other intangibles in connection with this
transaction.
On April 18, 2000, eB2B merged with and into DWeb, a New Jersey corporation,
with the surviving company using the name "eB2B Commerce, Inc.". Pursuant to the
Agreement and Plan of Merger between eB2B and DWeb (the "Merger"), the
shareholders of DWeb retained their shares in DWeb, while the shareholders of
eB2B received shares, or securities convertible into shares, of common stock of
DWeb representing approximately 89% of the equity of the Company, on a fully
diluted basis. The transaction was accounted for as a reverse acquisition.
The reverse acquisition was accounted for as a purchase business combination in
which eB2B is the accounting acquirer and DWeb is the legal acquirer. As a
result of the reverse acquisition, (i) the financial statements of eB2B are
the historical financial statements of the Company; (ii) the results of the
Company's operations include the results of DWeb after the date of the Merger;
(iii) the acquired assets and assumed liabilities of DWeb were recorded at
their estimated fair market value at the date of the Merger; (iv) all references
to the financial statements of the "Company" apply to the historical financial
statements of eB2B prior to the Merger and to the consolidated financial
statements of the Company subsequent to the Merger; and (v) any reference to
eB2B applies solely to eB2B Commerce, Inc., a Delaware corporation, and its
financial statements prior to the Merger. The purchase price of the Merger was
approximately $59.1 million, of which approximately $1.9 million was allocated
to identifiable net liabilities assumed, $58.1 million was allocated to
goodwill and $2.9 million was allocated to other intangibles.
The goodwill resulting from the above business combinations is being amortized
over five years and other intangibles are being amortized over a three-year
period. For the year ended December 31, 2000, amortization related to the
goodwill and other intangibles acquired in the Netlan and DWeb acquisitions
totaled approximately $9.8 million.
The Company's financial condition and results from operations were dramatically
different during the years ended December 31, 2000 and 1999. For the year ended
December 31, 2000, the Company's results reflect the new operations of the
Company, the operations of Netlan since March 1, 2000 and the operations of DWeb
since April 19, 2000. eB2B did not recognize any revenue in 1999. eB2B was a
development stage company, which primarily devoted its operations to recruiting
and training of employees, development of its business strategy, design of a
business system to implement its strategy, and development of business
relationships with buyers and suppliers. As a result, the Company believes that
the results of operations for the year ended December 31, 1999 are not
comparable to the results of operations for the same period in 2000 and the
Company's anticipated financial condition and results of operations going
forward. Furthermore, the Company's limited operating history makes the
prediction of future operating results very difficult. The Company believes that
period-to-period comparisons of operating results should not be relied upon as
predictive of future performance. The Company's prospects must be considered in
light of the risks, expenses and difficulties
II-4
encountered by companies at an early stage of development, particularly
companies in new and rapidly evolving markets. The Company may not be successful
in addressing such risks and difficulties.
Results of Operations
Revenue
Total revenue for the year ended December 31, 2000 amounted to $5,468,000.
During the same period in 1999, the Company was a development stage company and
did not recognize any revenue.
The Company's transaction processing and related services' business segment
generated revenue of $3,039,000 for the year ended December 31, 2000. Such
revenue includes fees paid for processing transactions between buyers and
suppliers, and related professional services revenue. The Company is an
authorized provider of technical education to its client base, and also designs
and delivers custom computer and Internet-based training. Training and client
educational services generated revenues of $2,429,000 during the year ended
December 31, 2000.
In the year ended December 31, 2000, one customer accounted for approximately
17% of the Company's total revenue.
Costs and Expenses
Cost of revenue consists primarily of salaries and benefits for employees
providing technical support as well as salaries and benefits of personnel
providing consulting and training services to clients. Total cost of revenue for
the year ended December 31, 2000 amounted to $2,839,000. Cost of revenue was nil
in 1999 as no revenue was generated.
Marketing and selling expenses consist primarily of employee salaries, benefits
and commissions, and the costs of promotional materials, trade shows and other
sales and marketing programs. Marketing and selling expenses (exclusive of
stock-based compensation) were approximately $2,804,000 for the year ended
December 31, 2000. Marketing and selling expenses (exclusive of stock-based
compensation) were nil in 1999.
Product development expenses consist primarily of payments to outside
contractors and personnel and related costs associated with the development of
the Company's proprietary software and technological infrastructure for its
platform necessary to process transactions, including the amortization of
certain capitalized costs. Product development expenses (exclusive of
stock-based compensation) were approximately $2,698,000 and $572,000 in 2000 and
1999, respectively. During the year ended December 31, 1999, eB2B abandoned the
use of the product development costs capitalized at December 31, 1998, and
recorded a $174,000 write-down.
II-5
The Company capitalizes qualifying computer software costs incurred during the
application development stage. Accordingly, the Company anticipates that product
development expenses will fluctuate from quarter to quarter as various
milestones in the development process are reached and future versions are
implemented.
General and administrative expenses consist primarily of (i) employee salaries
and related expenses for executives, administrative and finance personnel, (ii)
depreciation and amortization of property and equipment, as well as (iii) other
consulting, legal and professional fees, and, to a lesser extent, (iv) facility
and communication costs. In 2000 and 1999, total general and administrative
expenses (exclusive of stock-based compensation) amounted to $13,438,000 and
$1,670,000, respectively. During the first six months of 2000, non-recurring
outside contractor and consulting fees in relation to the design and the
implementation of the Company's strategy and management structure totaled
approximately $2.2 million.
During the third quarter of 2000, the Company entered into a lease for new
office space expiring in April 2007. During the fourth quarter of 2000, the
Company consolidated all its current locations into the new space with the
exception of its training center. This consolidation allowed the Company to
better streamline its operations and to reduce its overall cost structure.
Amortization of goodwill and other intangibles are non-cash charges associated
with the DWeb and Netlan business combinations. Such amortization expenses were
$9,829,000 for the year ended December 31, 2000. The Company periodically
assesses the recoverability of goodwill and other intangibles based upon
expectations of undiscounted future cash flows. Depending on the result of such
assessment in future periods, management may deem it necessary to record an
impairment charge.
In 2000 and 1999, stock-based compensation expense amounted to $16,027,000 and
$2,686,000, respectively. This relates primarily to deferred stock compensation
for options and warrants granted to employees, consultants and business
partners. The deferred stock compensation is being amortized over the vesting
periods of the related options and warrants. The vesting period of the options
and warrants ranges principally from two to four years with the exception of
500,000 options to purchase shares of eB2B common stock (equivalent to
1,330,000 shares of Company common stock) which vested upon the completion of
the Merger and generated a one-time charge of approximately $8.8 million in the
second quarter of 2000.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
The Company defines EBITDA as net income (loss) adjusted to exclude: (i)
provision (benefit) for income taxes, (ii) interest income and expense, (iii)
depreciation, amortization and write-down of assets, and (iv) stock-related
compensation.
EBITDA is discussed because management considers it an important indicator of
the operational strength and performance of its business based in part on the
significant level of non-cash expenses recorded by the Company to date, coupled
with the fact that these
II-6
non-cash items are managed at the corporate level. EBITDA, however, should not
be considered an alternative to operating or net income as an indicator of the
performance of the Company, or as an alternative to cash flows from operating
activities as a measure of liquidity, in each case determined in accordance with
generally accepted accounting principles in the United States of America. See
Liquidity and Capital Resources for a discussion of cash flow information.
For the years ended December 31, 2000 and 1999, EBITDA was a loss of $13,104,000
and $1,435,000, respectively. During the year ended December 31, 2000, the
Company expensed non-cash items including depreciation and amortization,
stock-based compensation expense, write-down of assets and the cost of shares
and warrants issued for services aggregating to $29,170,000, compared to
$6,671,000, including bridge loan financing costs of $3,178,000, for the same
period in 1999.
Interest income amounted to $1,130,000 for the year ended December 31, 2000 and
related primarily to interest earned on private placement proceeds. The $191,000
interest expense incurred during the year ended December 31, 2000 was chiefly
associated with the $2.5 million term loan obtained from a bank (the "Bank") in
February 2000. In 1999, interest was an expense of $3,192,000, which included
$3,178,000 incurred in connection with eB2B's bridge loan financing costs.
Net loss for the year ended December 31, 2000 was $41,335,000 compared to a net
loss of $8,120,000 for the same period in 1999.
As a result of the Merger, eB2B's 3.3 million shares of Series B preferred stock
issued for net proceeds of $29,442,000 were convertible into approximately 16.0
million shares of Company common stock valued at $124.4 million based on the
average quoted market price of DWeb's common stock in the three-day period
before and after December 1, 1999, the date at which the parties signed the
definitive merger agreement. As this value was significantly greater than the
net proceeds received in the private placement of Series B preferred stock, the
net proceeds received were allocated to the convertible feature and amortized as
a deemed dividend on preferred stock, resulting in a corresponding charge to
retained earnings and a credit to additional paid-in capital within the
stockholders' equity as of December 31, 1999.
Net loss attributable to common stockholders for the year ended December 31,
2000 was $41,335,000 and equaled the net loss for the period. For the same
respective period in 1999, the net loss attributable to common stockholders
amounted to $37,562,000 and reflected the effect of the $29,442,000 deemed
dividend on preferred stock.
Liquidity and Capital Resources
Since its inception on November 6, 1998, the Company has incurred significant
operating losses, net losses and negative cash flows from operations, due in
large part to the start-up and development of its operations and the development
of proprietary software and technological infrastructure for its platform to
process transactions. The Company expects that its net losses and negative cash
flows from operations will continue as it implements its growth strategy. The
Company anticipates increased revenues throughout
II-7
2001, which, if achieved, will reduce its net losses and improve cash flows from
operations in 2001 as compared to 2000. There can be no assurances that revenues
will improve in 2001, or that net losses and negative cash flows from operations
will be reduced. Historically, the Company has funded its losses and capital
expenditures through borrowings, capital contributions, and a portion of the net
proceeds of prior securities offerings. From inception through December 31,
2000, net proceeds from private sales of common stock and preferred stock
totaled approximately $29.9 million.
Net cash used in operating activities totaled approximately $9,416,000 for the
year ended December 31, 2000 as compared to net cash used in operating
activities of approximately $589,000 for the same period in 1999. Net cash used
in operating activities for the year ended December 31, 2000 resulted primarily
from the $41,335,000 net loss in the period offset by (i) an aggregate of
$29,170,000 of non-cash charges consisting primarily of depreciation,
amortization and stock-based compensation expense, and (ii) a combined
$3,318,000 increase in accounts payable and accrued expenses mainly attributable
to the acquisition of software licenses and, to a lesser extent, billings from
outside contractors working on the development of the Company's proprietary
software and technological infrastructure necessary to process transactions. Net
cash used in operating activities for the year ended December 31, 1999 resulted
primarily from the $8,120,000 net loss in the period offset by (i) an aggregate
of $6,671,000 of non-cash charges consisting primarily of depreciation,
amortization, stock-based compensation expense, as well as shares and warrants
issued for services chiefly associated with legal, consulting and bridge loan
financing costs, and (ii) a $1,019,000 increase in accrued expenses mainly
attributable to salaries and product development costs.
Net cash provided by investing activities totaled approximately $9,075,000 for
the year ended December 31, 2000, as compared to net cash used in investing
activities of approximately $17,430,000 for the same period in 1999. Net cash
provided by investing activities for the year ended December 31, 2000 resulted
from the $15,986,000 net proceeds from maturity of investments
available-for-sale offset by (i) the $978,000 net effect of the DWeb and Netlan
business combinations, (ii) the acquisition of software licenses for $2,527,000
and the purchase of capital assets for $1,075,000, primarily computer,
communications and office equipment, and (iii) $2,331,000 in product development
expenditures consisting of fees of outside contractors and capitalized salaries.
Net cash used in investing activities for the year ended December 31, 1999 was
chiefly associated with the purchase of investments available-for-sale for
$15,986,000, and product development expenditures, as well as purchases of
computer and office equipment for $1,335,000.
Net cash provided by financing activities totaled approximately $84,000 for the
year ended December 31, 2000, as compared to net cash provided by financing
activities of approximately $27,916,000 for the same period in 1999. In February
2000, eB2B obtained a $2,500,000 term loan from the Bank. The term loan has a
term of three years, is interest-only until December 1, 2000, and bears interest
at a rate equal to LIBOR plus 1%. Beginning December 1, 2000, the term loan
required ten quarterly principal payments of $250,000. The proceeds from the
term loan were primarily used to refinance the $2,116,000 debt of Netlan paid by
eB2B in connection with the Netlan Merger.
II-8
The Company has also obtained a $1.25 million line of credit with the Bank,
which secures $1,178,000 of letters of credit that are outstanding at December
31, 2000. In 1999, cash provided by financing activities primarily consisted of
proceeds from the issuance of shares of common stock, preferred stock as well as
certain warrants aggregating to $29,922,000, of which $2.0 million had been
loaned to DWeb.
As of December 31, 2000, the Company's principal source of liquidity is
approximately $9.7 million of cash and cash equivalents. The Company has pledged
a custodial cash account with the Bank as security on the term loan and line of
credit. The Company is required to maintain a minimum balance of approximately
111% of the outstanding term loan and the line of credit at all times. As of
December 31, 2000, the required balance was approximately $3,889,000, which is
included in cash and cash equivalents as of December 31, 2000. As of April 2,
2001, the $2,250,000 outstanding balance of the term loan as of December 31,
2000 was repaid in full using cash held in the custodial cash account. As a
result, the required balance in the custodial cash account as of April 2, 2001
was reduced to approximately $1,389,000.
As of December 31, 2000, the Company had entered into non-cancelable obligations
for software licenses in the amount of approximately $2.4 million, of which $0.5
million was paid in October 2000. Also, the Company has committed to an annual
maintenance contract of $0.4 million per year beginning on April 1, 2001. The
remaining balance, including the maintenance contract, of approximately $2.3 is
payable $0.5 million in February 2001. In addition, the Company has engaged an
outside contractor to assist in the completion of certain specified customized
development for a $1.0 million fee, which will be paid during the first six
months of 2001. As of April 16, 2001, the Company agreed to terms with the
software company to pay $0.4 million within 30 days and to issue stock in the
amount of $1.2 million. The remaining balance of $0.2 million relates to sales
tax, which will be paid upon issuance of the shares.
The Company anticipates spending approximately $1.4 million on capital
expenditures over the next twelve months, primarily on product development
expenditures, including approximately $600,000 of the $1.0 million in
development fees noted above, and technology infrastructure.
During April 2001, the Company is in the process of raising additional capital
(the "Private Placement"). The Private Placement terms are for a minimum
offering of $3,000,000 and a maximum offering of $7,000,000 with a maximum
over allotment of an additional $3,000,000. As of April 16, 2001, the Company
has closed on $7.5 million in the form of a convertible note and an irrevocable
line of credit. The securities offered in connection with the Private Placement
have not been registered under the Securities Act of 1933 and may not be offered
or sold in the United States of America absent registration or an applicable
exemption from registration requirements.
