As filed with the Securities and Exchange Commission on July 13, 2001
Registration No. 333-54410
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
AMENDMENT NO. 1
to
FORM S-3
on
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------
eB2B Commerce, Inc.
(Name of Small Business Inssuer in Its Charter)
New Jersey 7372 22-2267658
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
757 Third Avenue
New York, New York 10017
(212) 703-2000
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
Peter J. Fiorillo
Chief Financial Officer and Chairman of the Board
eB2B Commerce, Inc.
757 Third Avenue
New York, New York 10017
(212) 703-2000
(Name and Telephone Number of Agent for Service)
Copy to:
Gary T. Moomjian, Esq.
Kaufman & Moomjian, LLC
50 Charles Lindbergh Boulevard - Suite 206
Mitchel Field, New York 11553
(516) 222-5100
---------------
Approximate Date of Commencement of Proposed Sale to the Public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [x]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- - - -------------------------------------------------------------------------------------------------------------------------
Proposed
Maximum Proposed
Amount to Offering Maximum Amount Of
Title Of Each Class Of Be Price Per Aggregate Registration
Securities To Be Registered Registered Share(1) Offering Price(1) Fee
- - - -------------------------------------------------------------------------------------------------------------------------
Common Stock (2) 9,310 $.215 $ 2,002 $ 1
- - - -------------------------------------------------------------------------------------------------------------------------
Common Stock (3) 18,988,997 $.215 $4,082,634 $1,021
- - - -------------------------------------------------------------------------------------------------------------------------
Common Stock (4) 6,516,371 $.215 $1,401,020 $ 351
- - - -------------------------------------------------------------------------------------------------------------------------
Common Stock (5) 6,440,629 $.215 $1,427,755 $ 357
- - - -------------------------------------------------------------------------------------------------------------------------
Common Stock (6) 502,383 $.215 $ 108,012 $ 27
- - - -------------------------------------------------------------------------------------------------------------------------
Common Stock (7) 5,724,904 $.215 $1,230,854 $ 308
- - - -------------------------------------------------------------------------------------------------------------------------
Common Stock (8) 4,500,000 $.215 $ 967,500 $ 242
- - - -------------------------------------------------------------------------------------------------------------------------
Common Stock (9) 1,330,000 $.215 $ 285,950 $ 72
- - - -------------------------------------------------------------------------------------------------------------------------
Common Stock (10) 18,000,000 $.215 $3,870,000 $ 968
- - - -------------------------------------------------------------------------------------------------------------------------
Common Stock (11) 15,000,000 $.215 $3,225,000 $ 807
- - - -------------------------------------------------------------------------------------------------------------------------
Common Stock (12) 900,000 $.215 $ 193,500 $ 49
- - - -------------------------------------------------------------------------------------------------------------------------
Common Stock (13) 1,557,721 $.215 $ 334,910 $ 84
- - - -------------------------------------------------------------------------------------------------------------------------
Common Stock (14) 8,078,880 $.215 $1,736,959 $ 435
- - - -------------------------------------------------------------------------------------------------------------------------
TOTAL $3,118(15)
- - - -------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee, based on
the average of the high and low prices for the registrant's common stock at
$.215 per share as reported on the Nasdaq SmallCap Market on July 11, 2001,
in accordance with Rule 457(c) promulgated under the Securities Act of
1933, as amended.
(2) Relates to the resale of shares of common stock issuable upon conversion of
the registrant's Series A preferred stock.
(3) Relates to the resale of shares of common stock issuable upon conversion of
the registrant's Series B preferred stock.
(4) Relates to the resale of shares of common stock issuable upon the exercise
of warrants acquired by the selling securityholders in the December 1999
private placement.
(5) Relates to the resale of shares of common stock issuable upon the exercise
of warrants granted to Commonwealth Associates, L.P. and designees of
Commonwealth Associates, L.P. for acting as the placement agent for the
December 1999 private placement.
(6) Relates to the resale of shares of common stock issuable upon the exercise
of warrants granted to Commonwealth Associates, L.P. and designees of
Commonwealth Associates, L.P. in connection with acting as a financial
advisor regarding the April 2000 merger.
(7) Relates to the resale of shares of common stock issuable upon the exercise
of warrants granted to designees of Commonwealth Associates, L.P. and to
ComVest Capital Partners LLC and Michael S. Falk in connection with a
pre-bridge and bridge financing conducted in October 1999.
(8) Relates to the resale of shares of common stock issuable upon the exercise
(and subsequent conversion and/or exercise) of agents' options to purchase
units of Series C preferred stock and warrants granted to Commonwealth
Associates, L.P. and Gruntal & Co., LLC and their designees for acting as
placement agent for the May 2001 private placement.
(9) Relates to the resale of shares of common stock issuable upon the exercise
of warrants granted to Commonwealth Associates, L.P., and designees of
Commonwealth Associates, L.P. and certain third parties as a finder's fee
in connection with the April 2000 merger.
(10) Relates to the resale of shares of common stock issuable upon the
conversion of the 7% convertible notes, including interest (in the form of
shares of common stock or similar convertible notes), if any, and/or Series
C preferred stock acquired by selling securityholders in a private
placement that was completed in May 2001. 3,000,000 of such shares of
common stock have been registered in connection with possible interest
payments.
(11) Relates to the resale of shares of common stock issuable upon the exercise
of warrants acquired by the selling securityholders in the May 2001 private
placement.
(12) Relates to the resale of shares of common stock issuable upon the exercise
of warrants granted to ComVest Venture Partners L.P. in connection with
making a credit line available to us in April and May 2001.
(13) Relates to the resale of shares of common stock issuable upon the exercise
of warrants other than those described above.
(14) Relates to the resale of shares of common stock issued by the registrant.
(15) Fee of $6,811.08 was previously paid with the original filing of this
registration statement on January 26, 2001 with respect to 29,549,140
shares of the registrant's common stock. Fee of $3,118 has been paid
herewith with respect to 58,000,055 additional shares of the registrant's
common stock being registered hereby.
Pursuant to Rule 416 of the Securities Act of 1933, this registration
statement also relates to such additional indeterminate number of shares of
common stock as may become issuable by reason of stock splits, dividends,
antidilution adjustments and similar adjustments in accordance with the
provisions of the Series A preferred stock, Series B preferred stock,
convertible notes (or Series C preferred stock, as the case may be) or warrants.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
------------------------
The information contained in this preliminary prospectus is not complete and may
be changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is declared effective. This
preliminary prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
SUBJECT TO COMPLETION, DATED JULY 13, 2001
PRELIMINARY PROSPECTUS
eB2B COMMERCE, INC.
87,549,195 shares of common stock
This prospectus relates to the resale of up to 87,549,195 shares of our
common stock by the selling securityholders named in this prospectus from time
to time. The shares offered for resale hereby consist of 8,078,880 shares of our
common stock currently issued and outstanding, 36,998,307 shares of our common
stock underlying shares of our preferred stock and convertible notes, and
interest, if any, and 42,472,008 shares of our common stock issuable upon the
exercise of warrants issued by us.
We will not receive any of the proceeds from the sale of the shares other
than the exercise price, if any, to be received upon exercise of the warrants.
We have agreed to bear all of the expenses in connection with the registration
and sale of the shares, except for any applicable underwriting discounts,
brokerage fees or commissions and transfer taxes, as well as the fees and
disbursements of the selling securityholders' counsel and advisors.
Our common stock is quoted on the Nasdaq SmallCap Market under the symbol
"EBTB." On July 12, 2001, the closing price of our common stock, as reported by
Nasdaq, was $.22 per share.
---------------------------
The securities offered in this prospectus involve a high degree of risk.
You should carefully read and consider the "Risk Factors" commencing on page 4
for information that should be considered in determining whether to purchase any
of the securities.
---------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
---------------------------
The date of this prospectus is , 2001
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering, including the risk factors and the financial statements and related
notes, included elsewhere in this prospectus. Unless otherwise indicated or the
context otherwise requires, we refer to:
o eB2B Commerce, Inc., a New Jersey corporation and the issuer of the
securities offered by this prospectus, as "we", "us" or "our
company";
o eB2B Commerce, Inc., a former Delaware corporation that merged with
and into us on April 18, 2000 as "former eB2B"; and,
o DynamicWeb Enterprises, Inc., a New Jersey corporation (our company
prior to our April 2000 merger with former eB2B) as "DynamicWeb".
Following the April 2000 merger of former eB2B and DynamicWeb, although
we retained DynamicWeb's corporate and legal identity, we changed our name to
"eB2B Commerce, Inc." and assumed the accounting history of former eB2B.
Our Business
We are a provider of business-to-business transaction management
services designed to simplify trading partner integration, automation and
collaboration across the order management lifecycle. We utilize 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 acknowledgments, advanced shipping notices and invoices.
We do not allow customers to take delivery of our proprietary software. We
provide access via the Internet to our software, which is maintained on our
hardware and on hosted hardware.
We also offer 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, we provide authorized technical
education to our client base, and also design and deliver custom computer and
Internet-based training seminars.
Our principal executive offices are located at 757 Third Avenue, New
York, New York 10017. Our telephone number at that location is (212) 703-2000.
Our Internet address is www.eB2B.com. The information contained on our web site
is not incorporated by reference in this prospectus and shall not be considered
a part of this prospectus.
The Offering
Shares offered: 87,549,195 shares of common stock to be offered by
the selling securityholders as follows:
o 42,472,008 of which will be issued upon the
exercise of our warrants that are currently
outstanding;
o 9,310 of which will be issued upon conversion of
our Series A preferred stock;
o 18,988,997 of which will be issued upon
conversion of our series B preferred stock;
o 18,000,000 of which will be issued upon
conversion of our 7% convertible notes,
including interest thereon, if any, or Series C
preferred stock (into which such notes are
convertible); and
o 8,078,880 of which is currently issued.