Management believes that the Company's available cash resources at December 31,
2000, coupled with the proceeds from the $7.5 million of convertible note and
line of credit, will be sufficient to meet anticipated working capital and
capital expenditure requirements for the next fifteen months. The Company's
current use of cash is in excess of $1.0 million per month. The Company
anticipates that its use of cash will be below $500,000 per month by the end of
the third quarter of 2001 and expects to use less than $250,000 per month by
the end of 2001. The expected reduction in use of cash reflects an anticipated
increase in revenues, coupled with staffing reductions and operational cost
reductions implemented in early April 2001, for which there can be no
assurances.
II-9
Certain Trends and Uncertainties
In addition to the other information contained in this Annual Report on
Form 10-KSB, the following factors should be carefully considered.
RISKS RELATING TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY, HAVE NOT GENERATED SUBSTANTIAL REVENUES AND
HAVE INCURRED, AND WILL CONTINUE TO INCUR, SIGNIFICANT LOSSES.
We have a limited operating history in the business-to-business
electronic commerce industry. We were incorporated on July 26, 1979 in the State
of New Jersey, and have been engaged in electronic commerce since 1996. On April
18, 2000, eB2B Commerce, Inc., a Delaware corporation, incorporated on November
6, 1998, merged with and into us, and our name was changed at that time from
DynamicWeb Enterprises, Inc. to eB2B Commerce, Inc. In that the security holders
of former eB2B received the majority of the voting securities of the combined
company, former eB2B was deemed to be the accounting acquiror. Accordingly, the
financial results discussed herein prior to April 18, 2000 are those of former
eB2B, unless otherwise specified.
DynamicWeb Enterprises, Inc. generated revenues of $637,000, $1,187,000
and $3,045,000, and incurred net losses attributable to common stockholders of
$3,163,000, $3,031,000 and $4,465,000, for the fiscal years ended September 30,
1997, 1998 and 1999, respectively, and generated revenues of $2,032,000 and
incurred a net loss attributable to common stockholders of $3,464,000 for the
six months ended March 31, 2000. Its accumulated deficit at March 31, 2000 was
$12,665,000. eB2B Commerce, Inc., a Delaware corporation (the former eB2B), had
no revenues and incurred net losses attributable to common stockholders of
$108,000 for the period November 6, 1998 (inception) to December 31, 1998 and
$37,562,000 for the year ended December 31, 1999, which amount is inclusive of a
deemed dividend on preferred stock of $29,442,000. For the year ended December
31, 2000, we generated revenues of $5,468,000, incurred a
II-10
net loss attributable to common stockholders of $41,335,000 and our accumulated
deficit on December 31, 2000 was $79,005,000.
We cannot give assurances that we will soon make a profit or that we
will ever make a profit. Even though we expect that sales will increase
substantially in the near future, expenses are expected to exceed sales. Sales
are expected to increase due to the increasing number of companies joining
our trading communities. Among other things, to achieve profitability, we must
market and sell substantially more services, hire and retain qualified and
experienced employees and be able to manage our expected growth. We may not
be successful in these efforts.
We currently expect to achieve positive EBITDA (earnings before
interest, taxes, depreciation and amortization) in the first quarter of 2002.
There can be no assurance that positive EBITDA can be achieved in this timeframe
or at all, and all of the risk factors described herein may negatively effect
our operating results. We are unable to predict when we may achieve net income
in view of the substantial non-cash charges that which we will be required to
take in future years.
II-11
THERE WILL BE SUBSTANTIAL ADVERSE EFFECTS TO OUR FUTURE OPERATING RESULTS
BECAUSE OF SUBSTANTIAL NON-CASH CHARGES.
As of December 31, 2000, our balance sheet included $56,363,000 of
goodwill and other intangible assets and $2,368,000 of unearned stock-based
compensation. The goodwill arose in connection with the merger in April 2000 of
eB2B Commerce, Inc., a Delaware corporation, with and into DynamicWeb
Enterprises, Inc., and the February 2000 acquisition of Netlan Enterprises, Inc.
and subsidiaries. We expect to incur quarterly non-cash charges through March
2003 of approximately $3,400,000 corresponding to the amortization of such
goodwill and other intangibles. Between June 2003 and March 2005, the quarterly
amortization expense is expected to be approximately $3,100,000. Unearned
stock-based compensation arose from the grant of stock options and warrants to
employees, consultants and trading partners, and is being amortized over the
vesting periods of these securities. All of these non-cash charges will
significantly affect our reported operating results.
OUR BUSINESS MODEL IS UNPROVEN AND MAY NOT BE SUCCESSFUL.
Our business-to-business electronic commerce model is based on the
development of trading communities for the purchase and sale of goods between
buyers and suppliers. To date, we have generated limited revenue from the
trading communities. While we have signed several participants into our golf,
sporting goods and chain pharmacy networks, none of the participants are
required to conduct a minimum level of business. We believe that in order to
reach significant revenue levels from these networks, additional trading
partners will need to be added, particularly those who already conduct business
among themselves. Accordingly, the success of our business model will depend
upon a number of factors, including:
II-12
- the number of buyers and suppliers that participate in the
trading communities;
- the volume of transactions conducted by buyers and suppliers;
- our ability to attract new customers and maintain customer
satisfaction;
- our ability to upgrade, develop and maintain the technology
necessary for our operations;
- the introduction of new or enhanced services by our competitors;
- the pricing policies of competitors; and
- our ability to attract personnel with Internet industry
expertise.
In addition, our business depends upon the satisfactory performance,
reliability and availability of our systems and network infrastructure. Any
system failure or interruption could result in delays, loss of data or the
inability to accept and confirm business documents. Such decreased levels of
customer service would reduce the attractiveness of our services and would
negatively affect our operating results.
If our business strategy is flawed or if we fail to execute our
strategy effectively, our business, operating results and financial condition
will be substantially harmed. We do not have substantial experience in
developing and operating trading communities and we cannot assure you that the
trading communities will be operated effectively, that a sufficient number of
buyers and suppliers will join the trading communities or, if a sufficient
number of buyers and suppliers join, that they will conduct enough transactions
to generate significant revenues within the trading communities.
OUR SUCCESS WILL DEPEND ON EXPANDING MARKET ACCEPTANCE FOR INTERNET
BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE.
Our future revenues and any future profits depend upon the widespread
acceptance and use of the Internet as an effective medium of business-to-
business electronic commerce, particularly as a medium to perform goods
procurement and fulfillment functions in our targeted markets. If the use of the
Internet in electronic commerce in such markets does not grow or if it grows
more slowly than expected, our business will suffer. A number of factors could
prevent such growth, including:
- Internet electronic commerce is at an early stage and buyers may
be unwilling to shift their transmission of business documents
from traditional methods to electronic methods;
- Internet electronic commerce may not be perceived as offering a
cost saving to users;
II-13
- the necessary network infrastructure for substantial growth in
usage of the Internet may not be adequately developed;
- increased governmental regulation or taxation may adversely
affect the viability of electronic commerce;
- any shift from flat rate pricing to usage based pricing for
Internet access may adversely impact the viability of the
business models;
- insufficient availability of telecommunication services or
changes in telecommunication services could result in slower
response times;
- technical difficulties; and
- concerns regarding the security of electronic commerce
transactions.
WE MUST ENROLL A SIGNIFICANT NUMBER OF ADDITIONAL MAJOR BUYERS AND SUPPLIERS IN
OUR TRADING COMMUNITIES.
As of December 31, 2000, we connected approximately 150 retail
organizations and 1,600 supplier organizations within our trading communities.
We currently anticipate that the number of buyers and suppliers would have to
increase by approximately 3,500 in order for us to achieve EBITDA profitability.
Over the last several months, we have added approximately 6,000 suppliers as
potential customers to our backlog. This represents supplier lists provided by
retailers on our service, which need to be sold our services. We estimate that
we can sign and implement between 25% and 50% of these suppliers to our service
in 2001. Our business model depends in large part on our ability to create a
network effect of buyers and suppliers. Buyers may not perceive value in the
communities if there is an insufficient number of major suppliers within the
communities. Similarly, suppliers may not be attracted to the network trading
communities if there is an insufficient number of major buyers within the
communities. If we are unable to increase either the number of buyers or
suppliers, we will not be able to benefit from any network effect. As a result,
the overall value of the trading communities would be diminished, which could
harm our business, operating results and financial condition.
OUR BUSINESS IS DEPENDENT ON A LIMITED NUMBER OF CUSTOMERS.
In the year ended December 31, 2000, one customer accounted for
approximately 17% of our total revenue. We do not expect any significant
increases in revenues from the customer and, therefore, expect that such
percentage will decrease in future periods.
If this customer were to substantially reduce or stop its use of our
services, our business, operating results and financial condition would be
harmed. Generally, we do not have any long-term contractual commitments from any
of our current customers, and customers may terminate their contracts with us
with little or no advance notice and
II-14
without significant penalty. As a result, we cannot assure you that any of our
current customers will continue to use our services in future periods.
THE INTERNET-BASED BUSINESS-TO-BUSINESS INDUSTRY IS HIGHLY COMPETITIVE AND HAS
LOW BARRIERS TO ENTRY.
The market for Internet-based, business-to-business electronic commerce
solutions is extremely competitive. Our competition is expected to intensify as
current competitors expand their service offerings and new competitors --
including larger, more established companies with more resources -- enter the
market. The evolution of technology in our market is rapid and we must adapt to
remain competitive. We may not be able to compete successfully against current
or future competitors and such competitive pressures could harm our business,
operating results or financial condition.
Our direct competition falls into two general categories: direct
vertical and indirect horizontal competitors. Direct vertical competitors are
focused on the demand chain in the Company's vertical markets. Indirect
horizontal competitors are focused on similar products but not in specific or
multiple vertical industries. The Company's major direct vertical competitors
are iCongo.com and Channel-Sports. Major indirect horizontal competitors include
Automated Data Exchange (ADX) (formerly known as The EC Company) and SPS
Commerce. All competitors are privately held businesses and minimal public
information is available on their efforts to date.
Also, we believe that competition may develop from four additional
areas: EDI/electronic commerce companies, technology/software development
companies, retailer purchasing organizations, and leading industry
manufacturers. Additionally, large retailers and suppliers can create their own
technology platform to automate the exchange of business documents with their
small and medium sized trading partners, thereby reducing the number of large
retailers and suppliers in our target markets.
OUR BUSINESS IS DEPENDENT ON INTELLECTUAL PROPERTY RIGHTS.
To protect our proprietary products, we rely on a combination of
copyright, trade secret and trademark laws, as well as contractual provisions
relating to confidentiality and related matters. We also rely on common law
protection relating to unfair business practices. Our primary software is
licensed from others, and has been modified by us to perform the tasks specific
to our business. Such software is run on our computers, thereby avoiding third
party access. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Moreover, we cannot assure
you that our means of protecting our proprietary rights will be adequate or that
competitors will not independently develop similar or superior technology.
WE MAY NOT HAVE FEDERAL TRADEMARK PROTECTION FOR OUR NAME.
II-15
Our principal trademark is "eB2B", for which we are seeking a federal
registration. The United States Patent and Trademark Office has issued an
initial objection to the registration application based upon the descriptiveness
of the trademark. We have filed a response with the United States Patent and
Trademark Office challenging the objection. There can be no assurance that a
trademark will be granted by the United States Patent and Trademark Office. If a
federal trademark is not obtained then there can be no assurance that the mark
can be adequately protected against any third party infringement, which could
adversely affect our business. We have not made filings in any states with
respect to obtaining state trademark protection.
WE ARE DEPENDENT ON ONE PRIMARY DATA CENTER.
We operate our primary data center at Exodus Communications, Inc.'s
Internet Data Center facility in Jersey City, New Jersey. The data center
operates twenty-four hours a day, seven days a week, and is connected to: (1)
the Internet via Exodus Communications; and (2) the electronic data interchange
network via AT&T and IBM Global Network. The data center consists primarily of
servers, storage subsystems, and other peripheral technology to provide on-line,
batch and back-up operations. Customers' data is backed-up daily and stored
off-site.
We rely on Exodus Communications to provide us with Internet capacity,
security personnel and fire protection, and to maintain the facilities, power
and climate control necessary to operate our servers. Additionally, we rely on
Exodus Communications for redundant subsystems, such as multiple fiber trunks
from multiple sources, fully redundant power on the premises and multiple
back-up generators. If Exodus Communications fails to adequately host or
maintain our servers, our services could be disrupted and our business and
operating results could be significantly harmed. We can make no assurances
regarding our recourse against Exodus Communications in the event of such
failure. Our agreement with Exodus Communications has a term of one year and is
automatically renewable for additional one-year terms.
There can be no assurance that Exodus Communications can effectively
provide and manage the aforementioned infrastructure and services in a reliable
fashion.
WE WILL BE SUBJECT TO CERTAIN LEGAL RISKS AND UNCERTAINTIES RELATING TO OUR
SERVICES.
In the course of our business, we will be exposed to certain legal
risks and uncertainties relating to information transmitted in transactions
conducted by our customers. The services provided to customers may include
access to confidential or proprietary information. Any unauthorized disclosure
of such information could result in a claim against us for substantial damages.
In addition, our services include managing the collection and publication of
catalog content. The failure to publish accurate catalog content could deter
users from participating in trading communities, damage our business reputation
and potentially expose us to legal liability. From time to time, some of our
suppliers may submit inaccurate pricing or other catalog information. Even
though such
II-16
inaccuracies may not be caused by us and are not within our control, we could be
exposed to legal liability. Although we believe that we have implemented and
will continue to implement adequate policies to prevent disclosure of
confidential or inaccurate information, claims alleging such matters may still
be brought against us. Any such claim may be time-consuming and costly and may
harm our business and financial condition. We maintain insurance for many of the
risks encountered in our business, however, there can be no assurances that the
claims will be substantially covered by our insurance.
WE ARE CURRENTLY SUBJECT TO LITIGATION AND MAY BE SUBJECT TO ADDITIONAL
LITIGATION IN THE FUTURE.
In October 2000, Cintra Software & Services Inc. commenced a civil
action against us in New York Supreme Court, New York County. The complaint
alleges that we acquired certain software from Cintra upon the authorization of
our former Chief Information Officer. Cintra is seeking damages of approximately
$856,000. While the action is at a very early stage, we believe we have
meritorious defenses to the allegations made in the complaint and intend to
defend the action vigorously.
On March 2, 2001, a former employee commenced a civil action against
the Company and two members of its management in the Supreme Court of the State
of New York, County of New York, seeking, among other things, compensatory
damages in the amount of $1.0 million and additional punitive damages of $1.0
million for alleged defamation in connection with his termination by the
Company, as well as a declaratory judgment concerning his alleged entitlement to
stock options to purchase 75,000 shares of the Company's common stock. The
Company has not yet responded to the Complaint and no discovery has commenced.
The Company disputes these claims and intends to vigorously defend the action.