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Use of proceeds. We will not receive any of the proceeds from the
sale of the shares of common stock offered in this
prospectus other than the exercise price, if any, to
be received upon exercise of the warrants.
Summary financial information
The following summary financial information has been derived from the
financial statements of former eB2B for the periods on or prior to our merger
with such company on April 18, 2000, and from our consolidated financial
statements for periods following the April 2000 merger. Our financial statements
appear later in this prospectus, which should be read in conjunction with the
related notes. The information presented is in thousands, except per share data.
Year ended December 31, Three months ended March 31,
1999 2000 2000 2001
------------ -------------- ------------- ---------------
Consolidated statement of operations data:
Revenue........................................... $ - $ 5,468 $ 415 $ 1,864
---------- ------------ ----------- -------------
Costs and expenses:
Cost of revenue............................... - 2,839 249 874
Marketing and selling (exclusive of
stock-based compensation expense).......... - 2,804 351 834
Product development costs (exclusive of
stock-based compensation expense).......... 572 2,698 658 1,145
General and administrative (exclusive of
stock-based compensation expense).......... 1,670 13,438 2,556 3,060
Amortization of goodwill and other intangibles - 9,829 88 3,401
Stock-based compensation expense.............. 2,686 16,027 3,097 682
---------- ------------ ----------- -------------
Total costs and expenses.......................... 4,928 47,635 6,999 9,996
---------- ------------ ----------- -------------
Loss from operations.............................. (4,928) (42,167) (6,584) (8,132)
Interest and other, net........................... (3,192) 832 277 35
----------- ------------ ----------- -------------
Net loss.......................................... (8,120) (41,335) (6,307) (8,097)
Deemed dividend on preferred stock................ (29,442) - - -
----------- ------------ ----------- -------------
Net loss attributable to common stockholders...... $ (37,562) $ (41,335) $ (6,307) $ (8,097)
=========== ============ ============ =============
Basic and diluted net loss per common
share........................................ $ (5.70) $ (3.61) $ (0.85) $ (0.52)
=========== ============ ============ =============
Weighted average number of
common shares outstanding......................... 6,591 11,461 7,431 15,563
Consolidated balance sheet data:
December 31, March 31,
2000 2001
---- ----
Current assets......................................... $ 11,589 $ 6,571
Working capital (deficit).............................. 3,299 (1,698)
Goodwill, net.......................................... 54,104 50,972
Total assets........................................... 73,219 65,409
Total liabilities...................................... 10,131 9,736
Total stockholders' equity............................. 63,088 55,673
3
RISK FACTORS
You should carefully consider the risks and uncertainties described below,
as well as the discussion of risks and other information contained or
incorporated by reference in this prospectus before deciding whether to invest
in our common stock. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business operations.
If any of the following risks actually occur, our business, financial
condition or operating results could be materially adversely affected. In such
case, the trading price of our common stock could decline and you may lose part
or all of your investment.
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, former eB2B merged with and into us in a reverse acquisition, and our name
was changed at that time from "DynamicWeb Enterprises, Inc." to "eB2B Commerce,
Inc." In that the securityholders 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 in this
prospectus prior to April 18, 2000 are those of former eB2B, unless otherwise
specified.
DynamicWeb 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.
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 and incurred a net
loss attributable to common stockholders of $41,335,000. For the three months
ended March 31, 2001, we generated revenues of $1,864,000, incurred a net loss
of $8,097,000 and our accumulated deficit on March 31, 2001 was $87,102,000.
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.
Our business plan currently contemplates that we 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 principally
related to amortization of goodwill and stock-based compensation, which we
will be required to take in future years.
4
THERE WILL BE SUBSTANTIAL ADVERSE EFFECTS TO OUR FUTURE OPERATING RESULTS
BECAUSE OF SUBSTANTIAL NON-CASH CHARGES.
As of March 31, 2001, our balance sheet included $53,005,000 of goodwill
and other intangible assets, net, and $1,686,000 of unearned stock-based
compensation. The goodwill arose in connection with our April 2000 merger 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.
ADDITIONAL CAPITAL MAY BE NEEDED TO CONTINUE OPERATIONS
As of June 30, 2001, we had approximately $4,400,000 in cash, of
which approximately $3,000,000 was available. In the first quarter of 2001, we
used $3,666,000 of cash in our operating activities. Due to the significant cost
cutting measures carried out in 2001, we anticipate that our use of cash will be
below $500,000 per month by the end of the third quarter of 2001 and expect to
use less than $250,000 per month by the end of 2001. As a result, we believe
that our available cash resources will be sufficient to meet anticipated working
capital and capital expenditure requirements through March 31, 2002. However, in
the event that contemplated revenue levels are not achieved, or if we are not
successful in our efforts to reduce our cash burn rate, or if we are faced with
any significant unanticipated working capital or capital expenditure
requirements in the near future, we may need additional financing.
We may not be able to obtain such additional financing, or, if available,
the terms of the financing may not be favorable to us or our shareholders. Such
inability to raise additional financing would have a material adverse effect on
our business, prospects, operating results and financial condition and may
require us to cease operations. Further, if we issue equity securities,
shareholders may experience substantial dilution or the new equity securities
may have rights and preferences senior to our common stock and outstanding
preferred stock.
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:
o the number of buyers and suppliers that participate in the trading
communities;
o the volume of transactions conducted by buyers and suppliers;
o our ability to attract new customers and maintain customer
satisfaction;
o our ability to upgrade, develop and maintain the technology necessary
for our operations;
o the introduction of new or enhanced services by our competitors;
o the pricing policies of competitors; and
5
o 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:
o 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;
o Internet electronic commerce may not be perceived as offering a cost
saving to users;
o the necessary network infrastructure for substantial growth in usage
of the Internet may not be adequately developed;
o increased governmental regulation or taxation may adversely affect the
viability of electronic commerce;
o any shift from flat rate pricing to usage based pricing for Internet
access may adversely impact the viability of the business models;
o insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times;
o technical difficulties; and
o 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 June 30, 2001, we connected approximately 110 retail organizations
and 1,250 supplier organizations within our trading communities. We currently
anticipate that the number of buyers and suppliers would have to increase by
approximately 2,800 on an annual basis in order for us to achieve EBITDA
profitability without carrying out additional operating expense reductions. 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 30% and 50% of these suppliers to our
6
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 17.0% of our total revenue. In the quarter ended March 31, 2001,
this customer accounted for approximately 20.7% of our total revenue. We expect
a slight increase in revenues from the customer and, therefore, expect that such
percentage will decline over the long-term.
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 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 competition is primarily made of indirect horizontal competitors, which
are focused on similar services but not in specific or multiple vertical
industries. Major publicly traded indirect horizontal competitors include Marex,
Inc., Neoforma.com, Inc. and The viaLink Company. Major privately held
competitors include Automated Data Exchange (ADX) (formerly known as The EC
Company) and SPS Commerce for which 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.
7
WE MAY NOT HAVE FEDERAL TRADEMARK PROTECTION FOR OUR NAME.
Our principal trademark is "eB2B", for which we are seeking a federal
registration. The United States Patent and Trademark Office issued an initial
objection to the registration application based upon the descriptiveness of the
trademark. We have filed a response with the USPTO challenging the objection,
which response was denied by the USPTO. We may choose to continue to seek a
federal registration of the trademark. There can be no assurance that a
trademark will be granted by the USPTO. 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 TWO DATA CENTERS.
We operate our primary data center at Genuity's data center in Cambridge,
Massachusetts. We also have equipment hosted at Exodus Communications' Internet
Data Center facility in Jersey City, New Jersey. Each data center operates
twenty-four hours a day, seven days a week, and is connected to the Internet and
the electronic data interchange networks via AT&T and IBM Global Network. The
data centers consist 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 Genuity and 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 them for redundant subsystems, such as multiple fiber
trunks from multiple sources, fully redundant power on the premises and multiple
back-up generators. If Genuity or Exodus Communications fail 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 Genuity or Exodus Communications in the event of
such failure.
There can be no assurance that Genuity or 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 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 assurance 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
8
the action is at an 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 our
company and two members of our management in New York Supreme Court, New York
County, 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, as well as a declaratory judgment concerning
his alleged entitlement to stock options to purchase 75,000 shares of our
common stock. We subsequently filed a motion to dismiss. We dispute these claims
and intend 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 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
OUR COMPANY.
As a group, on July 6, 2001 our directors and executive officers
beneficially owned approximately 54.85% (22.02% on a fully diluted basis)
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. Commonwealth Associates, L.P., a placement
agent for our December 1999 and May 2001 private placements, and the beneficial
owner of 25.83% (5.88% on a fully diluted basis) of our common stock as of
July 6, 2001, has designated two members of our board of directors and may
have the right to designate a third in the future.
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.
THE EXERCISE OF OPTIONS AND WARRANTS AND CONVERSION OF CONVERTIBLE SECURITIES
MAY DILUTE THE PERCENTAGE OWNERSHIP OF OUR SHAREHOLDERS AND THE POTENTIAL OR
ACTUAL EXERCISE OR CONVERSION HAS NEGATIVELY AFFECTED, AND MAY CONTINUE TO
NEGATIVELY AFFECT, THE PRICE OF OUR COMMON STOCK AND MAY IMPEDE OUR ABILITY TO
RAISE CAPITAL.
We have a substantial number of outstanding shares of preferred stock and
convertible notes that may convert into our common stock and a substantial
number of outstanding options and warrants to purchase shares of our common
stock. As of July 9, 2001, there are outstanding shares of convertible preferred
stock and convertible notes to purchase an aggregate of approximately 34.7
million shares of our common stock and options and warrants to purchase an
aggregate of approximately 58.0 million shares of our common stock. If a
significant number of
9
these options or warrants were exercised, or a significant amount of preferred
stock was converted to common stock, the percentage ownership of our common
stock would be materially diluted. For example, if all outstanding options and
warrants were exercised and if all convertible securities were converted to
common stock as of July 9, 2001, there would be approximately 480% more common
stock outstanding at such time. We believe that the potential exercise or
conversion may have an adverse impact on the price of our common stock and
therefore on our ability to raise capital. The actual conversion or exercise of
convertible securities, and the sale of the underlying common stock into the
open market, could further substantially negatively affect the price of our
common stock.