More generally, some of our engagements involve the design and
development of customized e-commerce systems that are important to our clients'
businesses. Failure or inability to meet a client's expectations in the
performance of services could result in a diminished business reputation or a
claim for substantial damages regardless of which party is responsible for such
failure. In addition, the services provided to clients may provide us with
access to confidential or proprietary client information. Although we have
policies in place to prevent such client information from being disclosed to
unauthorized parties or used inappropriately, any unauthorized disclosure or use
could result in a claim against us for substantial damages. Contractual
provisions attempting to limit such damages may not be enforceable in all
instances or may otherwise fail to protect us from liability.
In addition, there is always the possibility that our shareholders will
blame us for taking an alleged inappropriate action that causes the loss of
their investment. In the past, following periods of volatility in the market
price of a company's securities, class action litigation often has been
instituted against a company experiencing stock price declines. Similar
litigation, if instituted against us, could result in substantial costs and a
diversion
II-17
of our management's attention and resources. As a result, your investment in our
stock may become illiquid and you may lose your entire investment.
RISKS RELATING TO OUR COMMON STOCK
OUR DIRECTORS AND EXECUTIVE OFFICERS HAVE SIGNIFICANT CONTROL AND INFLUENCE OVER
THE COMPANY.
As a group, our directors and executive officers beneficially own
approximately 45.6% of our outstanding voting stock. If they vote together, the
directors and executive officers will be able to exercise significant influence
over all matters requiring shareholder approval, including the election of
directors. The interests of our directors and executive officers may conflict
with the interests of our other shareholders. In addition, Commonwealth
Associates, L.P., the placement agent for our December 1999 and April 2001
private placements, has the right to designate three (of seven) members of our
Board of Directors, two of which (Michael S. Falk and Timothy P. Flynn) are
already serving.
WE DO NOT ANTICIPATE PAYING DIVIDENDS ON OUR COMMON STOCK.
We have never paid dividends on our common stock and we do not
anticipate paying dividends in the foreseeable future. We intend to reinvest any
funds that might otherwise be available for the payment of dividends in further
development of our business.
II-18
THE EXPIRATION OF RESTRICTIONS ON THE RESALE OF CERTAIN SECURITIES MAY
NEGATIVELY AFFECT THE PRICE OF OUR COMMON STOCK.
A significant number of shares of common stock which are currently
outstanding, and a significant number of shares of common stock underlying
convertible preferred stock, options or warrants outstanding, are subject to
lock up agreements under which the shareholders have agreed not to sell such
shares for specified periods of time. Specifically, in connection with the
private placement of Series B Convertible Preferred Stock and warrants completed
in December 1999, each of the investors in such private placement was required
to enter into a lock up agreement prohibiting the sale of the securities
purchased in the private placement for a period of at least twelve months from
the closing of such private placement, which lock-up period has expired.
All of our directors, officers and principal shareholders immediately
prior to the April 18, 2000 merger with eB2B Commerce, Inc., a Delaware
corporation, and all of current officers and directors have entered into lock up
agreements prohibiting the sale of such securities for various periods of time.
On each of December 2, 2000 and March 2, 2001, the lock up expired to
the extent of 25% of the holdings of each person subject to a lock-up agreement.
On May 31, 2001 and August 29, 2001, the restrictions will be lifted to the
extent of an additional 25% of each such person's respective holdings. Upon the
expiration of the restrictions imposed by the lock up agreements described
above, the persons party to those agreements will be able to sell their shares,
subject to the restrictions imposed by the federal securities laws. The sale or
the possibility of the sale of shares of our common stock after the expiration
of such lock up periods has and may continue to adversely affect the market
price of our common stock, and may adversely affect our ability to raise
capital.
THERE IS POTENTIAL EXPOSURE TO US IN THAT CERTAIN SHARES OF COMMON STOCK
UNDERLYING OUR PREFERRED STOCK HAVE BEEN SOLD
II-19
PRIOR TO THE EFFECTIVENESS OF A REGISTRATION STATEMENT THAT WAS RECENTLY FILED
From December 2, 2000 until January 12, 2001, certain shares of our
common stock, which were issued by virtue of conversion of shares of preferred
stock, were sold by our shareholders in the open market. Such shareholders
believed that their shares were registered pursuant to a previous registration
statement of ours. The Securities and Exchange Commission has advised us of
their opinion that such shares were not covered by the prior registration
statement. While we believe that such sales were made in conformance with
applicable securities laws and regulations, a different determination may result
in our having liability. Commencing January 25, 2001, we advised such converting
shareholders to resell their shares pursuant to Rule 144 promulgated under the
Securities Act of 1933. We estimate that approximately 2,933,000 shares of our
common stock were issued to such shareholders. Such shares may have potentially
been sold in the open market prior to January 25, 2001, at prices that may have
ranged from $.50 to $1-1/4 per share. It is possible that the selling
shareholders will seek to include us in any action for recission taken against
them by third parties who purchased the common stock. The measure of damages
could be the purchase price paid, plus interest. We are unable to assess, in the
event that there is any liability, what the amount thereof would be.
WE ARE SUBJECT TO A SUBSTANTIAL PENALTY IN THE EVENT WE DO NOT RECEIVE
SHAREHOLDER APPROVAL, BY NO LATER THAN SEPTEMBER 30, 2001, OF OUR APRIL 2001
PRIVATE PLACEMENT
II-20
In that our April 2001 private placement of convertible notes and
warrants resulted in the issuance of more than 20% of our outstanding common
stock, Nasdaq rules require that we obtain shareholder approval of this
transaction. Until such shareholder approval is obtained, conversion of the
convertible notes (or convertible preferred stock into which such notes may
eventually first be converted into) into shares of our common stock is limited
to an aggregate of not more than 19.9% of the number of shares of common stock
outstanding before such notes and warrants are issued and the warrants will not
be exercisable. We have agreed to hold a shareholders meeting, at which approval
will be sought, by July 31, 2001 (but in no event later than September 30,
2001). If we fail to receive the necessary shareholder approval by such date, we
may be required to redeem all of these private placement securities at a
redemption price (payable in cash or in stock at our discretion) equal to two
times the face amount thereof or the price required to make investors "whole"
in light of the then current market price. Alternatively, the holders may
terminate the conversion limitation, in which case we face delisting from
Nasdaq.
THE PRICE OF OUR COMMON STOCK IS VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL
LOSSES FOR INVESTORS.
Our stock price has been and is likely to continue to be volatile. For
example, from January 1, 2000 through March 31, 2001, our common stock traded as
high as $19.75 per share and as low as $0.50 per share.
Volatility in the future may be due to a variety of factors, including:
- volatility of stock prices of Internet and electronic commerce
companies generally;
- variations in our operating results and/or our revenue growth
rates;
- changes in securities analysts' estimates of our financial
performance, or for the performance of our industry as a whole;
- announcements of technological innovations;
- the introduction of new products or services by us or our
competitors;
- change in market valuations of similar companies;
- market conditions in the industry generally;
- announcements of additional business combinations in the industry
or by us;
- issuances or the potential issuances of additional shares;
II-21
- additions or departures of key personnel; and
- general economic conditions.
The stock market has experienced extreme price and volume fluctuations
that have particularly affected the market prices of securities of
Internet-related companies. These fluctuations may adversely affect the market
price of our common stock.
WE MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET.
Our common stock is traded on the Nasdaq SmallCap Market under the
symbol "EBTB." While our common stock has recently been traded at bid price of
over $1.00, over the past several months the bid price has fallen under $1.00 on
several occasions. In the event that our shares of common stock close below the
minimum $1.00 bid price for thirty consecutive business days, we will receive
notification from the Nasdaq Stock Market, Inc. ("Nasdaq") that we are not in
compliance with the minimum bid price requirement of Nasdaq. To regain
compliance with this standard, the common stock would be required to have a
closing bid price at or above $1.00 for ten consecutive business days within the
ninety-calendar day period from such notification. Should such compliance not be
achieved, Nasdaq could issue a delisting letter.
Our failure to meet Nasdaq's maintenance criteria, which includes
minimum price and other requirements, in the future may result in the
discontinuance of the inclusion of our securities on Nasdaq. In such event,
trading, if any, in the securities may then continue to be conducted on the
non-Nasdaq over-the-counter market in what are commonly referred to as the
electronic bulletin board and the "pink sheets". As a result, an investor may
find it more difficult to dispose of or obtain accurate quotations as to the
market value of the securities.
OUR SHARES COULD BECOME A "PENNY STOCK", IN WHICH CASE IT WOULD BE MORE
DIFFICULT FOR INVESTORS TO SELL THEIR SHARES.
The SEC has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks". Penny stocks generally are
equity securities with a price of less than $5.00, other than securities
registered on national securities exchanges or quoted on Nasdaq, provided that
current price and volume information with respect to transactions in such
securities is provided by the exchange or system. Prior to a transaction in a
penny stock, a broker-dealer is required to:
- - deliver a standardized risk disclosure document that provides
information about penny stocks and the nature and level of risks
in the penny stock market;
- - provide the customer with current bid and offer quotations for
the penny stock;
- - explain the compensation of the broker-dealer and its salesperson
in the transaction;
II-22
- - provide monthly account statements showing the market value of
each penny stock held in the customer's account; and
- - make a special written determination that the penny stock is a
suitable investment for the purchase and receive the purchaser's
written agreement to the transaction. These requirements may have
the effect of reducing the level of trading activity in the
secondary market for a stock that becomes subject to the penny
stock rules. If our shares become subject to the penny stock
rules, investors may find it more difficult to sell their shares.
II-23
Item 7. Financial Statements
eB2B Commerce, Inc.
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Reports F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 (as restated) F-4
Consolidated Statements of Operations for the years ended December 31,
2000 and 1999 (as restated) F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000 and 1999 (as restated) F-6
Consolidated Statement of Cash Flows for the years ended December 31,
2000 and 1999 (as restated) F-8
Notes to the Consolidated Financial Statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of eB2B Commerce, Inc.:
We have audited the accompanying consolidated balance sheet of eB2B Commerce,
Inc. (the "Company") as of December 31, 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2000, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
New York, New York
April 16, 2001
F-2
Report of Independent Auditors
To the Board of Directors
eB2B Commerce, Inc.
We have audited the accompanying balance sheet of eB2B Commerce, Inc. (the
"Company") as of December 31, 1999, and the related statement of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of eB2B
Commerce, Inc. as of December 31, 1999, and the results of its operations and
its cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.
As described in Note 3, the financial statements have been restated to correct
the valuation of certain common stock warrants and options.
Ernst & Young LLP
New York, New York
February 22, 2000, except for Notes 3, 10 and 11, as to which the date is
March 30, 2001.
F-3
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31, December 31,
2000 1999
ASSETS (as restated,
see Note 3)
Current Assets
Cash and cash equivalents $ 9,650 $ 9,907
Investments available-for-sale - 15,986
Accounts receivable (less allowance of $113 in 2000) 1,530 -
Other current assets 409 2,260
-------- ---------
Total Current Assets 11,589 28,153
Property and equipment, net 4,272 167
Goodwill, net of accumulated amortization of $8,852 in 2000 54,104 -
Other intangibles, net of accumulated amortization of $977
in 2000 2,259 -
Other assets 995 744
-------- ---------
Total Assets $ 73,219 $ 29,064
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,000 $ -
Accounts payable 1,806 -
Accrued expenses and other current liabilities 4,892 1,055
Deferred income 592 -
-------- ---------
Total Current Liabilities 8,290 1,055
Long-term debt, less current maturities 1,250 -
Capital lease obligations, less current maturities 212 -
Other 379 -
-------- ---------
Total Liabilities 10,131 1,055
-------- ---------
Commitments and contingencies (Note 8)
Stockholders' Equity
Undesignated preferred stock - no par value; 45,998,000 shares
authorized; no shares issued and outstanding - -
Preferred stock, convertible Series A - $.0001 par value; 2,000 shares
authorized; 7 and 300 shares issued and outstanding at December
31, 2000 and 1999, respectively - -
Preferred stock, convertible Series B - $.0001 par value;
4,000,000 shares authorized; 2,803,198 and 3,299,999 shares
issued and outstanding at December 31, 2000 and 1999, respectively - -
Common stock - $.0001 par value; 200,000,000 shares authorized;
15,384,015 and 7,253,820 shares issued and outstanding at
December 31, 2000 and 1999, respectively 2 1
Additional paid-in capital 144,459 67,500
Accumulated deficit (79,005) (37,670)
Unearned stock-based compensation (2,368) (1,822)
-------- ---------
Total Stockholders' Equity 63,088 28,009
-------- ---------
Total Liabilities and Stockholders' Equity $ 73,219 $ 29,064
======== =========
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Year Ended December 31,
-------------------------
2000 1999
---- ----
(as restated
see Note 3)
Revenue $ 5,468 $ -
-------- --------
Costs and expenses
Cost of revenue 2,839 -
Marketing and selling (exclusive of
stock-based compensation expense of
$1,412 and $500 for the years ended
December 31, 2000 and 1999,
respectively) 2,804 -
Product development costs (exclusive
of stock-based compensation expense
of $362 and $231 for the years ended
December 31, 2000 and 1999,
respectively) 2,698 572
General and administrative
(exclusive of stock-based
compensation expense of $14,253 and
$1,955 for the years ended December
31, 2000 and 1999, respectively) 13,438 1,670
Amortization of goodwill and other
intangibles 9,829 -
Stock-based compensation expense 16,027 2,686
-------- --------
Total costs and expenses 47,635 4,928
-------- --------
Loss from operations (42,167) (4,928)
Interest income 1,130 -
Interest expense
(including bridge loan financing
costs of $3,178 in 1999) (191) (3,192)
Other, net (107) -
-------- --------
Net loss $(41,335) $ (8,120)
Deemed dividend on preferred
stock - (29,442)
-------- --------
Net loss attributable to
common stockholders $(41,335) $(37,562)
======== ========
Basic and diluted net loss per common share $ (3.61) $ (5.70)
======== ========
Weighted average number of common shares
outstanding 11,461,496 6,591,108
========== =========
See accompanying notes to consolidated financial statements.