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 as to
75% of the securities; the lock-up for the remaining 25% will expire on August
29, 2001.
All of our directors, officers and principal shareholders immediately prior
to our April 2000 merger and all of current officers and directors have entered
into lock-up agreements prohibiting the sale of such securities for various
periods of time. 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 PRIOR TO THE DATE OF THIS
PROSPECTUS.
From December 2, 2000 until January 11, 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 2,815,000 shares of our common stock were issued
to such shareholders on or prior to January 11, 2001. Such shares may have
potentially been sold in the open market on or prior to January 11, 2001, at
prices that may have ranged from $.50 to $1.28125 per share. It is possible that
the selling securityholders 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 the amount of damages, in the event that there is any liability.
WE ARE SUBJECT TO A SUBSTANTIAL PENALTY IN THE EVENT WE DO NOT RECEIVE
SHAREHOLDER APPROVAL OF OUR MAY 2001 PRIVATE PLACEMENT NO LATER THAN SEPTEMBER
30, 2001.
In that our private placement of convertible notes and warrants which
closed in May 2001 resulted in the issuance of more than 20% of our outstanding
common stock, assuming conversion or exercise of all notes, preferred stock and
warrants sold in such offering, Nasdaq rules require that we obtain shareholder
approval of this
10
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 by no later than
September 30, 2001 at which approval will be sought. If we fail to receive the
necessary shareholder approval by September 30, 2001, 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.
BECAUSE OF THE RECENT DECLINE IN THE MARKET PRICE OF OUR COMMON STOCK RELATIVE
TO THE STOCK PRICES AT THE TIME OF OUR 2000 AND 2001 PREFERRED STOCK OFFERINGS,
IF WE RAISE ADDITIONAL CAPITAL, OUR COMMON SHAREHOLDERS MAY BE DILUTED DUE TO
PREFERENCES INCLUDED IN OUR OUTSTANDING PREFERRED SHARES AND WARRANTS.
We have a substantial number of outstanding shares of convertible preferred
stock and a substantial number of outstanding warrants to purchase shares of our
common stock. The preferred shareholders are entitled to an adjusted conversion
price, which results in their receiving additional shares of common stock upon
conversion, if we raise capital at a price below the then current conversion
price or market price. Similarly, many of our warrant holders are entitled to a
reduced exercise price on their warrants if we raise capital at a price below
the then current exercise price or market price. Therefore, if we raise
additional capital at a price below these amounts, and such likelihood has
increased as the price of our common stock has declined in recent months, our
common shareholders' percentage of ownership will be further diluted by the
additional common stock required to underly the preferred shares and warrants.
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 June 30, 2001, our common stock traded as
high as $19.75 per share and as low as $0.17 per share.
Volatility in the future may be due to a variety of factors, including:
o volatility of stock prices of Internet and electronic commerce
companies generally;
o variations in our operating results and/or our revenue growth rates;
o changes in securities analysts' estimates of our financial
performance, or for the performance of our industry as a whole;
o announcements of technological innovations;
o the introduction of new products or services by us or our competitors;
o change in market valuations of similar companies;
o market conditions in the industry generally;
o announcements of additional business combinations in the industry or
by us;
o issuances or the potential issuances of additional shares;
o additions or departures of key personnel; and
11
o 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". Nasdaq requires a bid price of at least $1.00 as a requirement for
continued listing. The bid price of our common stock has been below $1.00
continuously since April 9, 2001. As a result, on May 22, 2001, we received
notification from the Nasdaq Stock Market, Inc. that we were not in compliance
with the $1.00 minimum bid price requirement of Nasdaq for 30 consecutive
trading days. According to Nasdaq, to regain compliance with this standard, the
common stock is required to have a closing bid price at or above $1.00 for ten
consecutive trading days within the ninety- calendar day period from such
notification. To date, this $1.00 closing bid price has not been met and our
closing bid price has recently been significantly below $1.00. Should such
compliance not be achieved, Nasdaq stated that it would issue a delisting
letter.
Our failure to meet Nasdaq's maintenance criteria, which includes the $1.00
minimum bid price as well as other requirements, 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:
o deliver a standardized risk disclosure document that provides
information about penny stocks and the nature and level of risks in
the penny stock market;
o provide the customer with current bid and offer quotations for the
penny stock;
o explain the compensation of the broker-dealer and its salesperson in
the transaction;
o provide monthly account statements showing the market value of each
penny stock held in the customer's account; and
o 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.
12
FORWARD-LOOKING STATEMENTS
The statements contained in this prospectus that are not historical facts
may be "forward-looking statements," as defined in Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934 that contain risks
and uncertainty. Such statements can be identified by the use of forward-looking
terminology such as "estimates," "projects," "anticipates," "expects,"
"intends," "believes," or the negative of each of these terms or other
variations thereon or comparable terminology or by discussions of strategy that
involve risks and uncertainties. Although we believe that our expectations are
reasonable within the bounds of our knowledge of our business operations, there
can be no assurance that actual results will not differ materially from our
expectations. The uncertainties and risks include, among other things, our
plans, beliefs and goals, estimates of future operating results, our limited
operating history, the ability to raise additional capital, if needed, the risks
and uncertainties associated with rapidly changing technologies such as the
Internet, the risks of technology development and the risks of competition that
can cause actual results to differ materially from those in the forward- looking
statements.
Forward-looking statements are only estimates or predictions and cannot be
relied upon. We can give you no assurance that future results will be achieved.
Actual events or results may differ materially as a result of risks facing us or
actual results differing from the assumptions underlying such statements. These
risks and assumptions could cause actual results to vary materially from the
future results indicated, expressed or implied in the forward- looking
statements included in this prospectus.
All forward-looking statements made in this prospectus that are
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the factors listed above in the section captioned "Risk
Factors" and other cautionary statements included in this prospectus. We
disclaim any obligation to update information contained in any forward-looking
statement.
USE OF PROCEEDS
The proceeds from the sale of the shares by the selling securityholders
will belong to the individual selling securityholders. We will not receive any
of the proceeds from the sale of the shares other than with respect to the
exercise price, if any, of the warrants. Although the selling securityholders
that may sell shares of our common stock underlying warrants have a cashless
exercise option associated with the exercise of such warrants, the selling
securityholders may elect to make cash payments in connection with their
exercise of the warrants. Assuming exercise of all of the warrants and the
selling securityholders' election of a cash payment in connection with their
exercise of all of such warrants, the estimated net proceeds from the exercise
of such warrants to purchase shares of our common stock that are being
registered pursuant to the registration statement to which this prospectus
relates would be approximately $43.5 million. We intend to use the proceeds, if
any, from the exercise of the warrants for general corporate purposes and
working capital.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq SmallCap Market under the
symbol "EBTB" since August 15, 2000. Prior to such time, our common stock was
quoted on the Over-the-Counter Bulleting Board maintained by the National
Association of Securities Dealers. The volume of trading in our 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 our common stock or the
existence of an active trading market prior to such date.
13
The following table sets forth the high and low closing sale prices for our
common stock for the periods indicated:
Quarter Ended High Low
------------- ---- ---
March 31, 1999................................. 9.38 3.38
June 30, 1999.................................. 9 5.25
September 30, 1999............................. 6 3.56
December 31, 1999.............................. 16 2.94
March 31, 2000................................. 18.5 9.88
June 30, 2000.................................. 14 3.25
September 30, 2000............................. 5.44 2.06
December 31, 2000.............................. 2.16 0.70
March 31, 2001................................. 2.44 0.69
June 30, 2001 ................................. 1.19 0.20
September 30, 2001 (as of July 12, 2001)....... 0.26 0.22
As of the date hereof, we have approximately 3,000 record holders of our
common stock.
DIVIDEND POLICY
We have never paid cash dividends on our capital stock and do not
anticipate paying cash dividends in the foreseeable future. We currently intend
to retain any future earnings for reinvestment in our business. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and will be dependent upon our financial condition, results of
operations, capital requirements and other relevant factors.
14
SELECTED FINANCIAL DATA
The following selected financial data has been derived from the financial
statements of former eB2B from its inception until our merger with such company
on April 18, 2000 and from our consolidated financial statements for periods
presented following the April 2000 merger. Our financial statements appear later
in this prospectus, which should be read in conjunction with the related notes.
The information presented is in thousands, except per share data.
Period from
November 6,
1998 (Inception) Year ended Three months
to December 31, December 31, ended March 31,
1998 1999 2000 2000 2001
----------- ----------- ----------- -------- ---------
Consolidated statement of
operations data:
Revenue...................................... $ - $ - $ 5,468 $ 415 $ 1,864
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of revenue.......................... - - 2,839 249 874
Marketing and selling (exclusive of
stock-based compensation expense)...... - - 2,804 351 834
Product development costs (exclusive of
stock-based compensation expense)...... 53 572 2,698 658 1,145
General and administrative (exclusive of
stock-based compensation expense)...... 55 1,670 13,438 2,556 3,060
Amortization of goodwill and other
intangibles ........................... - - 9,829 88 3,401
Stock-based compensation expense......... - 2,686 16,027 3,097 682
--------- --------- --------- --------- ---------
Total costs and expenses..................... (108) 4,928 47,635 6,999 9,996
---------- --------- --------- --------- ---------
Loss from operations......................... (108) (4,928) (42,167) (6,584) (8,132)
Interest and other, net...................... - (3,192) 832 277 35
--------- ---------- --------- --------- ---------
Net loss..................................... (108) $ (8,120) $ (41,335) $ (6,307) $ (8,097)
Deemed dividend on preferred stock........... - (29,442) - - -
--------- ---------- --------- --------- ---------
Net loss attributable to common stockholders. $ (108) $ (37,562) $ (41,335) $ (6,307) $ (8,097)
========== ========== ========== ========== ==========
Basic and diluted net loss per common
share................................... $ (5.70) $ (3.61) $ (0.85) $ (0.52)
========== ========== ========== ==========
Weighted average number of common
shares outstanding..................... 6,591 11,461 7,431 15,563
Consolidated balance sheet data:
December 31, December 31, December 31, March 31,
1998 1999 2000 2001
----------- ----------- ----------- ---------
Current assets............................... $ 10 $ 28,153 $ 11,589 $ 6,571
Working capital (deficit).................... (41) 27,098 3,299 (1,698)
Goodwill, net................................ - - 54,104 50,972
Total assets................................. 384 29,064 73,219 65,409
Total liabilities............................ 137 1,055 10,131 9,736
Total stockholders' equity................... 247 28,009 63,088 55,673
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read with the financial
statements and accompanying notes, included elsewhere in this prospectus. It is
intended to assist the reader in understanding and evaluating our financial
position. Unless otherwise indicated or the context otherwise requires, we refer
to:
o eB2B Commerce, Inc., a New Jersey corporation, and the issuer of
the securities offered by this prospectus, as "we", "us" or "our
company";
o eB2B Commerce, Inc., a former Delaware corporation that merged with
and into us on April 18, 2000 as "former eB2B"; and
o DynamicWeb Enterprises, Inc., a New Jersey corporation (our company
prior to our April 2000 merger with former eB2B) as "DynamicWeb".
Following the April 2000 merger of former eB2B and DynamicWeb, as set
forth in greater detail below, although we retained DynamicWeb's corporate and
legal identity, we changed our name to "eB2B Commerce, Inc." and assumed the
accounting history of former eB2B.
Overview
We are a provider of business-to-business transaction management
services designed to simplify trading partner integration, automation and
collaboration across the order management lifecycle. We utilize 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 acknowledgments, advanced shipping notices and invoices.
We do not allow customers to take delivery of its proprietary software. We
provide access via the Internet to our proprietary software, which is maintained
on our hardware and on hosted hardware.
In addition, we are 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 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
we do 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, we recognize
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.
16
On February 22, 2000, former eB2B completed its acquisition of Netlan
Enterprises, Inc. Pursuant to the agreement and plan of merger, Netlan's
stockholders exchanged 100% of their common stock for 46,992 shares of former
eB2B common stock (equivalent to 125,000 shares of our common stock).
Additionally, 75,188 shares of former eB2B common stock (equivalent to 200,000
shares of our common stock) were issued, placed into an escrow account, and
released to certain former shareholders of Netlan upon successful completion of
escrow requirements. The purchase price of the Netlan acquisition was
approximately $1.6 million. We recorded approximately $4,896,000 of goodwill and
approximately $334,000 of other intangibles in connection with this transaction.
On April 18, 2000, former eB2B merged with and into our company, with
the surviving company changing its name from "DynamicWeb Enterprises, Inc." to
"eB2B Commerce, Inc." Pursuant to our agreement and plan of merger with former
eB2B, our shareholders retained their shares in our company, while the
shareholders of former eB2B received shares, or securities convertible into
shares, of common stock of our company representing approximately 89% of our
equity, on a fully diluted basis.
The April 2000 merger was accounted for as a purchase business
combination in which former eB2B was the accounting acquirer and our company was
the legal acquirer. As a result of the reverse acquisition, (i) the financial
statements of former eB2B are our historical financial statements; (ii) our
results of operations include our results after the date of the April 2000
merger; (iii) our acquired assets and assumed liabilities were recorded at their
estimated fair market value at the date of the April 2000 merger and (iv) all
references to our financial statements apply to the historical financial
statements of former eB2B prior to the April 2000 merger and to our consolidated
financial statements subsequent to the April 2000 merger. The purchase price of
the April 2000 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 Enterprises, Inc.
acquisition and April 2000 merger totaled approximately $9.8 million. For the
three months ended March 31, 2001 and 2000, amortization related to the goodwill
and other intangibles acquired in such transactions totaled approximately $3.4
million and $0.1 million, respectively.
Our financial condition and results from operations were dramatically
different during the years ended December 31, 2000 and 1999 as well as the
quarters ended March 31, 2001 and 2000. For the year ended December 31, 2000 and
the quarter ended March 31, 2001, our results reflect our new operations, the
operations of Netlan since March 1, 2000 and the operations of our company since
April 19, 2000. Former eB2B did not recognize any revenue in 1999. Former 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, we believe that
the results of operations for the year ended December 31, 1999 and the quarter
ended March 31, 2000 are not comparable to the results of operations for the
same periods in 2000 and 2001, respectively, and our anticipated financial
condition and results of operations going forward. Furthermore, our limited
operating history makes the prediction of future operating results very
difficult. We believe that period-to-period comparisons of operating results
should not be relied upon as predictive of future performance. Our prospects
must be considered in light of the risks, expenses and difficulties encountered
by companies at an early stage of development, particularly companies in new and
rapidly evolving markets. We may not be successful in addressing such risks and
difficulties.
17
Three Months Ended March 31, 2001 and 2000
Revenue
Total revenue for the three-month periods ended March 31, 2001 and 2000
amounted to $1,864,000 and $415,000, respectively, reflecting an increase of
$1,449,000, or 349%.
Our transaction processing and related services' reportable segment
generated revenue of $1,165,000 for the three-month period ended March 31, 2001
as compared to $177,000 for the three-month period ended March 31, 2000. Such
revenue in 2001 includes fees paid for processing transactions between buyers
and suppliers and related consulting revenue, and in 2000 reflected primarily
consulting revenue from the Netlan Enterprises, Inc. operations acquired on
February 22, 2000. The increase in revenue of $988,000, or 558%, in 2001 as
compared to 2000 for the three-month period ended March 31 reflected revenue
related to the DynamicWeb operations acquired on April 18, 2000, coupled with an
increase in the average fee paid per customer for transaction processing,
partially offset by revenue in the consulting services acquired from Netlan on
February 22, 2000 as these services have been eliminated during the latter part
of 2000.
Our training and client educational services' reportable segment
generated revenue of $699,000 during the three-month period ended March 31, 2001
as compared to $238,000 for the same period in the previous year. The increase
in revenue of $461,000, or 194%, in 2001 as compared to 2000 for the three-month
period ended March 31 reflected revenue for the full three-month period in 2001
related to the Netlan acquisition on February 22, 2000.
In the three-month period ended March 31, 2001, one customer accounted
for approximately 20.7% of our total revenue. No other customer accounted for
10% or more of our total revenue for the three-month period ended March 31,
2001.
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 and consultants providing consulting and training services to clients.
Total cost of revenue for the three-month periods ended March 31, 2001 and 2000
amounted to $874,000 and $249,000, respectively. The increase in cost of revenue
of $625,000, or 251%, in 2001 as compared to 2000 for the three-month period
ended March 31 reflected primarily our greater scope of operations as compared
to the same period in 2000.
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 $834,000 and $351,000
for the three-month periods ended March 30, 2001 and 2000, respectively. The
increase in marketing and selling expenses of $483,000, or 138%, in 2001 as
compared to 2000 for the three-month period ended March 31 consisted principally
of the additional costs associated with marketing and selling the services
acquired in the April 2000 merger, coupled with an increase in general marketing
expenses.
Product development expenses mainly represent payments to outside
contractors and personnel and related costs associated with the development of
our technological infrastructure necessary to process transactions, including
the amortization of certain capitalized costs. Product development expenses
(exclusive of stock-based compensation) were approximately $1,145,000 and
$658,000 for the three-month periods ended March 31, 2001 and 2000,
respectively. The increase in product development expenses for the three-month
period ended March 31, 2001 as compared to the same period of 2000 was $487,000,
or 74%. During the first quarter ended March 31, 2001, we expensed approximately
$910,000 in relation with costs chiefly associated with the transition of
certain of our existing customers to our new technology platform. We capitalize
qualifying computer software costs incurred during the application development
stage. Accordingly, we anticipate that product development expenses will
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fluctuate from quarter to quarter as various milestones in the development are
reached and future versions are implemented.
General and administrative expenses consist primarily of employee
salaries and related expenses for executives, administrative and finance
personnel, as well as other consulting, legal and professional fees, and, to a
lesser extent, facility and communication costs. During the three-month periods
ended March 31, 2001 and 2000, total general and administrative expenses
(exclusive of stock-based compensation) amounted to $3,060,000 and $2,556,000,
respectively. The increase in general and administrative expenses of $504,000,
or 20%, in 2001 as compared to 2000 for the three-month period ended March 31
reflected increased expenses to manage and operate the companies acquired during
2000, partially offset by non-recurring outside contractor and consulting fees
in relation with the design and the implementation of our strategy and
management structure of approximately $772,000 in the same period in 2000.
Amortization of goodwill and other intangibles are non-cash charges
associated with the April 2000 merger and the Netlan acquisition. Such
amortization expenses were $3,401,000 and $88,000 for the three-month periods
ended March 31, 2001 and 2000, respectively. The increase is due primarily to
amortization of goodwill and other intangibles in the 2001 period for the April
2000 merger from April 18, 2000 versus none in the three-month period ended
March 31, 2000, and a full quarter of amortization on the Netlan acquisition
from March 1, 2000 versus one month in 2000. We periodically assess 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.
During the three-month periods ended March 31, 2001 and 2000,
stock-based compensation expense amounted to $682,000 and $3,097,000,
respectively. The deferred stock compensation is being amortized over the
vesting periods of the related options and warrants contingent upon continued
employment of the respective option or warrant holders. The vesting period of
the options and warrants ranges principally from two to four years. The balance
of unearned stock-based compensation at March 31, 2001 was approximately
$1,686,000. This balance will be amortized at varying amounts per quarter
through March 2002.