F-5
eB2B Commerce, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
Series A Preferred Series B Preferred Common Stock Additional
Stock Stock Paid-In
Shares Amount Shares Amount Shares Amount Capital
---------------------------------------------------------------------------------------
Balance at
January 1, 1999 - - - - 6,167,210 1 354
Sale of common stock - - - - 259,350 - 195
Sale of Series A
preferred stock 300 - - - - - 300
Sale of Series B
preferred stock - - 3,299,999 - - - 29,442
Issuance of common
stock in exchange
for services - - - - 393,680 - 228
Issuance of common
stock in exchange
for domain name - - - - 7,980 - 2
Issuance of common
stock in exchange
for note payable - - - - 425,600 - 80
Issuance of warrants
in connection with
bridge financing (as
restated, see Note 3) - - - - - - 3,178
Unearned stock-based
compensation (as
restated, see Note 3) - - - - - - 4,279
Amortization of
unearned stock-
based compensation
(as restated, see
Note 3) - - - - - - -
Unearned
Stock-Based Accumulated
Compensation Deficit Total
-----------------------------------------------
Balance at
January 1, 1999 - (108) 247
Sale of common stock - - 195
Sale of Series A
preferred stock - - 300
Sale of Series B
preferred stock - - 29,442
Issuance of common
stock in exchange
for services (228) - -
Issuance of common
stock in exchange
for domain name - - 2
Issuance of common
stock in exchange
for note payable - - 80
Issuance of warrants
in connection with
bridge financing (as
restated, see Note 3) - - 3,178
Unearned stock-based
compensation (as
restated, see Note 3) (4,279) - -
Amortization of
unearned stock-
based compensation
(as restated, see
Note 3) 2,685 - 2,685
F-6
Net loss - - - - - - -
Deemed dividend
on preferred stock - - - - - - 29,442
--------- ---------- ------------ ---------- ------------- ---------- ---------------
Balance at
January 1, 2000
(as restated, see
Note 3) 300 - 3,299,999 - 7,253,820 1 67,500
Netlan merger - - - - 325,000 - 3,347
DynamicWeb reverse
acquisition - - - - 4,811,969 1 58,648
Conversion of Series
A preferred stock (293) - - - 389,690 - -
Conversion of Series
B preferred stock - - (496,801) - 2,402,710 - -
Exercise of stock
options and warrants - - - - 117,691 - 144
Unearned stock-
based compensation - - - - - - 14,523
Amortization of
unearned stock-
based compensation - - - - - - -
Other - - - - 83,135 - 297
Net loss - - - - - - -
-------------------------------------------------------------------------------------
Balance at
December 31, 2000 7 $ - 2,803,198 $ - 15,384,015 $ 2 $ 144,459
Net loss - (8,120) (8,120)
Deemed dividend
on preferred stock - (29,442) -
--------------------- ---------------- ----------
Balance at
January 1, 2000
(as restated, see
Note 3) (1,822) (37,670) 28,009
Netlan merger $ (2,050) - 1,297
DynamicWeb reverse
acquisition - - 58,649
Conversion of Series
A preferred stock - - -
Conversion of Series
B preferred stock - - -
Exercise of stock
options and warrants - - 144
Unearned stock-
based compensation (14,523) - -
Amortization of
unearned stock-
based compensation 16,027 - 16,027
Other - - 297
Net loss - (41,335) (41,335)
-------------------------------------------------
Balance at
December 31, 2000 $ (2,368) $ (79,005) $63,088
See accompanying notes to consolidated financial statements.
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
2000 1999
---- ----
(as restated,
see Note 3)
Operating Activities
Net loss $(41,335) $ (8,120)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 13,086 633
Stock-based compensation expense 15,991 1,427
Write-down of assets 57 174
Shares, options and warrants issued for services 36 1,259
Warrants issued in connection with bridge loan financing - 3,178
Management of operating assets and liabilities
Accounts receivable, net (277) -
Accounts payable (327) -
Accrued expenses and other liabilities 3,645 1,019
Other (292) (159)
-------- --------
Net cash used in operating activities (9,416) (589)
-------- --------
Investing Activities
Acquisitions, net of cash acquired (978) -
Proceeds (purchases) of investments available-for-sale, net 15,986 (15,986)
Purchase of software (2,527) -
Purchase of property and equipment (1,075) (195)
Product development expenditures (2,331) (1,140)
Other investing activities - (109)
-------- --------
Net cash provided by (used in) investing activities 9,075 (17,430)
-------- --------
Financing Activities
Proceeds from borrowings 2,500 -
Repayment of borrowings (2,366) (6)
Loan to DWeb - (2,000)
Payment of capital lease obligations (194) -
Proceeds from issuance of shares and warrants - 29,922
Proceeds from exercise of options and warrants 144 -
-------- --------
Net cash provided by financing activities 84 27,916
-------- --------
Net (decrease) increase in cash and cash equivalents (257) 9,897
Cash and cash equivalents at beginning of year 9,907 10
-------- --------
Cash and cash equivalents at end of year $ 9,650 $ 9,907
======== ========
Non-cash transactions
Common stock, options and warrants issued or exchanged in
connection with acquisitions $ 61,996 $ -
Shares, options and warrants issued for services $ 398 $ 4,507
Equipment acquired under capital lease $ 346 $ -
Preferred stock issued in exchange for note payable $ - $ 15
Common stock issued in exchange for note payable $ - $ 80
Common stock issued in exchange for domain name $ - $ 2
Cash paid during the period for
Interest $ 148 $ -
See accompanying notes to consolidated financial statements.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND PLAN OF OPERATIONS
eB2B Commerce, Inc. (the "Company") utilizes proprietary software to provide a
technology platform for large buyers and large suppliers to transfer business
documents via the Internet to their small and medium-sized trading partners.
These documents include, but are not limited to, purchase orders, purchase
order acknowledgements, advanced shipping notices and invoices. The Company
does not allow customers to take delivery of its proprietary software. The
Company provides access via the Internet to its proprietary software, which is
maintain on its hardware and on hosted hardware. The Company also offers
professional services, which provide consulting expertise to the same client
base, as well as to other businesses that prefer to operate or outsource the
transaction management and document exchange of their business-to-business
relationships. In addition, the Company provides authorized technical
education to its client base, and also designs and delivers custom computer
and Internet-based training seminars.
Since its inception, the Company has experienced significant losses from
operations and negative cash flows from operations in the transaction
management and document exchange services. Management has addressed the
costs of providing these services throughout 2000 and 2001. While the Company
continues to add large customers to its service, the Company is focused
primarily on implementing the trading partners who transact business with its
largest existing customers.
To ensure the success of the Company, and to address the continuing loss from
operations and negative cash flows from operations, management enacted a
plan for the Company, which includes various cost cutting measures
during the third and fourth quarter of 2000 and into 2001.
Additionally, on April 16, 2001, the Company received additional financing of
$7.5 million in the form of a convertible note and an irrevocable line of credit
(see Note 14, Subsequent Events).
NOTE 2. BASIS OF PRESENTATION AND OTHER MATTERS
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation ("eB2B"), merged
with and into DynamicWeb Enterprises, Inc., a New Jersey corporation and an SEC
registrant ("DWeb"), with the surviving company using the name "eB2B Commerce,
Inc." (the "Company"). Pursuant to the Agreement and Plan of Merger between eB2B
and DWeb (the "Merger"), the shareholders of DWeb retained their shares in DWeb,
while the shareholders of eB2B received shares, or securities convertible into
shares, of common stock of DWeb representing approximately 89% of the equity of
the Company, on a fully diluted basis. The transaction was accounted for as a
reverse acquisition.
The reverse acquisition was accounted for as a "purchase business combination"
in which eB2B was the accounting acquirer and DWeb was the legal acquirer. The
management of eB2B remained the management of the Company. As a result of the
reverse acquisition, (i) the financial statements of eB2B are the historical
financial statements of the Company; (ii) the results of the Company's
operations include the results of DWeb after the date of the Merger; (iii) the
acquired assets and assumed liabilities of DWeb were recorded at their estimated
fair market value at the date of the Merger; (iv) all references to the
financial statements of the "Company" apply to the historical financial
statements of eB2B prior to the Merger and to the consolidated financial
statements of the Company subsequent to the Merger; (v) any reference to eB2B
applies solely to eB2B Commerce, Inc., a Delaware corporation, and its financial
statements prior to the Merger, and (vi) the Company's year-end is December 31,
that of the accounting acquirer, eB2B.
In the opinion of management, all material adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have been
included in the accompanying consolidated financial statements. All significant
intercompany balances and transactions have been eliminated in consolidation.
Also, the contributed capital of eB2B as of December 31, 1999 has been recast
to give effect to the Merger. Certain other prior period balances have been
reclassified to conform to the current period presentation.
F-9
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles
The consolidated financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States of
America ("generally accepted accounting principles").
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 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.
Revenue Recognition
Revenue from transaction processing is recognized on a per transaction basis
when a transaction occurs between a buyer and a supplier. The fee is based
either on the volume of transactions processed during a specific period,
typically one month, or calculated as a percentage of the dollar volume of the
purchase related to the documents transmitted during a similar period. Revenue
from related implementation, if any, and monthly hosting fees are recognized on
a straight-line basis over the term of the contract with the customer. Deferred
income includes amounts billed for implementation and hosting fees, which have
not been earned.
For related consulting arrangements on a time-and-materials basis, revenue is
recognized as services are performed and costs are incurred in accordance with
the billing terms of the contract. Revenues from related fixed price consulting
arrangements are recognized using the percentage-of-completion method. Progress
towards completion is measured using efforts-expended method based upon
management estimates. Fixed price consulting arrangements are mainly short-term
in nature and the Company does not have a history of incurring losses on these
types of contracts. If the Company were to incur a loss, a provision for the
estimated loss on the uncompleted contract would be recognized in the period in
which such loss becomes probable and estimable. Billings in excess of revenue
recognized under the percentage-of-completion method on fixed price contracts is
included in deferred income.
Revenue from training and client educational services is recognized upon the
completion of the seminar and is based upon class attendance. If a seminar
begins in one period and is completed in the next period, the Company recognizes
revenue based on the percentage of completion method for the applicable period.
Deferred income includes amounts billed for training seminars and classes that
have not been completed.
Cash and Cash Equivalents
Cash and cash equivalents include cash, money market investments and other
highly liquid investments with original maturities of three months or less.
F-10
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization, and are depreciated or amortized using the straight-line method
over the following estimated useful lives:
Computer and communications equipment...... 2 to 3 years
Purchased software......................... 2 years
Office equipment and furniture............. 4 to 5 years
Leasehold improvements..................... Shorter of useful life or lease term
Goodwill and Other Intangibles
Goodwill is amortized using the straight-line method from the date of
acquisition over the period of expected benefit, or five years. Other
intangibles resulting from the Company's purchase business combinations,
including assembled workforce and customer list, are also amortized over the
straight-line method from the date of acquisition over the period of expected
benefit, or three years.
Impairment of Long-Lived Assets
The Company's long-lived assets, including property and equipment, goodwill and
other intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the net carrying amount may not be recoverable. When
such events occur, the Company measures impairment by comparing the carrying
value of the long-lived asset to the estimated undiscounted future cash flows
expected to result from use of the assets and their eventual disposition. If the
sum of the expected undiscounted future cash flows were less than the carrying
amount of the assets, the Company would recognize an impairment loss. The
impairment loss, if determined to be necessary, would be measured as the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
Product Development
In accordance with the provisions of Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", the Company capitalizes qualifying computer software costs
incurred during the application development stage. All other costs incurred in
connection with internal use software are expensed as incurred. The useful life
assigned to capitalized product development expenditures is based on the period
such product is expected to provide future utility to the Company. As of
December 31, 2000 and 1999, capitalized product development expenditures, which
have been classified as other assets in the Company's balance sheets, were
$905,000 and $738,000, respectively. During the year ended December 31, 1999,
eB2B abandoned the use of the product development expenditures capitalized at
December 31, 1998, and recorded a $174,000 write-down.
Income Taxes
The Company records income taxes using the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to
F-11
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and the tax effect of net
operating loss carryforwards. A valuation allowance is recorded against deferred
tax assets if it is more likely than not that such assets will not be realized.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts
payable and the current portion of long-term debt approximate fair value due to
the short maturities of such instruments. The carrying value of the long-term
debt and capital lease obligations approximate fair value based on current rates
offered to the Company for debt with similar collateral and guarantees, if any,
and maturities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk are cash and cash equivalents and accounts receivable. Cash and cash
equivalents are deposited with high credit quality financial institutions. The
Company's accounts receivable are derived from revenue earned from customers
located in the United States of America and are denominated in U.S. dollars.
Portions of the Company's accounts receivable balances are settled either
through customer credit cards or electronic fund transfers. The Company
maintains an allowance for doubtful accounts based upon the estimated
collectibility of accounts receivable. The Company recorded provisions
(additions) to the allowance of $211,000 and write-offs (deductions) against the
allowance of $98,000 during the year ended December 31, 2000.
In the year ended December 31, 2000, one customer from the Company's
transaction processing and related services' segment accounted for approximately
17% of the Company's total revenue. As of December 31, 2000, the same customer
accounted for approximately 14% of accounts receivable.
Net Loss per Common Share
Basic net loss per common share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. Diluted
net loss per common share is the same as basic net loss per common share since
the assumed conversion of options, warrants and preferred shares would have been
antidilutive. Had the Company reported net earnings at December 31, 2000 and
1999, options and warrants to purchase 21,552,096 and 13,535,687 common shares,
and preferred shares convertible into 13,566,595 and 16,358,995 common shares,
respectively, would have been included in the computation of diluted earnings
per common share, to the extent they were not antidilutive.
The unaudited pro forma net loss per common share presented in Note 4 herein has
been computed in the same manner as net loss per common share.
The weighted-average number of shares outstanding for purposes of presenting net
loss per common share on a comparative basis has been retroactively restated to
the earliest period presented to reflect the 2.66 to 1 exchange ratio in the
reverse acquisition described in Note 4 herein.
F-12
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value method in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees". For disclosure purposes, pro
forma net loss and loss per common share data are provided in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," as if the fair value method had been applied.
Restatement
Management determined that the valuation methodology utilized by eB2B in 1999 to
ascribe fair value to warrants issued in connection with certain financing and
other transactions, as well as to compensation related to certain employee stock
options, should be revised. Upon further review, management determined that (i)
the Black-Scholes option pricing model should have been used to estimate the
respective fair value of such warrants, and (ii) the options issued to employees
after commencement of merger discussions with DWeb on October 27, 1999 should
have reflected the 2.66 to 1 exchange ratio in the Merger. As a result, the
financial statements of eB2B as of December 31, 1999 and for the year then ended
have been restated to reflect the utilization of the Black-Scholes pricing model
and to give effect to the 2.66 to 1 exchange ratio in the Merger, where
applicable. The effect of the restatement was to increase additional paid-in
capital by $3,568,000, increase accumulated deficit by approximately $2,066,000,
and increase unearned stock-based compensation by $1,502,000, resulting in no
change to the total stockholders' equity as of December 31, 1999; and to
increase the net loss attributable to common stockholders by $2,066,000, a
non-cash charge, for the year ended December 31, 1999.
A summary of the effects of the restatement is as follows (in thousands except
per share data):
As previously
At December 31, 1999 reported (1) As restated
- -------------------- ------------ -----------
Common stock $ 1 $ 1
Additional paid-in capital 63,932 67,500
Accumulated deficit (35,604) (37,670)
Unearned stock-based compensation (320) (1,822)
-------- --------
Stockholders' Equity $ 28,009 $ 28,009
======== ========
As previously
For the year ended December 31, 1999 reported (1) As restated
- ------------------------------------ -------- -----------
Stock-based compensation expense $ 1,452 $ 2,686
Interest expense 2,360 3,192
Net loss (6,054) (8,120)
Net loss attributable to common stockholders (35,496) (37,562)
Basic and diluted net loss per common share $ (5.39) $ (5.70)
F-13
(1) Recast to give effect to the Merger and certain reclassifications.
Recent Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. SFAS No. 133 established accounting and reporting for
derivative and for hedging activities. The Company intends to adopt SFAS No. 133
on January 1, 2001 in accordance with SFAS No. 137, which delayed the required
implementation of SFAS No. 133 for one year. Additionally, in June 2000, SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of SFAS No. 133" was issued. The Company expects the
adoption of SFAS No. 133 and 138 in fiscal 2001, as well as the effect in
subsequent periods, to be immaterial.
In March 2000, Emerging Issues Task Force ("EITF") No. 00-2, "Accounting for Web
Site Development Costs", and EITF No. 00-3, "Application of AICPA Statement of
Position 97-2 to Arrangements That Include the Right to Use Software Stored on
Another Entity's Hardware", were issued. The Company adopted both EITF No. 002
and EITF No. 00-3, which did not have a material impact on the Company's
consolidated financial statements.
NOTE 4. ACQUISITIONS
Netlan Enterprises, Inc.
On February 22, 2000, eB2B completed its acquisition of Netlan Enterprises, Inc.
and subsidiaries ("Netlan"). Pursuant to the Agreement and Plan of Merger (the
"Netlan Merger"), Netlan's stockholders exchanged 100% of their common stock for
46,992 shares of eB2B common stock (equivalent to 125,000 shares of Company
common stock), valued at the market value of DWeb's common stock on January 7,
2000, the date at which the parties signed the letter of intent. Additionally,
75,188 shares of eB2B common stock (equivalent to 200,000 shares of Company
common stock) were issued, placed into an escrow account, and may be released to
certain former shareholders of Netlan upon successful completion of escrow
requirements, including continued employment with the Company. The aggregate
value of such shares, or $2,050,000, has been treated as stock-based
compensation and is being amortized over the one-year vesting period from the
date of acquisition. In connection with this acquisition, eB2B incurred
transaction costs consisting primarily of professional fees of approximately
$332,000, which have been included in the purchase price of the Netlan Merger.
The purchase price was allocated to those assets acquired and liabilities
assumed based on the estimated fair value of Netlan's net assets as of February
22, 2000. At that date, assets acquired and liabilities assumed had fair values
that approximated their historic book values. A total of approximately $334,000
of the purchase consideration was allocated to other intangibles, including
assembled workforce. The remaining purchase consideration,
F-14
or approximately $4,896,000, was recorded as goodwill. The results of operations
of Netlan have been included in the Company's results of operations since March
1, 2000.
The following is a summary of the allocation of the purchase price in the Netlan
Merger (in thousands):
Purchase price .................................................... $ 1,297
Acquisition costs ................................................. 332
-------
Total purchase price ........................................... $ 1,629
=======
Historical net liabilities assumed ................................ $(2,490)
Write-down of property and equipment, and intangible assets ....... (753)
Liabilities for restructuring and integration costs ............... (358)
Identifiable intangible assets .................................... 334
Goodwill .......................................................... 4,896
-------
Total purchase price ........................................... $ 1,629
=======
DynamicWeb Enterprises, Inc.
As described in Note 2 herein, the Merger of eB2B with and into DWeb was
accounted for as a reverse acquisition, utilizing the purchase business
combination method of accounting, in which eB2B acquired control of DWeb for
accounting purposes and DWeb acquired eB2B for legal purposes. Each share of
common stock of DWeb remained outstanding and each share of eB2B common stock
was exchanged for the equivalent of 2.66 shares of DWeb's common stock. In
addition, shares of eB2B preferred stock, warrants and options were exchanged
for like securities of DWeb, reflective of the 2.66 to 1 exchange ratio.
The purchase price of the Merger was approximately $59.1 million, which
primarily represents (i) the number of shares of DWeb's common stock outstanding
as of April 18, 2000, the date of the Merger, valued based on the average quoted
market price of DWeb's common stock in the three-day period before and after
December 1, 1999, the date at which the parties signed the definitive merger
agreement, or $31.9 million; (ii) the number of shares of DWeb's common stock
issuable under existing stock option and warrant agreements as of April 18, 2000
valued using the Black-Scholes option pricing model, or $6.4 million; (iii) the
aggregate market value of the shares of common stock and warrants principally
issued to a financial advisor (the "Financial Advisor"), or $10.2 million; and
(iv) the market value of warrants issued to the Financial Advisor in
consideration for the advisory services rendered during the Merger, or $10.1
million. In connection with this acquisition, eB2B also incurred transaction
costs consisting primarily of professional fees of approximately $363,000, which
have been included in the purchase price of the Merger. The purchase price was
allocated to those assets acquired and liabilities assumed based on the
estimated fair value of DWeb's net assets as of April 18, 2000. At that date,
assets acquired and liabilities assumed had fair values that approximated their
historic book values. A total of approximately $2.9 million of the purchase
consideration was allocated to other intangibles, including assembled workforce
F-15
and customer list. Also, the Company recorded liabilities totaling $1.0 million
principally in relation to severance provided to certain employees as well as
the settlement of a claim existing at the time of the Merger. The remaining
purchase consideration, or $58.1 million, was recorded as goodwill. The results
of operations of DWeb have been included in the Company's results of operations
since April 19, 2000.
The following is a summary of the allocation of the purchase price in the
acquisition of DWeb (in thousands):
Purchase price ................................................... $ 58,724
Acquisition costs ................................................ 363
--------
Total purchase price .......................................... $ 59,087
========
Historical net assets acquired ................................... $ 10
Write-down of property and equipment, and intangible assets ...... (838)
Liabilities for restructuring and integration costs .............. (1,047)
Identifiable intangible assets ................................... 2,902
Goodwill ......................................................... 58,060
--------
Total purchase price .......................................... $ 59,087
========
At December 31, 2000, accumulated amortization related to the goodwill and other
intangibles acquired in the Netlan and DWeb acquisitions totaled approximately
$9.8 million.
The following represents the summary unaudited pro forma condensed consolidated
results of operations for the years ended December 31, 2000 and 1999 as if the
acquisitions had occurred at the beginning of each of the periods presented (in
thousands, except per share data):
Year Ended
December 31,
2000 1999
---- ----
Revenue $7,073 $7,735
Net loss attributable to common
stockholders (48,705) (67,494)
Basic and diluted net loss per common share (3.77) (5.75)
For the purpose of presenting pro forma condensed consolidated results of
operations for the twelve-month period ended December 31, 1999, the Company
excluded Netlan's computer network design, consulting, implementation,
integration, procurement and support activities that had been discontinued on
October 31, 1999. For the year ended December 31, 1999, the loss from these
subsequently discontinued operations was approximately $772,000 and revenue was
approximately $6,127,000.
The pro forma results are not necessarily indicative of what would have occurred
if the acquisitions had been in effect for the periods presented. In addition
the pro forma results
F-16
are not necessarily indicative of the results that will occur in the future and
do not reflect any potential synergies that might arise from combined
operations.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31 (in
thousands):
2000 1999
---- ----
Computer and communications equipment $ 2,420 $ 193
Purchased software 2,914 -
Office equipment and furniture 614 2
Leasehold improvements 226 -
------- -----
6,174 195
Accumulated depreciation and amortization (1,902) (28)
------- -----
$ 4,272 $ 167
======= =====
As of December 31, 2000, the cost of assets under capital leases, principally
computer and communications equipment, was approximately $725,000. The net book
value of such assets was approximately $367,000.
NOTE 6. ACCRUED EXPENSES & OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following as of
December 31 (in thousands):
2000 1999
---- ----
Accrued software development costs $2,439 $ 258
Accrued severance 748 -
Accrued professional fees 559 292
Accrued compensation and related costs 467 488
Current maturities of capital lease obligations 191 -
Other 488 17
------ ------
$4,892 $1,055
====== ======
During April 2001, the Company renegotiated approximately $2.0 million of
accrued expenses and other current liabilities outstanding as of
December 31, 2000 with several of its vendors. The vendors agreed to accept
a 25% payment to be made within 30 days and common stock for the remaining
75% of such balance. The Company owes approximately $0.2 million of related
sales tax, which will be paid upon issuance of the common stock.
NOTE 7. LONG-TERM DEBT
In February 2000, eB2B obtained a $2,500,000 term loan from a bank (the "Bank").
The term loan has a term of three years, is interest-only until December 1,
2000, and bears interest at a rate equal to LIBOR plus 1%. Beginning December 1,
2000, the term loan required ten quarterly principal payments of $250,000. The
proceeds from the term loan were primarily used to refinance the $2,116,000 debt
of Netlan paid by eB2B in connection with the Netlan Merger.
F-17
At December 31, 2000, the maturity of long-term debt is as follows (in
thousands):
2001 $1,000
2002 1,000
2003 250
-----
Total $2,250
=====
The Company has obtained a $1,250,000 line of credit with the Bank, which
secures $1,178,000 of letters of credit that are outstanding at December 31,
2000. As of December 31, 2000, there was no amount outstanding under the line
of credit. The Company has pledged a custodial cash account with the Bank as
security on the term loan and line of credit. The Company is required to
maintain a minimum balance of approximately 111% of the outstanding term loan
and the line of credit at all times. As of December 31, 2000, the required
balance was $3,889,000. As of April 2, 2001, the $2,250,000 outstanding balance
of the term loan was repaid in full using cash held the custodial cash account.
As a result, the required balance in the custodial cash account as of April 2,
2001 was reduced to $1,389,000.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Leases and other commitments
The Company has several capital leases with various financial institutions for
computer and communications equipment used in operations with lease terms
ranging from 2 to 3 years. Also, during the third quarter of 2000, the Company
entered into a lease for new office space that will expire in 2007. According to
the terms of the lease agreements, the Company is required to maintain letters
of credit in the aggregate amount of $1,178,000. The line of credit with the
Bank secures such letters of credit.
Future minimum rental commitments under noncancellable leases as of December 31,
2000 were as follows (in thousands):
Capital leases Operating leases
-------------- ----------------
2001 $ 233 $ 1,467
2002 133 1,192
2003 111 1,162
2004 - 1,166
F-18
2005 - 1,175
Thereafter - 1,567
----- -----
Total $ 477 $ 7,729
=== =====
Less: amounts representing interest 74
Less: current maturities 191
Long-term capital lease obligations $ 212
=====
Employment agreements
The Company maintains employment agreements with one director and four of its
officers. These employment agreements provide for (i) minimum annual base
salaries of $950,000 in the aggregate, and (ii) minimum bonuses totaling
$265,000 for each year of employment of these four individuals.
Severance agreements
An officer and director resigned as Executive Vice President, effective
September 30, 2000, and as member of the Board of Directors, effective December
31, 2000. In connection with his resignation as an officer of the Company, the
Company signed an agreement, which provides that (i) he will be paid an
aggregate of $270,000 in semi-monthly installments between September 30, 2000
and September 30, 2003, (ii) his options will become exercisable in accordance
with their initial terms, and (iii) the Company will provide him with certain
benefits, as defined in the agreement. In relation with this obligation, the
Company recorded a severance accrual and a general and administrative expense of
$327,000 for the year ended December 31, 2000.
An officer and director resigned as Executive Vice President and Chief
Technology Officer, effective September 1, 2000, and as a member of the Board of
Directors, effective December 31, 2000. In connection with his resignation, the
Company signed an agreement, which provides that (i) he will be paid an
aggregate of $205,000 in semi-monthly installments between September 1, 2000 and
December 31, 2001, (ii) his options will become exercisable in accordance with
their initial terms, and (iii) the Company will provide him with certain
benefits, as defined in the agreement. In relation with this obligation, the
Company recorded a severance accrual and a general and administrative expense of
$241,000 for the year ended December 31, 2000.
The former Chief Executive Officer of DWeb resigned effective April 18, 2000
upon consummation of the Merger. In connection with his resignation, the Company
signed an agreement with this individual, which provides for installments in the
aggregate of $215,000 payable monthly between May 1, 2000 and October 31, 2001.
In relation with this obligation, the Company recorded a $215,000 severance
accrual, which was included in the purchase price of the Merger.
The former President and Chief Operating Officer of DWeb resigned effective
August 1, 2000. Based on a change in control provision in his employment
agreement with DWeb,
F-19
the Company signed an agreement, which provides for installments in the
aggregate of $450,000 payable semi-monthly between August 1, 2000 and September
30, 2002. In relation with this obligation, the Company recorded a $517,000
severance accrual, which was included in the purchase price of the Merger.
Litigation
The Company is party to certain legal proceedings and claims, which arise in the
ordinary course of business. In the opinion of management, the amount of an
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or cash flows of the Company.
In October 2000, Cintra Software & Services Inc. ("Cintra") commenced a civil
action against the Company in New York Supreme Court, New York County. The
complaint alleges that the Company acquired certain software from Cintra upon
the authorization of the Company's former Chief Information Officer. Cintra is
seeking damages of approximately $856,000. While the actions are at an early
stage, the Company believes it has meritorious defenses to the allegations made
in the complaint and intends to vigorously defend the action.
On March 2, 2001, a former employee commenced a civil action against the
Company and two members of its management in the Supreme Court of the State of
New York, County of New York, seeking, among other things, compensatory damages
in the amount of $1.0 million and additional punitive damages of $1.0 million
for alleged defamation in connection with his termination by the Company, as
well as a declaratory judgment concerning his alleged entitlement to stock
options to purchase 75,000 shares of the Company's common stock. The Company has
not yet responded to the Complaint and no discovery has commenced. The Company
disputes these claims and intends to vigorously defend the action.
NOTE 9. PREFERRED STOCK
In April 1999, eB2B authorized 2,000 shares of Series A Convertible Preferred
Stock ("Series A") with a par value of $.0001 per share, and issued 300 shares
of Series A for $300,000. Each share of Series A is convertible into the number
of shares of common stock by dividing the purchase price for the Series A by the
conversion price in effect resulting in approximately 399,000 shares of Company
common stock. The Series A have antidilution provisions, which can change the
conversion price in certain circumstances if additional shares of common stock
were to be issued by the Company. The holders have the right to convert the
shares of Series A at any time into common stock. Upon liquidation, dissolution
or winding up of the Company, the holders of the Series A are entitled to
receive $1,000 per share plus any accrued and unpaid dividends before
distributions to any holder of the Company's common stock. As of December 31,
2000, 293 shares of Series A issued in April 1999 had been converted into
389,690 shares of Company common stock.