We define EBITDA as net income or loss adjusted to exclude:
o provision or benefit for income taxes,
o interest income and expense,
o depreciation, amortization and write-down of assets, and
o stock-related compensation.
EBITDA is discussed because our management considers it an important
indicator of the operational strength and performance of our business based in
part on the significant level of non-cash expenses recorded by our company to
date, coupled with the fact that these 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 our performance, 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. EBITDA, as defined, may not be the same as similarly captioned
measures used by other companies. For a discussion of cash flow information,
refer to the "Liquidity and Capital Resources" section of this prospectus.
For the three-month periods ended March 31, 2001 and 2000, EBITDA was a
loss of $3,549,000 and $2,765,000, respectively. During the three months ended
March 31, 2001, we expensed non-cash items including depreciation, amortization
and stock-based compensation expense aggregating to $4,589,000, compared to
$3,880,000 for the same period in 2000.
Interest and other, net amounted to $35,000 and $277,000 for the
three-month periods ended March 31, 2001 and 2000, respectively. Such income,
net of other expenses, related primarily to interest earned on cash balances and
available-for-sale marketable securities during the respective periods. The
decrease in interest and
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other, net during the 2001 period as compared to the 2000 period was principally
associated with the reduced cash balance and available-for-sale marketable
securities during the 2001 period as compared to the 2000 period.
Net loss for the three-month periods ended March 31, 2001 and 2000
was $8,097,000 and $6,307,000, respectively.
Years Ended December 31, 2000 and 1999
Revenue
Total revenue for the year ended December 31, 2000 amounted to
$5,468,000. During the same period in 1999, former eB2B was a development stage
company and did not recognize any revenue.
Our 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. We are an authorized
provider of technical education to our client base, and also design and deliver
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 our total revenue.
Costs and Expenses
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 (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 (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, former eB2B abandoned the use of the
product development costs capitalized at December 31, 1998, and recorded a
$174,000 write-down.
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 our strategy and management structure totaled approximately $2.2 million.
During the third quarter of 2000, we entered into a lease for new
office space expiring in April 2007. During the fourth quarter of 2000, we
consolidated all our locations into the new space with the exception of our
training center. This consolidation allowed us to better streamline our
operations and to reduce our overall cost structure.
Amortization of goodwill and other intangibles are non-cash charges
associated with the April 2000 merger and the acquisition of Netlan Enterprises,
Inc. Such amortization expenses were $9,829,000 for the year ended December 31,
2000. We periodically assess 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,
20
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 former eB2B
common stock (equivalent to 1,330,000 shares our 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.
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, we 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 $2,500,000 term loan obtained from a bank in
February 2000. In 1999, interest was an expense of $3,192,000, which included
$3,178,000 incurred in connection with former 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 April 2000 merger, former 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 our common stock valued at
$124.4 million based on the average quoted market price of our 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 the inception of former eB2B on November 6, 1998 (the inception
of our accounting history), we have incurred significant operating losses, net
losses and negative cash flows from operations, due in large part to the
start-up and development of operations and the development of proprietary
software and technological infrastructure for our platform to process
transactions. We expect that our net losses and negative cash flows from
operations will continue as we implement our growth strategy. We anticipate
increased revenues throughout 2001, which, if achieved, will reduce our 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, we have
funded our losses and capital expenditures through borrowings, capital
contributions, and a portion of the net proceeds of prior securities offerings.
From inception through March 31, 2001 net proceeds from private sales of
securities totaled approximately $29.9 million.
Management has addressed the costs of providing transaction management
and document exchange services throughout 2000 and thus far in 2001. While we
continue to add large customers to our service, we are focused primarily on
adding trading partners who transact business with our largest existing
customers.
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To address the continuing loss from operations and negative cash flows
from operations, management enacted a plan for our company, which included
various cost cutting measures, principally staffing reductions and discretionary
spending reductions in selling, marketing, general and administrative areas,
during the third and fourth quarter of 2000 and into 2001.
On May 2, 2001, we completed a private placement of convertible notes
and warrants. The gross proceeds of this financing totaled $7.5 million.
Pursuant to this financing, we issued $7,500,000 of principal amount of 7%
convertible notes, convertible into an aggregate of 15,000,000 shares of our
common stock ($0.50 per share), and warrants to purchase an aggregate 15,000,000
shares of our common stock at $0.93 per share. The convertible notes have a term
of 18 months, which period may be accelerated in certain events. Interest is
payable quarterly in cash, in identical convertible notes or in shares of common
stock, at our option. In addition, the convertible notes will automatically
convert into Series C preferred stock if we receive the required consent of the
holders of our Series B preferred stock to the issuance of this new series. The
Series C preferred stock would be convertible into common stock on the same
basis as the convertible notes. We intend to seek shareholder approval of the
financing, as required by the rules of Nasdaq. The warrants will be exercisable
for a period of two years from the earlier of (i) the date we receive
shareholder approval of this financing, (ii) the date such shareholder approval
is no longer required, either because our common stock is no longer listed on
Nasdaq or otherwise, or (iii) October 1, 2001.
In connection with the closing of the financing, we canceled a
$2,050,000 line of credit issued in April 2001, pursuant to which we had not
borrowed any funds. We incurred a cash fee amounting to $61,500 in consideration
of the availability of the line of credit. In addition, the issuer of the line
of credit was issued warrants to purchase 900,000 shares of our common stock at
$0.50 per share for a period of five years in consideration of the availability
of such line. These warrants were valued using the Black-Scholes option pricing
model at $549,000.
In connection with the financing, we incurred a cash fee amounting to
$750,000 and issued (i) warrants to purchase 2,250,000 shares of common stock
with an exercise price of $0.93 for a period of five years and (ii) unit
purchase options to purchase Series C preferred stock convertible into an
aggregate of 2,250,000 shares of common stock with a conversion price of $0.50
per share for a period of five years. These warrants and unit purchase options
were valued using the Black-Scholes option pricing model at $675,000 and
$810,000, respectively. Additionally, other expenses directly related to the
financing were approximately $400,000.
Net cash used in operating activities totaled approximately $3,666,000
for the three months ended March 31, 2001 as compared to net cash used in
operating activities of approximately $2,187,000 for the same period in 2000.
Net cash used in operating activities for the three months ended March 31, 2001
resulted primarily from (i) the $8,097,000 net loss in the period and (ii) a
$158,000 use of cash from operating assets and liabilities, offset by (iii) an
aggregate of $4,589,000 of non-cash charges consisting primarily of
depreciation, amortization and stock-based compensation expense. Net cash used
in operating activities for the three months ended March 31, 2000 resulted
primarily from (i) the $6,307,000 net loss in the period, offset by (ii)
$240,000 of cash provided by operating assets and liabilities, and (iii) an
aggregate of $3,880,000 of non-cash charges consisting primarily of
depreciation, amortization and stock-based compensation expense.
Net cash used in investing activities totaled approximately $1,091,000
for the three months ended March 31, 2001 as compared to net cash provided by
investing activities of approximately $1,730,000 for the same period in 2000.
Net cash used in investing activities for the three months ended March 31, 2001
resulted from (i) the purchase of capital assets for $195,000, primarily
computer and office equipment, and (ii) $896,000 in product development costs
consisting of fees of outside contractors and capitalized salaries. Net cash
provided by investing activities for the three months ended March 31, 2000
resulted from (i) $2,970,000 net proceeds from maturity of investments
available-for-sale offset by (ii) the purchase of capital assets for $156,000,
primarily computer and office equipment, (ii) $499,000 in product development
costs consisting of fees of outside contractors and capitalized salaries, and
(iii) the $585,000 net cash effect of the Netlan Enterprises, Inc. acquisition.
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Net cash used in financing activities totaled approximately $332,000
for the three months ended March 31, 2001 as compared to net cash provided by
financing activities of approximately $370,000 for the same period in 2000. In
February 2000, former eB2B obtained a $2,500,000 term loan from a bank. The
proceeds from the term loan were primarily used to refinance the $2,116,000 debt
of Netlan paid by former eB2B in connection with the Netlan acquisition. The
term loan had a term of three years, was interest-only until December 1, 2000,
and bore interest at a rate equal to LIBOR plus 1%. Beginning December 1, 2000,
the term loan required ten quarterly principal payments of $250,000. At March
31, 2001 the outstanding balance of the term loan was $2.0 million. The loan was
secured by a custodial cash account in the amount of approximately 111% of the
outstanding balance of the term loan. We paid the outstanding balance of the
loan in full on April 2, 2001 using cash held in the custodial cash account. We
also have a $1,250,000 line of credit with the bank. No amounts were borrowed
under the line of credit as of March 31, 2001. The line of credit secures
approximately $1,178,000 of letters of credit that are outstanding at March 31,
2001. The line is secured by a custodial cash account in the amount of
approximately 111% of the line.
As of March 31, 2001, our principal source of liquidity was
approximately $4.6 million of cash and cash equivalents against which the bank
held a custody account with approximately $3,611,000 as security on the term
loan and line of credit with the bank. During April 2001 we paid the remaining
outstanding balance on the term loan of $2.0 million. Accordingly, the required
balance in the custodial cash account has been reduced to $1,389,000.
As of March 31, 2001, we had commitments for software license and
maintenance fees as well as outside consulting fees in the aggregate amount of
approximately $2.2 million with two vendors. During April 2001, we renegotiated
the payment schedule with these vendors and accordingly paid cash of
approximately $0.5 million and agreed to issue approximately 2.5 million shares
of common stock in lieu of $1.5 million of payments to these vendors. The
remaining $0.2 million represents sales tax payable on the software license and
maintenance agreements, which was paid in May 2001.
We anticipate spending approximately $1.1 million on capital
expenditures over the next twelve months, primarily on capitalized product
development costs.