F-20
In December 1999, eB2B authorized 4.0 million shares of Series B Convertible
Preferred Stock ("Series B") with a par value of $.0001 per share, and issued
approximately 3.3 million shares for $33.0 million in gross proceeds ($29.4
million in net proceeds), in a private placement conducted by eB2B. Each share
of Series B is convertible into the number of shares of common stock that
results from dividing the purchase price by the conversion price per share in
effect resulting in approximately 16.0 million shares of Company common stock
valued at $124.4 million based on the average quoted market price of DWeb's
common stock in the three-day period before and after December 1, 1999, the date
at which the parties signed the definitive merger agreement. As this value was
significantly greater than the net proceeds received in the private placement of
Series B preferred stock, the net proceeds received were allocated to the
convertible feature and amortized as a deemed dividend on preferred stock,
resulting in a corresponding charge to retained earnings and a credit to
additional paid-in capital within the stockholders' equity as of December 31,
1999. The Series B have antidilution provisions, which can change the conversion
price in certain circumstances if additional shares of common stock were to be
issued by the Company. The holders have the right to convert the shares of
Series B at any time into common stock. Upon liquidation, dissolution or winding
up of the Company, the holders of the Series B are entitled to receive $10.00
per share plus any accrued and unpaid dividends before distributions to any
holder of the Company's common stock. As of December 31, 2000, 496,801 shares of
Series B issued in December 1999 had been converted into 2,402,710 shares of
Company common stock.
In the event the Company declares a cash dividend on the common stock, the
Company will at the same time, declare a dividend to the Series A and B
stockholders equal to the dividend which would have been payable if the Series A
and B stock had been converted into common stock. The holders of the Series A
and B are entitled to one vote for each share of the Company's common stock into
which such share of Series A and B is then convertible. In addition, upon any
liquidation of the Company, holders of shares of Series A and Series B shall be
entitled to payment of the purchase price before distributions to any holder of
the Company's common stock.
NOTE 10. COMMON STOCK AND WARRANTS
As of December 31, 2000, there were 15,384,015 shares of our common stock issued
and outstanding. The Company's common stock is currently listed on The Nasdaq
SmallCap Market under the trading symbol "EBTB". Holders of the Company's common
stock are entitled to one vote for each share owned on all matters submitted to
a vote of stockholders. Although the Company currently does not anticipate
paying any cash dividend for the foreseeable future, holders of the Company's
common stock are entitled to receive cash dividends, if any, declared by our
board of directors out of funds legally available therefore, subject to the
rights of any holders of preferred stock. Holders of the Company's common stock
do not have subscription, redemption, conversion or preemptive rights. Each
share of common stock is entitled to participate pro rata in any distribution
upon liquidation, subject to the rights of holders of preferred stock.
F-21
In September 1999, eB2B signed a letter of intent with the Financial Advisor to
raise capital in a private placement offering of the Company's securities. In
October 1999, in anticipation of eB2B's Series B preferred stock private
placement offering, the Financial Advisor arranged for $1,000,000 in bridge
financing for eB2B until the private placement offering commenced. The bridge
financing consisted of convertible notes, in the aggregate, of $1,000,000, which
automatically converted into units offered in the private placement offering
based on the face value of the bridge notes, and warrants to purchase up to
717,409 shares of eB2B common stock (equivalent to 1,908,308 shares of Company
common stock), exercisable at $4.00 per share ($1.50 reflective of the 2.66 to 1
exchange ratio in the Merger) for a period of seven years (the "Bridge Financing
Warrants"). The Bridge Financing Warrants were valued using the Black-Scholes
option pricing model at approximately $3,178,000 and were expensed in 1999 as
interest in eB2B's statement of operations when the bridge financing was
liquidated.
In December 1999, eB2B issued to the Financial Advisor, for services relating to
the private placement, warrants to purchase 1,482,600 shares of eB2B common
stock (equivalent to 3,943,716 shares of Company common stock) at an exercise
price of $5.50 per share ($2.07 reflective of the 2.66 to 1 exchange ratio in
the Merger) for a period of five years (the "Private Placement Fees"). Also,
investors in the Series B preferred stock private placement offering received
warrants to purchase an aggregate of 1,500,048 shares of eB2B common stock
(equivalent to 3,990,128 shares of Company common stock) with similar terms
(the "Private Placement Investors"). The Private Placement Fees and the Private
Placement Investors were valued utilizing the Black-Scholes option pricing model
at approximately $52,284,000.
In connection with certain salaries and various legal and consulting services
rendered during 1999, eB2B issued 148,000 shares of common stock (equivalent to
393,680 shares of Company common stock) and 188,500 warrants to purchase shares
of common stock (equivalent to 501,410 shares of Company common stock),
respectively. The warrants are exercisable for a period of five years at prices
ranging from $0.50 to $5.50 ($0.19 to $2.07 reflective of the 2.66 to 1 exchange
ratio in the Merger) per share (the "Consulting Warrants"). The shares of common
stock issued in lieu of salaries were valued at $228,000, and expensed as
stock-based compensation in eB2B's statement of operations in 1999. The
Consulting Warrants were valued using the Black-Scholes option pricing model at
approximately $1,029,000, and charged to stock-based compensation in eB2B's
statement of operations in 1999.
A principal and the Chief Executive Officer of the Financial Advisor is a
director of the Company. Under an agreement between the Financial Advisor and
eB2B, upon completion of the Merger with DWeb on April 18, 2000, the Financial
Advisor received a finder's fee equal to 3% of the total number of shares
received by eB2B stockholders in the Merger. The fee was paid in the form of
720,282 shares of Company common stock and seven-year warrants to purchase
502,383 of such shares at an exercise price of $2.07 per share (the "Finder's
Warrants"). The shares of common stock were valued at the fair market of the
DWeb stock on April 18, 2000, the date of the Merger and the Finder's
Warrants have
F-22
been valued using the Black-Scholes option pricing model.The aggregate value of
the shares of common stock and warrants, or $10.2 million, was included in the
purchase price of the Merger.
In November 1999, eB2B issued the Financial Advisor five-year warrants to
purchase 470,000 shares of eB2B common stock (equivalent to 1,250,200 shares of
Company common stock) at an exercise price of $5.50 per share (equivalent to
$2.07 per share of Company common stock) in consideration for the advisory
services rendered during the Merger (the "Advisory Warrants"). The Advisory
Warrants vested upon completion of the Merger on April 18, 2000 and have been
included in the purchase price of the Merger, along with 30,000 additional
warrants to purchase shares of eB2B common stock with similar terms (equivalent
to 79,800 shares of Company common stock) granted to a Board member and his
affiliate, for an aggregate value of approximately $10.1 million using the
Black-Scholes option pricing model.
On April 18, 2000, the number of shares of DWeb's common stock issuable under
existing warrants agreements became warrants to purchase shares of Company
common stock. As of December 31, 2000, 410,772 of such warrants were
outstanding.
In 2000, the Company issued 300,000 warrants to purchase shares of Company
common stock at an exercise price of $3.91 per share to a business partner,
which vest in three equal installments, on each of the annual anniversary of
the warrant agreement date (the "Business Partner Warrants"). The Business
Partner Warrants have been valued at $900,000 using the Black-Scholes option
pricing model and their value will be amortized ratably over three years.
During the year ended December 31, 2000, the Company recognized business
partner warrant expenses in the amount of $89,000, which have been classified
as stock-based compensation expense in the Company's consolidated statement of
operations.
The assumptions used by the Company in determining the fair value of the above
warrants were as follows: dividend yield of 0%, risk-free interest rate of 6.0%
and 6.5% in 1999 and 2000, respectively, expected volatility of 80%, and
expected life of 3 to 7 years depending on the actual life of the respective
warrants.
The following table summarizes the status of the above warrants at December 31,
2000:
Warrants outstanding Warrants
exercisable
-------------------------------------------------------------------------------------
Range of exercise Number of shares Weighted average Number of shares
price per share remaining life (in years)
Bridge
Financing $1.50 1,908,308 5.8 1,908,308
Private
Placement Fees $2.07 3,943,716 3.9 3,943,716
F-23
Private
Placement
Investors $2.07 3,990,128 3.9 3,990,128
Consulting $0.19 to $2.07 501,410 3.6 501,410
Finder's $2.07 502,383 6.3 502,383
Advisory $2.07 1,330,000 3.8 1,330,000
DWeb $1.00 to $9.90 410,772 6.0 410,772
Business Partner $3.91 300,000 6.8 -
---------- ----------
Total 12,886,717 12,586,717
========== ==========
NOTE 11. STOCK OPTION AND DEFINED CONTRIBUTION PLANS
Stock options plans
The Company has stock-based compensation plans under which outside directors,
certain employees and consultants received stock options and other equity-based
awards. The shareholders of the Company approved the 2000 stock option plan. All
options outstanding under either eB2B's or DWeb's prior plans at the time of the
Merger remained in effect, but the plans have been retired as of April 18, 2000,
the date of the Merger. Stock options under the Company's 2000 stock option plan
are generally granted with an exercise price equal to 100% of the market value
of a share of common on the date of the grant, have 10 year terms and vest
within 2 to 4 years from the date of the grant. Subject to customary
antidilution adjustments and certain exceptions, the total number of shares of
common stock authorized for option grants under the plan was approximately 10.0
million shares at December 31, 2000. At that date, approximately 5.7 million
shares were available for grant.
In connection with the Merger, outstanding options held by DWeb employees became
exercisable, according to their terms, for Company common stock effective at the
acquisition date. These options did not reduce the shares available for grant
under the 2000 stock option plan. The fair value of these options, valued using
the Black-Scholes pricing model, was included in the purchase price of
the Merger. There were no unvested options held by employees of companies
acquired in a purchase combination.
F-24
The former Chief Executive Officer and current Chairman of the Board of
Directors of the Company was granted options to purchase 500,000 shares of eB2B
common stock (equivalent to 1,330,000 shares of Company common stock) at an
exercise price of $5.50 per share (equivalent to $2.07 per share of Company
common stock). These options vested upon the completion of the Merger on April
18, 2000. In connection with such options, the Company recorded a one-time
charge classified as stock-based compensation expense of approximately $8.8
million in the year ended December 31, 2000.
In connection with certain consulting services rendered during 2000, the Company
granted 65,000 stock options in exchange for services. These options were
valued, utilizing the Black-Scholes option pricing model, at approximately
$70,000, of which $36,000 was charged to stock-based compensation expense in
the year ended December 31, 2000. The assumptions used by the Company in
determining the fair value of these options were consistent with the
assumptions described in Note 10, Common Stock and Warrants.
The Company has adopted the disclosure requirements of SFAS No. 123 and, as
permitted under SFAS 123, applies APB 25 and related interpretations in
accounting for its plans. Compensation expense recorded under APB 25 was
approximately $16.0 and $2.7 million for the years ended December 31, 2000 and
1999, respectively. If the Company had elected to adopt optional recognition
provisions of SFAS 123 for its stock option plans, net loss and net loss per
share would have been changed to the pro forma amounts indicated below (in
thousands, except per share data):
Years ended December 31,
------------------------
2000 1999
---- ----
Net loss attributable to common stockholders
As reported $ (41,335) $ (37,562)
Pro forma $ (50,909) $ (38,070)
Net loss per common share - basic and diluted
As reported $ (3.61) $ (5.70)
Pro forma $ (4.44) $ (5.78)
The fair value of stock options used to compute pro forma net loss and net loss
per common share disclosures is the estimated fair value at grant date using the
Black-Scholes pricing model with the following assumptions:
Weighted-Average Assumptions 2000 1999
- ---------------------------- ---- ----
Dividend yield 0 % 0 %
Expected volatility 80% 80%
Risk-free interest rate 6.5% 6.0%
Presented below is a summary of the status of the Company employee and director
stock options and the related transactions for the years ended December 31,
2000 and 1999:
F-25
Shares (in thousands) Weighted Average Exercise Price
-------------------- Per Share
---------
Options outstanding at
January 1, 1999 - -
- -------------------------------------------------------------------------------------------------------------
Granted 2,048 $ 0.78
Exercised - -
Forfeited/expired - -
- -------------------------------------------------------------------------------------------------------------
Options outstanding at
January 1, 2000 2,048 $ 0.78
Granted/assumed (1) 7,784 $ 2.78
Exercised 81 $ 2.69
Forfeited/expired 1,143 $ 2.64
- -------------------------------------------------------------------------------------------------------------
Options outstanding at
December 31, 2000 8,608 $ 2.32
(1) Includes options converted in DWeb acquisition.
Defined contribution plan
The Company has a defined contribution savings plan (the "Plan"), which
qualifies under Section 401(k) of the Internal Revenue Code. Participants may
contribute up to 20% of their gross wages, not to exceed, in any given year, a
limitation set by Internal Revenue Service regulations. The Plan provides for
discretionary contributions to be made by the Company as determined by its Board
of Directors. The Company has not made any contributions to the Plan.
NOTE 12. INCOME TAXES
The components of the net deferred tax asset as of December 31, 2000 and 1999
consist of the following (in thousands):
2000 1999
---- ----
Deferred tax assets:
Net operating loss carryforwards................ $ 6,900 $ 1,292
Stock-based compensation........................ 7,500 --
Capitalized start-up expenditures............... -- 1,069
-------- --------
14,400 2,361
Deferred tax liability:
Research and development........................ -- 278
-------- --------
14,400 2,083
Valuation allowance............................. (14,400) (2,083)
======== ========
Net deferred tax asset.......................... $ -- $ --
======== ========
F-26
Deferred income taxes reflect the net effects of temporary differences between
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which temporary differences
representing net future deductible amounts become deductible. Due to the
uncertainty on the Company's ability to realize the benefit of the deferred tax
assets, the deferred tax assets are fully offset by a valuation allowance at
December 31, 2000 and 1999.
As of December 31, 2000, the Company had approximately $20.0 million of net
operating loss carryforwards for federal income tax purposes. These
carryforwards will begin expiring in 2019 if not utilized.
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes.
The sources and tax effects of the differences are as follows (in thousands):
Year Ended December 31,
-----------------------
2000 1999
---- ----
Federal income tax at statutory rate $(14,000) $(2,700)
State income tax, net of federal benefit (2,400) (500)
Non deductible expenditures including
goodwill amortization and other 4,083 1,117
Change in valuation allowance 12,317 2,083
------ -----
Income tax as recorded $ - $ -
====== =====
NOTE 13. SEGMENT REPORTING
The Company has two reportable operating segments. The Company utilizes
proprietary software to provide a technology platform for large buyers and large
suppliers to transfer business documents via the Internet to their small and
medium-sized trading partners. The Company also offers professional services,
which provide consulting expertise to the same client base, as well as to other
businesses that prefer to operate or outsource the transaction management and
document exchange of their business-to-business relationships. The Company's
transaction processing technology platform and professional services make up one
reportable segment defined as "transaction processing and related services." In
addition, the Company designs and delivers custom technical education through
delivery of custom computer and Internet-based on line training seminars. This
second reportable segment is defined as "training and client educational
services."
The following information is presented in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
established standards
F-27
for reporting information about operating segments in the Company's financial
statements (in thousands):
Year Ended December, 31
------------------------
2000 1999
---- ----
Revenue from external customers
Transaction processing and related services $ 3,039 $ -
Training and client educational services 2,429 -
-------- -------
$ 5,468 $ -
======== =======
EBITDA (1)
Transaction processing and related services $(13,467) $(1,435)
Training and client educational services 363 -
-------- -------
EBITDA (13,104) (1,435)
Depreciation and amortization (13,143) (807)
Stock-related compensation (16,027) (5,864)
Interest 939 (14)
-------- -------
Net Loss $(41,335) $(8,120)
======== ========
Identifiable assets
Transaction processing and related services $ 15,201 $29,064
Training and client educational services 1,310 -
Corporate, mainly goodwill and other intangibles 56,708 -
-------- -------
$ 73,219 $29,064
======== =======
Capital expenditures, including product development
Transaction processing and related services $ 5,892 $ 1,335
Training and client educational services 41 -
-------- -------
$ 5,933 $ 1,335
======== =======
(1) EBITDA is defined as net income (loss) adjusted to exclude: (i) provision
(benefit) for income taxes, (ii) interest income and expense, (iii)
depreciation, amortization and write-down of assets, (iv) stock-related
compensation.
EBITDA is presented because management considers it an important indicator of
the operational strength and performance of its business. The Company evaluates
the performance of its operating segments without considering the effects of (i)
debt financing interest expense and investment interest income, and (ii)
non-cash charges related to depreciation, amortization and stock-related
compensation, which are managed at the corporate level.
NOTE 14. SUBSEQUENT EVENTS
F-28
On April 16, 2001, the Company received additional financing of $7.5 million
in the form of a convertible note and an irrevocable line of credit. Such note
is redeemable in cash or common stock of the Company commencing October 1, 2001.
The Company's intention is to redeem such note, if called, with the issuance of
common stock. In connection with such financing, the Company incurred a cash
fee on the convertible note amounting to 10% of the gross proceeds and a cash
fee on the line of credit, amounting to 3% of amount drawn upon, if any, and
issued warrants with a strike price of $0.93 a share. In addition, the Company
has issued approximately 1.9 million shares of common stock in settlement of
certain vendor payables.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
On April 18, 2000, eB2B merged with and into DWeb. Prior to the merger, eB2B's
independent accountants were Ernst & Young LLP and DWeb's independent
accountants were Richard A. Eisner & Company, LLP ("Richard Eisner").
Effective July 12, 2000, the Company engaged Deloitte & Touche LLP as
independent accountants to audit the Company's financial statements for the year
ended December 31, 2000 and, consequently, ended the engagement of Richard
Eisner, the SEC registrant's independent accountants. Such actions were approved
by the Company's Board of Directors as of June 28, 2000. Richard Eisner neither
resigned nor declined to stand for re-election. The reports of Richard Eisner on
DWeb`s financial statements for each of the past two fiscal years contained no
adverse opinion or disclaimer of opinion, and were not modified as to
uncertainty, audit scope, or accounting principles, except for their report,
dated November 19, 1999 and related to the financial statements of DWeb for the
years ended September 30, 1999 and 1998, which contained an explanatory
paragraph regarding substantial doubt that existed in relation to DWeb's ability
to continue as a going concern. This explanatory paragraph was unrelated to the
Company's decision to terminate its engagement with Richard Eisner. The Company
had no disagreements with Richard Eisner on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to Richard Eisner's satisfaction, would have caused them
to make reference to the subject matter of such disagreement in connection with
their report.
F-29
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act
Executive officers and directors
The following table sets forth certain information regarding the directors and
executive officers of the Company:
Name Age Position
- ---- --- --------
Peter J. Fiorillo 41 President and Chairman of the Board of Directors
Alan J. Andreini 54 Chief Executive Officer
Victor L. Cisario 39 Chief Financial Officer, Treasurer
John J. Hughes, Jr. 47 Executive Vice President, Corporate
Development, General Counsel and Secretary
Steven Rabin 46 Chief Technology Officer
Daniel G. Lannon 43 Executive Vice President, Business Development
Michael S. Falk 38 Director
Timothy P. Flynn 49 Director
Jack Slevin 64 Director
Peter J. Fiorillo co-founded eB2B in November 1998. He served as President,
Chief Executive Officer and Chairman of the Board of Directors of eB2B from
November 1998 until April 18, 2000, and, upon completion of the merger with
DWeb, assumed those positions with the Company until November 2000. In November
2000, he relinquished his positions as Chief Executive Officer and President of
the Company and remained as Chairman of the Board. In April 2001, he was
reappointed President. He was a director of eB2B since its inception until the
merger with DWeb, and has since been a director of the Company. From January
1991 until October 1998, Mr. Fiorillo held various positions with FIND/SVP,
Inc., a publicly held consulting and business advisory company, including
Executive Vice President from November 1994 to October 1998.
Alan J. Andreini joined the Company in July 2000 as Executive Chairman. He
served as Executive Chairman from July 2000 to November 2000. Between November
2000 and April 2001, he has served as President and Chief Executive Officer.
Since April 2001, he has served as Chief Executive Officer. Prior to joining the
Company, from April 1997 to June 2000, Mr. Andreini was successively President
and Chief Operating Officer, Chief Executive Officer and Vice Chairman of
InterWorld Corporation, a public company and a leading provider of e-commerce
software solutions. Previously, Mr. Andreini was Executive Vice President and a
member of the Office of the President of Comdisco Inc., a public company engaged
III-1
in technology services. Mr. Andreini joined Comdisco Inc. in 1978, and was named
Senior Vice President in 1986 and Executive Vice President in 1994.
Victor L. Cisario has been Chief Financial Officer and Treasurer since April 18,
2000, the date of the merger of DWeb and eB2B. Prior to the merger, Mr. Cisario
was eB2B's Chief Financial Officer and Treasurer since January 2000. He served
as Secretary of the Company from April 2000 to June 2000. From March 1995 to
December 1999, Mr. Cisario held various positions with FIND/SVP, Inc. serving as
Vice President and Chief Financial Officer from October 1998 until December
1999, Vice President and Controller from January 1997 to October 1998 and
Controller from March 1995 to January 1997.
John J. Hughes, Jr. has been Executive Vice President, Corporate Development,
General Counsel and Secretary since June 2000. Prior to joining the Company, Mr.
Hughes was a partner at Moskowitz, Altman & Hughes, a New York based law firm,
for 13 years.
Steven Rabin joined the Company in November 2000 and serves as Chief Technology
Officer. Prior to joining the Company, Mr. Rabin was the Chief Technology
Officer for InterWorld Corporation from May 1997 to September 2000. From
February 1995 to May 1997, Mr. Rabin worked as Chief Technologist at Logility,
Inc., a division of American Software Inc., a publicly held company, where he
designed and developed a variety of supply chain management and
business-to-business e-commerce solutions.
Daniel G. Lannon joined the Company in March 2001 and serves as Executive Vice
President, Business Development and Strategic Alliances. Prior thereto, Mr.
Lannon was Vice President of Alliances for InterWorld Corporation from April
2000 to March 2001. From July 1998 to April 2000, Mr. Lannon was Director of
Business Development for Healtheon Web/MD, an e-commerce firm in Santa Clara,
California. From February 1981 until July 1998, Mr. Lannon held a variety of
management positions in the IBM Corporation in business development, sales, and
marketing.
Michael S. Falk has been a member of the Company's board of directors since the
merger with DWeb, and prior to the merger was a director of eB2B since January
2000. Mr. Falk is the co-founder, chairman and chief executive officer of
Commonwealth Associates, L.P., a New York-based merchant bank and investment
bank. Mr. Falk is also a member of the board of directors of FutureLink
Corporation, a publicly held application service provider.
Timothy P. Flynn has been a member of the Company's board of directors since the
merger with DWeb, and prior to the merger was a director of eB2B since January
2000. Mr. Flynn is a principal of Flynn Gallagher Associates, LLC. Mr. Flynn is
also a member of the boards of directors of FutureLink Corporation and MCG
Communications, Inc., a publicly held telecommunications company. Mr. Flynn has
served on the board of directors of PurchasePro.com, Inc., a publicly held
business-to-business e-commerce company. From 1993 until 1997, Mr. Flynn served
as a director of ValuJet Airlines. Prior to that, he served as a senior
executive and director of WestAir Holdings, Inc., a
III-2
company, which operated WestAir, a California-based commuter airline affiliated
with United Airlines.
Jack Slevin has been a member of the Company's board of directors since June
2000. From June 1995 until his retirement in January 1999, Mr. Slevin was the
Chairman and Chief Executive Officer of Comdisco Inc. From October 1994 to June
1995, Mr. Slevin was Chief Operating Officer at Comdisco Inc. and from January
1993 to October 1994, he was Executive Vice President of North American Sales at
Comdisco Inc. He became a member of the Office of the President when it was
created in 1992 and was a member of Comdisco Inc.'s board of directors from 1979
until January 1999.
All of the above directors will hold office until the next annual meeting of the
stockholders and until their successors have been duly elected and qualified.
All of the above executive officers serve at the discretion of the Company's
board of directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), requires executive officers and directors and
persons who beneficially own more than ten percent (10%) of the Company's common
stock to file initial reports of ownership on Form 3 and reports of changes in
ownership on Form 4 with the Securities and Exchange Commission.
Based solely on a review of the copies of such forms furnished to the Company
and written representations from the executive officers and directors, the
Company believes that all Section 16(a) filing requirements applicable to its
executive officers, directors and greater than ten per cent (10%) beneficial
owners were satisfied.
III-3
Item 10. Executive Compensation
The following table provides information concerning the annual and long-term
compensation earned or paid to the Company's Chief Executive Officer and to each
of its most highly compensated executive officers other than the Chief Executive
Officer, whose compensation exceeded $100,000 during 2000 (the "named executive
officers"). For the period prior to April 18, 2000, the date of the merger of
DWeb and eB2B, the following table includes compensation earned at eB2B, but
excludes the compensation earned or paid to DWeb's executives.
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name and Principal Year Salary Bonus Restricted Number of Securities
------------------- ---- ------ ----- ----------- --------------------
Position Stock Award Underlying Options
-------- ----------- ------------------
- -------------------------------------------------------------------------------------------------------------
Peter J. Fiorillo,
President 2000 $219,000 $ 50,000 - -
1999 $195,000(1) $110,000 1,995,000
- -------------------------------------------------------------------------------------------------------------
Alan J. Andreini, CEO
(2) 2000 $112,500 - - 1,500,000
- -------------------------------------------------------------------------------------------------------------
Victor L.
Cisario, CFO 2000 $150,000 $ 50,000 - 266,000
- -------------------------------------------------------------------------------------------------------------
John J. Hughes,
General
Counsel(3) 2000 $102,000 $110,000(6) - 266,000
- -------------------------------------------------------------------------------------------------------------
Steve Rabin,
CTO(4) 2000 $ 61,500(5) $ 72,500(7) 50,000 550,000
- -------------------------------------------------------------------------------------------------------------
(1) From January 1, 1999 to September 30, 1999, eB2B elected, in accordance
with the right it was granted under each employment agreement, to accrue
the base salary for each of the executive officers of eB2B. In January
2000, the accrued salary for each officer (which represented approximately
seventy-five percent (75%) of the total salary for each officer) was
converted at the election of the officers, into common stock of eB2B at
$5.50 per share.
(2) Mr. Andreini commenced employment with the Company in July 2000.
(3) Mr. Hughes commenced employment with the Company in June 2000.
(4) Mr. Rabin commenced employment with the Company in November 2000.
(5) Includes $32,500 paid as consulting fees to a company whose
majority-shareholder is Mr. Rabin.
(6) Includes a $35,000 signing bonus.
(7) Includes a $50,000 signing bonus.
III-4
The following table provides information concerning individual grants of stock
options made during 2000 to each named executive officer of the Company. For the
period prior to April 18, 2000, the date of the merger of DWeb and eB2B, the
following table includes options granted at eB2B.
Name Number of Securities Percent of Total Options Exercise Or Base Expiration
---- Underlying Options Granted to Employees in Price (in $ per date
------------------ 2000 Share) ----
---- ------
- -------------------------------------------------------------------------------------------------------------
Peter J.
Fiorillo - - - -
- -------------------------------------------------------------------------------------------------------------
Alan J.
Andreini 1,500,000 26.7% $3.25 July 2010
- -------------------------------------------------------------------------------------------------------------
Victor L. January
Cisario 266,000 4.7% $2.07 2010
- -------------------------------------------------------------------------------------------------------------
John J.
Hughes 266,000 4.7% $2.07 June 2010
- -------------------------------------------------------------------------------------------------------------
Steve November
Rabin 550,000 9.8% $2.10 2010
- -------------------------------------------------------------------------------------------------------------
The following table provides information concerning the exercise of stock
options during 2000, and the value of unexercised options owned, by each named
executive officer of the Company.
- ------------------------------------------------------------------------------------------------------------------
Name Shares Value Number of Securities Value of Unexercised In-
---- Acquired Realized Underlying Unexercised The-Money Options (2)
on -------- Options (1) ---------------------
Exercise -----------
--------
- ------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------
Peter J.
Fiorillo - - 1,995,000 - $373,750 -
- ------------------------------------------------------------------------------------------------------------------
Alan J.
Andreini - - 1,500,000 - - -
- ------------------------------------------------------------------------------------------------------------------
Victor L.
Cisario - - 177,000 89,000 - -
- ------------------------------------------------------------------------------------------------------------------
John J. Hughes - - 266,000 - - -
- ------------------------------------------------------------------------------------------------------------------
Steve Rabin - - 315,000 235,000 - -
- ------------------------------------------------------------------------------------------------------------------
(1) Includes ownership of options as of December 31, 2000.
(2) Based on closing price of the Company's common stock as reported on Nasdaq
on December 29, 2000.
III-5
The Company and Peter J. Fiorillo, the Company's President and Chairman of the
Board of Directors, are parties to an employment agreement, dated December 1,
1998. The initial term of the agreement expires in December 2002, but the
agreement automatically renews for successive one-year terms unless terminated
by either party prior to renewal. The agreement provides for an annual base
salary of $225,000 with a minimum annual bonus of $50,000. Under the terms of
the agreement, if Mr. Fiorillo's employment is terminated by the Company for
reasons other than "cause" (as defined in the agreement), or in the event of a
"change of control" (as defined in the agreement) involving the Company, the
Company is required to pay Mr. Fiorillo an amount equal to the greater of four
times his annual base salary, or two and one half times his annual base salary
and bonus. The payments are to be made over a one-year period following the date
of the event that resulted in the termination of employment or the "change of
control." In the event of a termination of employment other than for "cause" or
in the event of a "change of control", the Company is also required to provide
Mr. Fiorillo with office space and secretarial services for a period of two
years.
The Company and Alan J. Andreini, the Company's Chief Executive Officer, are
parties to an employment agreement, dated effective as of July 1, 2000. The
initial term expires on June 30, 2002, but the agreement automatically renews
for successive one-year terms unless terminated by either party prior to
renewal. The agreement provides for an annual base salary of $225,000. In the
event the agreement is terminated for reasons other than "cause" (as defined in
the agreement), the Company is required to pay Mr. Andreini an amount equal to
his annual base salary, with such sum payable over a period of one year.