Our management believes that our available cash resources at March 31,
2001, coupled with the gross proceeds from our private placement of $7.5 million
of convertible notes and warrants, will be sufficient to meet anticipated
working capital and capital expenditure requirements through March 31, 2002. Our
use of cash as of June 30, 2001 approximates $700,000 per month. As a result of
the cost cutting measures carried out in 2001, we anticipate that our use of
cash will be below $500,000 per month by the end of the third quarter of 2001
and expect to use less than $250,000 per month by the end of 2001. The expected
reduction in use of cash in future periods reflects an anticipated increase in
revenue, together with staffing reductions and operational cost reductions
implemented in April and May 2001. There can be no assurance that anticipated
revenue increases will be realized or that such cost reduction measures will be
sufficient to successfully reduce the current use of cash.
BUSINESS
General
We utilize 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
23
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, 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.
We also provide 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, we provide authorized technical education, and also design
and deliver custom computer and Internet-based on-line training seminars.
History and Organization
Our company was incorporated in the state of New Jersey on July 26,
1979.
Former eB2B Commerce, Inc. was incorporated in the state of Delaware on
November 6, 1998. It is referred to as "former eB2B" in this prospectus.
On February 22, 2000, former eB2B completed its acquisition of Netlan
Enterprises, Inc. and its subsidiaries.
On April 18, 2000, former eB2B merged with and into our company, an SEC
registrant, and as the surviving company, we changed our name from "DynamicWeb
Enterprises, Inc." to "eB2B Commerce, Inc." Our company is referred to in this
prospectus as "us", "we" or "our company". References to "DynamicWeb" in this
prospectus are to our company and operating history prior to the April 2000
merger. Pursuant to the agreement and plan of merger between us and former eB2B,
our shareholders retained their shares in our company, while the shareholders of
former eB2B received shares, or securities convertible into shares, of common
stock of our company representing approximately 89% of our equity, on a fully
diluted basis.
24
The April 2000 merger was accounted for as a reverse acquisition, a
"purchase business combination" in which former eB2B was the accounting acquirer
and our company was the legal acquirer. The management of former eB2B remained
as our management. As a result of the April 2000 merger, (i) the financial
statements of former eB2B are historical financial statements; (ii) the results
of the our operations include the results of our company after the date of the
merger; (iii) acquired assets and assumed liabilities were recorded at their
estimated fair market value at the date of the merger; (iv) all references to
our financial statements apply to the historical financial statements of former
eB2B prior to the April 2000 merger and to our consolidated financial statements
subsequent to the April 2000 merger; (v) any reference to former eB2B applies
solely to eB2B Commerce, Inc., a Delaware corporation, and its financial
statements prior to the merger, and (vi) our year-end is December 31, that of
the accounting acquirer, former eB2B.
Industry Background
Businesses are increasingly seeking to improve their operating
efficiency with other businesses through electronically automated and integrated
business to business solutions. Electronic Data Interchange, or "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 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
We utilize 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 EDI enabled companies to transfer
25
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. We provide
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.
We are 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.
We also offer 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:
Benefit to Suppliers
o Significant reduction in order processing costs
o Reduced customer service costs
o Ability to support the transactional and other requirements of
their trading partners
o Increased inventory turnover and order-to-delivery cycle time
o Up-sell and cross-sell opportunities
o Supplier-buyer demand collaboration
o Improved purchasing history and buying pattern information
o Increased ability to project demand cycles
o Access to broader buying community
o Improved customer service
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Benefit to Buyers
o Significant reduction in order management costs
o Substantially more convenient and efficient ordering
o Ability to support the transactional and other trading requirements
of their trading partners
o Real-time information exchange, with access order status, shipment
timing and inventory availability
o Improved product information via online catalog access
o Faster delivery and increased inventory turns
o Significant reduction in order error rates
o Buyer-supplier demand collaboration
o Access to broader base of suppliers
We provide a complete solution, tailored for each customer and designed
specifically for our business processes. By leveraging our expertise in EDI,
business to business transaction management and document exchange, application
development, and Internet networking, we are 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.
We are 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:
o chain drug,
o sporting goods, and
o toys.
These sizeable industries are characterized by certain operating
inefficiencies. Our 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.
27
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 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 influencing buying behavior. For example, joint marketing or sales
programs with alliance partners would be intended to gain access to several
large buyers, enabling us 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 June 30, 2001 we connected approximately 110 retail organizations
and 1,250 supply organizations to their trading partners. As of June 30, 2001 we
were processing in excess of 600,000 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 total revenue.
Revenue Recognition
We earn revenue from two business units:
o transaction processing and related services, and
o 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.
We do 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.
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.
28
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 we do 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, we recognize
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. Our
management believes that we provide 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 competition is primarily made of indirect horizontal competitors,
which are focused on similar services but not in specific or multiple vertical
industries. Major publicly traded indirect horizontal competitors include Marex,
Inc., Neoforma.com, Inc. and The viaLink Company. Major privately held
competitors include Automated Data Exchange (ADX) (formerly known as The EC
Company) and SPS Commerce, for which 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. However, we believe it will prove
to be an inefficient use of resources for these large companies to build a
technology platform for their internal use as compared to using our services.
Intellectual Property
Our success depends on our ability to maintain the proprietary aspects
of our technology and operate without infringing the proprietary rights of
others. We rely on a combination of trademarks, patents, trade secrets and
copyright law, as well as contractual restrictions, to protect the proprietary
aspects of our technology. We seek to protect the source code for our
proprietary software, documentation and other written materials under trade
secret and copyright law.
We also seek to protect our intellectual property by requiring
employees and consultants with access to proprietary information to execute
confidentiality agreements with us and by restricting access to our source code.
Due to rapid technological change, our 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.
29
Government Regulation
Our 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. Our management believes that we are in compliance with
applicable regulations.
In addition, due to the increasing popularity and use of the Internet,
we 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 us 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 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, former eB2B abandoned the
use of the product development expenditures capitalized at December 31, 1998,
and recorded a $174,000 write-down. We continue to make the product development
expenditures that management believes are necessary to rapidly deliver new
features and functions. As of June 30, 2001, seven employees were engaged in
product development activities. In addition, based on its specific needs to
rapidly deliver new features and functions, we hire consultants who take part in
product development activities.
Personnel
As of June 30, 2001, we employed 65 full-time employees and two
part-time employees. Many of our employees are highly skilled, with advanced
degrees. Our continued success depends upon our ability to continue to attract
and retain highly skilled employees. We have never had a work stoppage, and none
of our employees are represented by a labor organization. We consider our
employee relations to be good.
Property
We operate out of two offices in New York, New York. The following
table sets forth information on our 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.
Pursuant to the 757 Third Avenue lease we pay fixed annual rent of $1,197,694 in
monthly payments of $99,808 until July 2004 and a fixed annual rent of
$1,242,890 in monthly payments of $103,574 thereafter.
30
Legal Proceedings
We are party to certain legal proceedings and claims, which arise in
the ordinary course of business. In the opinion of our management, the amount of
an ultimate liability with respect to these actions will not materially affect
our financial position, results of operations or cash flows.
In October 2000, Cintra Software & Services Inc. commenced a civil
action against our company 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 an early stage, we believe
that we have meritorious defenses to the allegations made in the complaint and
intend to vigorously defend the action.
On March 2, 2001, a former employee commenced a civil action against
our company and two members of our management in New York Supreme Court, New
York County, 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, as well as a declaratory judgment
concerning his alleged entitlement to stock options to purchase 75,000 shares of
our common stock. We subsequently filed a motion to dismiss. We dispute these
claims and intend to vigorously defend the action.
We are not currently a party to any other material legal proceeding.
MANAGEMENT
Executive officers and directors
The following table sets forth certain information regarding our directors and
executive officers:
Name Age Position
- - - ---- --- --------
Richard S. Cohan 48 President and Chief Operating Officer
Peter J. Fiorillo 42 Chief Financial Officer and Chairman of the Board of Directors
Alan J. Andreini 54 Chief Executive Officer and Director
Steven Rabin 46 Chief Technology Officer
Michael S. Falk 39 Director
Timothy P. Flynn 50 Director
Stephen J. Warner 61 Director
Harold S. Blue 40 Director
Bruce J. Haber 49 Director
Mark Reichenbaum 50 Director
Richard S. Cohan joined our company in May 2001 as president and chief
operating officer. Mr. Cohan served as senior vice president of CareInsite, a
health information technology company (which merged with WebMD in September
2000), from June 1998 to January 2001. He was also president of The Health
Information Network Company, an e-health consortium of major New York health
insurers and associations of which CareInsite was the managing partner, from
1998 to 2001. Prior to joining CareInsite, Mr. Cohan spent 15 years at National
Data Corporation, with various titles including executive vice president.
Peter J. Fiorillo co-founded former eB2B in November 1998. He served as
president, chief executive officer and chairman of the board of directors of
former eB2B from November 1998 until April 2000, and, upon completion of the
April 2000 merger, assumed those positions with our company until November 2000.
In
31
November 2000, he relinquished his positions as chief executive officer and
president of our company, became chief financial officer and remained as a
chairman of the board. From April 2001 until May 2001 he again served as
president. He has also served as director of former eB2B from its inception
until the April 2000 merger, and has since been a director of our 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 our company in July 2000 as executive chairman,
serving in such capacity until November 2000. Between November 2000 and April
2001, he served as president and chief executive officer. Since April 2001, he
has served as chief executive officer. Mr. Andreini has also been a director of
our company since July 2000. Prior to joining our 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 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 in technology services. Mr.
Andreini joined Comdisco Inc. in 1978, and was named senior vice president in
1986 and executive vice president in 1994.
Steven Rabin has served as our chief technology officer since November
2000. Prior to joining our 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.
Michael S. Falk has been a director of our company since April 2000,
and prior to the April 2000 merger was a director of former eB2B since
January 2000. Mr. Falk is the co-founder and, since 1988, 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 the following public companies: IntraWare, Inc., a provider of
Internet-enabled software delivery and information technology management
solutions; U.S. Wireless Data, Inc., a provider of technology for wireless
point of sale and ATM transactions; and ProxyMed, Inc., a provider of
healthcare transaction processing services.