The Company and Steven Rabin, the Company's Chief Technology Officer, are
parties to an employment agreement, dated effective as of October 31, 2000. The
initial term expires on December 31, 2002, but the agreement automatically
renews for successive one-year terms unless terminated by either party prior to
renewal. The agreement permits Mr. Rabin to determine the allocation of his
business time between the Company's offices and his home in Martha's Vineyard,
MA. The agreement provides for an annual base salary of $175,000 and an annual
minimum bonus of $90,000. In the event the agreement is terminated for reasons
other than "cause" (as defined in the agreement), the Company is required to pay
Mr. Rabin an amount equal to his annual base salary, with such sum payable over
a period of one year.
The Company and Victor Cisario, the Company's Chief Financial Officer, are
parties to an employment agreement, dated effective as of January 3, 2000. The
initial term expires on June 30, 2002, but the agreement automatically renews
for successive one-year terms unless terminated by either party prior to
renewal. The agreement provides for an annual base salary of $150,000 and an
annual minimum bonus of $50,000. In the event the agreement is terminated for
reasons other than "cause" (as defined in the agreement) or in the event of a
"change of control" (as defined in the agreement) involving the Company, the
Company is required to pay Mr. Cisario an amount equal to one and one half times
his annual base salary and bonus, with such sum payable over a period of one
year.
The Company and John J. Hughes, Jr., the Company's Executive Vice President,
Corporate Development and General Counsel, are parties to an employment
agreement, dated effective as of June 1, 2000. The initial term expires on
December 31, 2003, but the agreement automatically renews for successive
one-year terms unless terminated by either party prior to renewal. The agreement
provides for an annual base salary of $175,000 and an annual minimum bonus of
$75,000. In the event the agreement is terminated for reasons other than "cause"
(as defined in the agreement) or in the event of a "change of control" (as
defined in the agreement) involving the Company, the Company is required to pay
Mr. Hughes an amount equal to one and one half times his base annual salary and
bonus, with such sum payable over a period of one year.
The Company and Daniel G. Lannon, the Company's Executive Vice President,
Business Development and Strategic Alliances, are parties to an employment
agreement, dated effective as of March 4, 2001. The initial term expires on
February 28, 2003, but the agreement automatically renews for successive
one-year terms unless terminated by either party prior to renewal. The agreement
provides for an annual base salary of $175,000 and an annual minimum bonus of
$75,000. In the event the agreement is terminated for reasons other than "cause"
(as defined in the agreement), the Company is required to pay Mr. Lannon an
amount equal to his annual base salary, with such sum payable over a period of
one year.
The Company's amended and restated certificate of incorporation provides that
the Company will indemnify any person who is or was a director, officer,
employee or agent of the Company to the fullest extent permitted by the New
Jersey Business Corporation Act, and to the fullest extent otherwise permitted
by law. The New Jersey law permits a New Jersey corporation to indemnify its
directors, officers, employees and agents against liabilities and expenses they
may incur in such capacities in connection with any proceeding in which they may
be involved, unless a judgment or other final adjudication adverse to the
director, officer, employee or agent in question establishes that his or her
acts or omissions (a) were in breach of his or her duty of loyalty (as defined
in the New Jersey law) to the Company or its stockholders, (b) were not in good
faith or involved a knowing violation of law or (c) resulted in the receipt by
the director, officer, employee or agent of an improper personal benefit.
Pursuant to the Company's amended and restated certificate of incorporation and
the New Jersey law, no director or officer of the Company will be personally
liable to the Company or to any of its stockholders for damages for breach of
any duty owed to the Company or its stockholders, except for liabilities arising
from any breach of duty based upon an act or omission (i) in breach of such
director's or officer's duty of loyalty (as defined in the New Jersey law) to
the Company or its stockholders, (ii) not in good faith or involving a knowing
violation of law or (iii) resulting in receipt by such director or officer of an
improper personal benefit.
In addition, the Company's bylaws include provisions to indemnify its officers
and directors and other persons against expenses, judgments, fines and amounts
incurred or paid in settlement in connection with civil or criminal claims,
actions, suits or proceedings against such persons by reason of serving or
having served as officers, directors, or in other capacities, if such person
acted in good faith, and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Company and, in a criminal action or
proceeding, if he had no reasonable cause to believe that his/her conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent will
not, of itself, create a presumption that the person did not act in good faith
and in a manner which he or she reasonably believed to be in or not opposed to
the best interests of the Company or that he or she had reasonable cause to
believe his or her conduct was unlawful. Indemnification as provided in the
bylaws will be made only as authorized in a specific case and upon a
determination that the person met the applicable standards of conduct.
III-6
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table shows the common stock owned by the Company's directors and
executive officers and by persons known by us to beneficially own, individually,
or as a group, more than 5% of our outstanding common stock as of December 31,
2000. Included for purposes of this table, as common stock, are shares of
convertible preferred stock, which preferred shares have the equivalent voting
rights of the underlying common shares. Such preferred shares are included to
the extent of the number of underlying shares of common stock.
Beneficial Percent of
Name and Address Ownership of Common
of Beneficial Owner (1) Capital Stock (2) Stock (3)
- ------------------- ----------------- ---------
Alan J. Andreini................................................. 1,555,556 (4) 5.10%
Victor L. Cisario................................................ 199,500 (4) 0.68%
John J. Hughes................................................... 350,234 (5) 1.20%
Steve Rabin...................................................... 400,000 (6) 1.36%
Daniel G. Lannon................................................. 150,000 (4) 0.52%
Peter J. Fiorillo................................................ 4,999,007 (7) 16.15%
Michael S. Falk (11)............................................. 6,113,991 (8) 17.87%
Timothy Flynn (12)............................................... 800,133 (9) 2.74%
Jack Slevin...................................................... - -
Commonwealth Associates, L.P. (13)............................... 4,359,032 (10) 13.31%
All directors and executive officers as a group (10 persons)..... 14,692,171 45.62%
- -------------
(1) The address of each person, except as otherwise noted, is c/o eB2B
Commerce, Inc., 757 Third Avenue, New York, New York 10017.
(2) Except as otherwise noted, each individual or entity has sole voting and
investment power over the securities listed. Includes ownership of options
and warrants that are exercisable within 60 days of December 31, 2000.
(3) The ownership percentages are calculated on a fully diluted basis,
including options and warrants exercisable within 60 days of December 31,
2000, and giving effect to the shares of common stock underlying the Series
A Preferred Stock and the Series B Preferred Stock.
(4) Represents shares underlying options.
(5) Includes 266,000 shares underlying options and 48,767 shares underlying
warrants.
(6) Includes 350,000 shares underlying options and 50,000 shares of restricted
stock.
(7) Includes 1,995,000 shares underlying options and 42,560 shares of common
stock owned by family members.
(8) In addition to Commonwealth Associates L.P.'s 4,359,032 shares which may be
deemed to be beneficially owned (see footnote 10 below), Mr. Falk's
holdings include 180,836 shares of common stock, and the right to acquire
(i) 1,460,306
III-7
shares issuable upon exercise of warrants, (ii) 108,817 shares issuable
upon conversion of preferred shares, and (iii) 5,000 share issuable upon
exercise of options. In his capacity as Chairman and controlling equity
owner of Commonwealth Associates Management Corp., Mr. Falk shares voting
and dispositive power with respect to the securities beneficially owned by
Commonwealth Associates L.P. and may be deemed to be the beneficial owner
of such securities. In his capacity as a manager and principal member of
ComVest Capital Partners LLC, Mr. Falk shares indirect voting and
dispositive power with respect to the securities beneficially owned by
ComVest Capital Partners LLC and may be deemed to be the beneficial owner
of such securities, although Mr. Falk disclaims beneficial interest in such
shares other than that portion which corresponds to his membership interest
in ComVest Capital Partners LLC.
(9) Includes preferred shares convertible into 501,772 shares of common stock,
138,000 shares underlying immediately exercisable options and 160,361
shares underlying immediately exercisable warrants.
(10) Commonwealth Associates L.P.'s holding includes the right to acquire (i)
156,940 shares issuable upon conversion of preferred shares, (ii) 3,806,981
shares underlying immediately exercisable warrants. Commonwealth Associates
L.P.'s holding as described in the table include the holding of ComVest
Capital Partners LLC, an affiliate. Such holding, or 1,242,511 securities,
includes the right to acquire (i) 145,091 shares issuable upon conversion
of preferred shares, (ii) 1,097,420 shares underlying immediately
exercisable warrants.
(11) The address of Mr. Falk is c/o Commonwealth Associates, L.P., 830 Third
Avenue, New York, New York 10022.
(12) The address of Mr. Flynn is c/o Flynn Gallagher Associates, 3291 North
Buffalo Drive, Las Vegas, Nevada 89129.
(13) The address of Commonwealth Associates, L.P. is 830 Third Avenue, New York,
New York 10022.
Item 12. Certain Relationships and Related Transactions
In September 1999, eB2B signed a letter of intent with Commonwealth Associates,
L.P., a more than 10% stockholder of the Company, (the "Financial Advisor") to
raise capital in a private placement offering of eB2B's securities. On October
4, 1999, eB2B issued in consideration of $375,000 promissory notes and five-year
warrants to purchase up to 498,659 shares of eB2B common stock (equivalent to
1,326,433 shares of Company common stock) to ComVest Capital Partners LLC, an
affiliate of the Financial Advisor, and Michael S. Falk (the "Pre-Bridge
Financing"). The promissory notes were automatically converted into units in the
Bridge Financing. Also, warrants to purchase 131,250 shares of eB2B common stock
(equivalent to 349,125 shares of Company common stock) issued to ComVest Capital
Partners LLC and Michael S. Falk in the Pre-Bridge Financing were cancelled upon
the conversion of the promissory notes into units in the bridge financing. Mr.
Falk, a director of the Company, is a principal and the Chief
III-8
Executive Officer of the Financial Advisor, and is a principal of ComVest
Capital Partners LLC.
In October 1999, in anticipation of a private placement offering, eB2B issued
convertible promissory notes in an aggregate principal amount of $1,000,000,
which were automatically converted into units offered in the private placement
based on the face value of such notes, and five-year warrants to purchase up to
717,409 shares of eB2B common stock (equivalent to 1,908,308 shares of Company
common stock), exercisable at $4.00 per share ($1.50 reflective of the 2.66 to 1
exchange ratio in the Merger) for a period of seven years (the "Bridge
Financing"). The Financial Advisor was the placement agent in such offering.
In December 1999, eB2B issued to the Financial Advisor, for providing services
as the placement agent in a private placement of Series B preferred stock and
warrants, warrants to purchase 1,482,600 shares of eB2B common stock (equivalent
to 3,943,716 shares of Company common stock) at an exercise price of $5.50
($2.07 reflective of the 2.66 to 1 exchange ratio in the Merger).
On October 4, 1999, eB2B entered into a finder's agreement with the Financial
Advisor, which provided that upon completion of a merger, sale or other similar
transaction, the Financial Advisor would earn a finder's fee equal to 3% of the
total compensation received in the transaction. Upon the completion of the
Merger on April 18, 2000, the Company issued the Financial Advisor 3% of the
total number of securities received by eB2B's stockholders in the Merger,
consisting of 720,282 shares of Company common stock and seven-year warrants to
purchase 502,383 shares of Company common stock.
In November 1999, in connection with the Financial Advisor providing advisory
services to eB2B during the Merger, eB2B granted to the Financial Advisor
five-year warrants to purchase 470,000 shares of eB2B common stock (equivalent
to 1,250,200 shares of Company common stock) at an exercise price of $5.50 per
share (equivalent to $2.07 per share of Company common stock), vesting upon
completion of the Merger. On April 18, 2000, the closing of the Merger, the
warrants vested.
III-9
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
April 16, 2001 eB2B Commerce, Inc.
By: /s/ Alan J. Andreini
-------------------------------
Alan J. Andreini
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
April 16, 2001 By: /s/ Alan J. Andreini
-------------------------------
Chief Executive Officer
April 16, 2001 By: /s/ Victor L. Cisario
-------------------------------
Chief Financial Officer
April 16, 2001 By: /s/ Peter J. Fiorillo
-------------------------------
Director
April 16, 2001 By: /s/ Michael S. Falk
-------------------------------
Director
April 16, 2001 By: /s/ Timothy P. Flynn
-------------------------------
Director
April 16, 2001 By: /s/ Jack Slevin
-------------------------------
Director
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT INDEX
EXHIBIT
NUMBER TITLE
- ------- -----
2.1 --Agreement and Plan of Merger by and between eB2B Commerce, Inc. and DynamicWeb Enterprises, Inc.,
dated December 1, 1999, and as amended, dated February 29, 2000 (incorporated by reference to
Exhibit 2.1 and Exhibit 2.2 filed with the Registrant's Registration Statement on Form S-4/A
filed on March 20, 2000 (the "Form S-4")).
2.2 --Agreement and Plan of Merger by and between eB2B Commerce, Inc., Netlan Merger Corporation and
Netlan Enterprises, Inc., dated February 22, 2000 (incorporated by reference to Exhibit 2.5
filed with the Registrant's Form S-4).
3.1. --Certificate of Incorporation of DynamicWeb Enterprises, Inc., as filed with the Secretary of
State of New Jersey on August 7, 1979 together with all subsequently filed Amendments and
Restatements(incorporated by reference to Exhibits 3.1.1 through Exhibit 3.1.13 filed with the
Registrant's Form S-4).
3.2.1 --Bylaws of DynamicWeb Enterprises, Inc. adopted August 7, 1979 including all subsequently
filed Amendments and Restatements (incorporated by reference to Exhibit 3.2.1 through Exhibit
3.2.4 filed with the Registrant's Form S-4).
10.1 --Agreement of Sub-Lease between 757 Third Avenue LLC and eB2B Commerce, Inc., dated July 28 2000.
10.2 --Employment Agreement between eB2B Commerce, Inc. and Alan J. Andreini, dated effective as of
July 1, 2000.
10.3 --Employment Agreement between Peter J. Fiorillo and eB2B Commerce, Inc., dated effective as of
December 1, 1998 (incorporated by reference to Exhibit 10.3 filed with the Registrant's Form S-4).
10.4 --Employment Agreement between Victor Cisario and eB2B Commerce, Inc., dated effective as of
January 3, 2000 (incorporated by reference to Exhibit 10.12 filed with the Registrant's Form S-4).
10.5 --Employment Agreement between eB2B Commerce, Inc. and John J. Hughes, dated effective as of
June 1, 2000.
10.6 --Employment Agreement between eB2B Commerce, Inc. and Steven Rabin, dated effective as of
October 31, 2000.
10.7 --Consulting Agreement between Steven L. Vanechanos and DynamicWeb Enterprises, Inc., dated as of
February 29, 2000 (incorporated by reference to Exhibit 10.18 filed with the Registrant's Form S-4).
23.1 --Independent Auditors' Consent - Deloitte & Touche LLP.
23.2 --Independent Auditors' Consent - Ernst & Young LLP.
99.1 --eB2B Commerce, Inc. 2000 Stock Option Plan (incorporated by reference to Exhibit 99.1
filed with the Registrant's Form S-4).