Timothy P. Flynn has been a director of our company since April 2000,
and prior to the April 2000 merger was a director of former eB2B since January
2000. Mr. Flynn is a principal of Flynn Gallagher Associates, LLC. Mr. Flynn is
also a director of FutureLink Corporation, a publicly held applications service
provider, 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 company which operated WestAir, a California-based commuter
airline affiliated with United Airlines.
Stephen J. Warner has been a director of our company since May 2001.
Mr. Warner has been chief executive officer of Crossbow Ventures, Inc., a
venture capital firm, since January 1999. He was chairman of Bioform Inc.,
a consulting firm, from 1994 to 1999. From 1991 to 1994, he was a director
of Commonwealth Associates, L.P. Mr. Warner served as president of Merrill
Lynch Venture Capital from 1981 to 1990.
Harold S. Blue has been a director of our company since May 2001.
Mr. Blue has been an executive vice president of Commonwealth Associates, L.P.
since January 2001. He served as chairman and chief executive officer of
ProxyMed, Inc. from 1993 to December 2000. Mr. Blue previously served as
president and chief executive officer of Health Services, Inc., a physician
practice management company, from 1990 to 1993. In 1984 he founded Best
Generics, a major generic drug distribution company that was acquired by
Ivax Corp. and served on Ivax's board of directors. He also currently serves
as a director of the following public companies: Futurelink Corporation;
Healthwatch, Inc., a healthcare information technology company; ProxyMed, Inc.;
and MonsterDaata, Inc., an information infrastructure utility company.
32
Bruce J. Haber has been a director of our company since July 2001.
Mr. Haber served as president and chief executive officer of MedConduit.com,
Inc., a healthcare e-commerce company from March 2000 to June 2001. From 1997
until 1999, Mr. Haber was executive vice president and director of Henry
Schein, Inc., a healthcare distribution company, and president of such
company's medical group. From 1981 until 1997, Mr. Haber served as president,
chief executive officer and director of Micro Bio-Medics, Inc., a medical
supply distributor which merged into Henry Schein, Inc. in 1997.
Mark Reichenbaum has been a director of our company since July 2001.
Mr. Reichenbaum has served as president of HAJA Capital Corporation, an
investment firm, since 1997. Prior to such time, Mr. Reichenbaum served as
president of Medo Industries, Inc., a manufacturer and distributor of consumer
products, from 1972 until 1997. From 1996 to 1997, he was Vice President of
Quaker State Corporation. Mr. Reichenbaum has also served as co- chairman of
Clean Rite Centers, a retail chain of laundry serving super stores, since
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
our board of directors.
Commonwealth Associates, L.P. currently has the right to designate two
members of our board of directors, and has designated Harold S. Blue and Michael
S. Falk. The holders of our Series B preferred stock, voting as a class, have
the right to designate one member of our board of directors, and have designated
Timothy P. Flynn. When the holders of the Series B preferred stock no longer
have the right to designate a director, Commonwealth shall receive the right to
designate such member. Commonwealth's right to designate this third member of
the board and one of its two other designees shall expire when the Series C
preferred stock has converted into shares of common stock or there is otherwise
less than 20% of the originally issued shares of Series C preferred stock
outstanding.
33
Executive Compensation
The following table provides information concerning the annual and
long-term compensation earned or paid to our chief executive officer and to each
of our most highly compensated "named executive officers" other than the chief
executive officer, whose compensation exceeded $100,000 during 2000. For the
period prior to April 18, 2000, the date of the merger of former eB2B with and
into DynamicWeb, the following table includes compensation earned at former
eB2B, but excludes the compensation earned or paid to DynamicWeb's executives in
such capacity prior to the April 2000 merger.
Long-Term Compensation
Annual Compensation ---------------------------------------
Name and Principal ------------------- Restricted Number of Securities
Position Year Salary Bonus Stock Award Underlying Options
- - - ------------------ ---- -------- -------- ----------- ------------------
Peter J. Fiorillo,
President (1) 2000 $219,000 $ 50,000 - -
1999 $195,000 (2) $110,000 1,995,000
Alan J. Andreini,
Chief Executive
Officer (1)(3) 2000 $112,500 - - 1,500,000
Victor L. Cisario,
Chief Financial
Officer (4) 2000 $150,000 $ 50,000 - 266,000
John J. Hughes,
Executive Vice
President and
General Counsel (5) 2000 $102,000 $ 60,000 (6) - 266,000
Steve Rabin,
Chief Technology
Officer (7) 2000 $61,500 (8) $ 72,500 (9) 50,000 550,000
- - - --------------
(1) Mr. Fiorillo was the chief executive officer of former eB2B prior to
the April 2000 merger and of our company from April 2000 until November
2000, at which point Mr. Andreini became our chief executive officer.
(2) From January 1, 1999 to September 30, 1999, former 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 former eB2B. In January 2000, the accrued salary for each officer
(which represented approximately 75% of the total salary for each
officer) was converted at the election of the officers, into common
stock of former eB2B at $5.50 per share.
(3) Mr. Andreini commenced employment with our company in July 2000.
(4) As of May 2001, Mr. Cisario is no longer an employee or executive
officer of our company. In connection with his cessation of employment,
Mr. Cisario received a lump sum severance payment of $130,000.
(5) Mr. Hughes was employed by our company from June 2000 until July 2001.
In connection with his cessation of employment, Mr. Hughes will receive
severance payments, over a six month period, aggregating $106,250.
(6) Includes a $35,000 signing bonus.
34
(7) Mr. Rabin commenced employment with our company in November 2000.
(8) Includes $32,500 paid as consulting fees to a company whose majority
shareholder is Mr. Rabin.
(9) Includes a $50,000 signing bonus.
Option Grants in 2000
The following table provides information concerning individual grants
of stock options made during 2000 to each of our named executive officers. For
the period prior to our April 2000 merger, the following table includes options
granted by former eB2B:
Percent of Total Options Exercise Or
Number of Securities Granted to Employees in Base Price Expiration
Name Underlying Options 2000 (in $ per share) Date
- - - ---- -------------------- ----------------------- ---------------- --------------
Peter J. Fiorillo - - - -
Alan J. Andreini 1,500,000 26.7% $3.25 July 2010
Victor L. Cisario 266,000 4.7% $2.07 January 2010
John J. Hughes 266,000 4.7% $2.07 June 2010
Steven Rabin 550,000 9.8% $2.10 November 2010
Aggregated Option Exercises in 2000 and Year End Values
The following table provides information concerning the exercise of
stock options during 2000, and the value of unexercised options owned, by each
of our named executive officers:
Shares
Acquired
on Value Number of Securities Value of Unexercised
Name Exercise Realized Underlying Unexercised (1) In-the-Money Options (2)
- - - ---- -------- -------- ------------------------------- ----------------------------
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 - - -
Steven 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.
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Employment Agreements
Our company and Peter J. Fiorillo, our chairman of the board of
directors and chief financing officer, are parties to an employment agreement,
dated December 1, 1998, as amended April 2001. 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
$25,000. Under the terms of the agreement, if we terminate Mr. Fiorillo's
employment 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 our
company, we are required to pay Mr. Fiorillo an amount equal to 75% of his
annual base salary and bonus. The payments are to be made over a nine month
period following the date of the event that resulted in the termination of
employment or the "change of control."
Our company and Alan J. Andreini, our chief executive officer, are
parties to an employment agreement, dated as of July 1, 2000, as amended May 14,
2001. 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 $125,000. In the
event the agreement is terminated for reasons other than "cause" (as defined in
the agreement), we are required to pay Mr. Andreini an amount equal to one-half
of his annual base salary, with such sum payable over a period of six months.
Our company and Steven Rabin, our chief technology officer, are parties
to an employment agreement, dated as of October 31, 2000, as amended April 2001.
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 our offices and his home in Martha's Vineyard,
Massachusetts. The agreement provides for an annual base salary of $175,000 and
an annual minimum bonus of $45,000. In the event the agreement is terminated for
reasons other than "cause" (as defined in the agreement), we are required to pay
Mr. Rabin an amount equal to his annual base salary, with such sum payable over
a period of one year.
Provisions of our charter and by-laws
Our company's amended and restated certificate of incorporation
provides that we will indemnify any person who is or was our director, officer,
employee or agent 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 our company or our 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 our amended and restated certificate of incorporation and
the New Jersey law, no director or officer of our company will be personally
liable to us or to any of our stockholders for damages for breach of any duty
owed to us or our 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, our 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 our best interests and, in a criminal action or proceeding, if he
had no reasonable cause to believe that
36
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 our best interests 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.
BENEFICIAL OWNERSHIP OF SECURITIES
The following table shows the common stock owned by our directors and
"named executive officers", by persons known by us to beneficially own,
individually, or as a group, more than 5% of our outstanding common stock as of
July 6, 2001 and all of our current directors and executive officers as a group.
Included as shares beneficially owned 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 Percent of
Name and Address Ownership of Common Common Stock
of Beneficial Owner (1) Capital Stock (2) Stock (3) On a Fully Diluted Basis (4)
- - - ----------------------- ----------------- --------- ----------------------------
Alan J. Andreini 1,722,222 (5) 8.19% 2.23%
Victor L. Cisario (6) 316,000 (7) 1.61% .28%
John J. Hughes (8) 400,234 (9) 2.04% .36%
Steven Rabin 500,000 (10) 2.53% .54%
Peter J. Fiorillo 4,999,007 (11) 23.48% 5.36%
Michael S. Falk (12) 14,651,234 (13) 43.91% 13.09%
Timothy Flynn (14) 2,229,491 (15) 10.36% 2.21%
Richard S. Cohan - - 1.79%
Stephen J. Warner (16) 5,200,000 (17) 21.23% 4.87%
Harold S. Blue (18) 98,852 (19) .51% .31%
Bruce J. Haber - - .22%
Mark Reichenbaum (20) 1,061,508 (21) 5.22% 1.17%
Commonwealth Associates, L.P. (22) 6,581,992 (23) 25.83% 5.88%
ComVest Capital Partners LLC (24) 3,462,300 (25) 15.21% 3.09%
ComVest Venture Partners L.P. 900,000 (26) 4.46% .80%
All directors and executive officers 19,518,022 (27) 54.85% 22.02%
as a group (10 persons)
- - - ------------
(1) The address of each person who is a 5% holder, 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
only those options and warrants that are exercisable within 60 days of
the date of this prospectus.
(3) The ownership percentages in this column for each person listed in this
table are calculated assuming the exercise of all options and warrants
held by such person exercisable within 60 days of the date of this
prospectus and conversion of all convertible notes held by such person
convertible within such time period and giving effect to the shares of
common stock underlying the Series A preferred stock, the Series B
preferred stock and the 7% convertible notes (or the Series C preferred
stock, as the case may be) held by such person.
(4) The ownership percentages in this column are calculated for each person
listed in this table on a fully diluted basis, assuming the exercise of
all options and warrants, regardless of whether or not exercisable
37
within 60 days, held by such person and all of our other
securityholders and conversion of all preferred stock and convertible
notes regardless of whether or not convertible within 60 days held by
such person and all of our other securityholders.
(5) Represents shares underlying options.
(6) Mr. Cisario is no longer an officer or employee of our company as of
May 2001.
(7) Includes 266,000 shares underlying options and 50,000 shares underlying
warrants.
(8) Mr. Hughes is no longer an officer or employee of our company as of
July 2001.
(9) Includes 266,000 shares underlying options and 98,767 shares underlying
warrants.
(10) Includes 450,000 shares underlying options and 50,000 shares of
restricted stock.
(11) Includes 1,995,000 shares underlying options and 42,560 shares of
common stock owned by family members.
(12) The address of Mr. Falk is c/o Commonwealth Associates, L.P., 830 Third
Avenue, New York, New York 10022.
(13) In addition to the aggregate of 10,944,292 shares beneficially owned by
Commonwealth Associates L.P., ComVest Capital Partners LLC and ComVest
Venture Partners L.P., which may be deemed to be beneficially owned by
Mr. Falk, Mr. Falk's holdings include 180,836 shares of common stock,
and the right to acquire (i) 3,356,391 shares underlying warrants, (ii)
164,715 shares underlying convertible preferred stock, and (iii) 5,000
shares underlying 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. Mr. Falk is a managing member of the general partner of
ComVest Venture Partners L.P.
(14) The address of Mr. Flynn is c/o Flynn Gallagher Associates, 3291 North
Buffalo Drive, Las Vegas, Nevada 89129.
(15) Includes (i) 759,516 shares underlying convertible preferred stock,
(ii) 500,000 shares underlying convertible notes, (iii) 138,000 shares
underlying options and (iv) 831,975 shares underlying warrants.
(16) The address of Mr. Warner is One N. Clematis Street, West Palm Beach,
Florida 33401.
(17) Includes 2,600,000 shares underlying convertible notes and 2,600,000
shares underlying warrants owned by Alpine Venture Capital Partners
L.P. Mr. Warner is the chief executive officer of Crossbow Ventures
Inc., the management company for Alpine Venture Capital Partners L.P.
(18) The address of Mr. Blue is c/o Commonwealth Associates, L.P., 830 Third
Avenue, New York, New York 10022.
(19) Includes 25,168 shares underlying convertible preferred stock and
66,130 shares underlying warrants.
(20) The address of Mr. Reichenbaum is c/o HAJA Capital Corp., 323 Railroad
Avenue, Greenwich, Connecticut 06830.
(21) Includes (i) 113,258 shares underlying convertible preferred stock,
(ii) 400,000 shares underlying convertible notes and (iii) 514,255
shares underlying warrants.
(22) The address of Commonwealth Associates, L.P. is 830 Third Avenue, New
York, New York 10022.
(23) Commonwealth Associates L.P.'s holding includes 36,237 shares
underlying convertible preferred stock and 6,150,644 shares underlying
warrants. Commonwealth Associates L.P.'s holding as described in this
table does not include the holding of ComVest Capital Partners LLC or
ComVest Venture Partners L.P. Commonwealth, ComVest Capital and ComVest
Venture are affiliated through overlapping ownership interests.
(24) The address for ComVest Capital Partners LLC is 830 Third Avenue, New
York, New York 10022.
(25) Includes 219,619 shares underlying convertible preferred stock and
3,242,680 shares underlying warrants.
(26) Includes 900,000 shares underlying warrants.
(27) Includes (i) 1,062,657 shares underlying convertible preferred stock,
(ii) 3,500,000 shares underlying convertible notes and (iii) an
aggregate of 11,728,973 shares underlying options and warrants.
38
CERTAIN TRANSACTIONS
In September 1999, former eB2B signed a letter of intent with
Commonwealth Associates, L.P., an investment banking firm, to raise capital in a
private placement offering of former eB2B's securities. On October 4, 1999,
former eB2B issued, in consideration of $375,000, promissory notes and five-year
warrants to purchase up to 498,659 shares of former eB2B common stock
(equivalent to 1,326,433 shares of our common stock) to ComVest Capital Partners
LLC, an affiliate of Commonwealth, and Michael S. Falk constituting "pre-bridge
financing". The promissory notes and warrants were replaced with promissory
notes and warrants in the subsequent bridge financing described in the next
paragraph. Mr. Falk, a director of our company, is a principal and the chief
executive officer of Commonwealth, and is a principal of ComVest.
In October 1999, in anticipation of a private placement offering and
for an investment of $1,000,000, including the replacement of securities issued
in the pre-bridge financing, former eB2B issued to ComVest Capital Partners,
LLC, an affiliate of Commonwealth, and to designees of such entity, convertible
promissory notes in an aggregate principal amount of $1,000,000, which were
automatically converted into units offered in the subsequent December 1999
private placement based on the face value of such notes, and seven-year warrants
to purchase up to 717,409 shares of former eB2B common stock (equivalent to
1,908,308 shares of our common stock), exercisable at $4.00 per share ($1.50
reflective of the 2.66 to 1 exchange ratio in the April 2000 merger).
Commonwealth was the placement agent in such "bridge financing" offering. In May
2001, these warrants were adjusted pursuant to anti- dilution provisions to
become warrants to purchase an aggregate of 5,724,904 shares of our common stock
with an exercise price of $.50 per share.
In December 1999, former eB2B issued to Commonwealth, for providing
services as the placement agent in a $33,000,000 private placement of Series B
preferred stock and warrants, a cash consideration of $3,300,000 and warrants to
purchase 1,482,600 shares of former eB2B common stock (equivalent to 3,943,716
shares of our 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. In January and May 2001, these warrants were adjusted pursuant to
anti-dilution provisions to become warrants to purchase an aggregate of
6,440,629 shares of our common stock with an exercise price of $1.266 per share.
In October 1999, former eB2B entered into a finder's agreement with
Commonwealth, which provided that upon completion of a merger, sale or other
similar transaction, Commonwealth would earn a finder's fee equal to three
percent of the total compensation received in the transaction. Upon the
completion of the April 2000 merger, we issued Commonwealth 3% of the total
number of securities received by former eB2B's stockholders in the merger,
consisting of 720,282 shares of our common stock and seven-year warrants to
purchase 502,383 shares of our 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).
In November 1999, in connection with Commonwealth providing advisory
services to former eB2B during the merger, former eB2B granted to Commonwealth
five-year warrants to purchase 470,000 shares of former eB2B common stock
(equivalent to 1,250,200 shares of our common stock) at an exercise price of
$5.50 per share (equivalent to $2.07 per share of our common stock). The
warrants vested upon the closing of the April 2000 merger.
In May 2001, we issued to Commonwealth (and its designees), for
providing services as the placement agent in a private placement of convertible
notes and warrants, five year "agents options" to purchase Series C preferred
stock, convertible into an aggregate of 1,875,200 shares of our common stock
at an exercise price of $.50 and warrants to purchase 1,875,200 shares of our
common stock at an exercise price of $.93 per share. We also paid Commonwealth
a fee of $637,500 plus reimbursement of its expenses in connection with such
services.
39
In connection with the closing of the May 2001 financing, we canceled a
$2,050,000 line of credit issued to us in April 2001 by ComVest Venture Partners
L.P., an affiliate of Commonwealth, pursuant to which we did not borrow any
funds. We incurred a cash fee amounting to $61,500 in consideration of the
availability of the line of credit. In addition, ComVest Venture Partners L.P.
was issued warrants to purchase 900,000 shares of our common stock at an
exercise price of $.50 per share for a period of five years.
As a result of the foregoing transactions, Commonwealth currently
beneficially owns 25.83% of our voting securities (5.88% on a fully diluted
basis).
SELLING SECURITYHOLDERS
The shares covered by this prospectus are shares of our common stock
that have been issued and shares of our common stock that have been issued or
will be issued upon the conversion of our preferred stock or convertible notes
or upon the exercise of warrants to purchase shares of our common stock. The
number of shares of common stock that may be actually sold by the selling
securityholders will be determined by such selling securityholder, subject to
the restrictions of the lock-up agreements, if any. We are registering for the
selling securityholders named herein an aggregate of 87,549,195 shares of common
stock. The shares to which this prospectus relates include but are not limited
to the following:
o 8,078,880 of the shares consist of shares of common stock that we
previously issued;
o 9,310 of the shares consist of shares of common stock issuable upon
conversion of the Series A Preferred Stock acquired by selling
securityholders in a private placement that was completed in May
1999;
o 5,724,904 of the shares consist of shares of common stock issuable
upon the exercise of warrants granted to designees of Commonwealth
Associates L.P. in connection with a bridge financing conducted in
October 1999 and to ComVest Capital Partners LLC and Michael S.
Falk in connection with a pre-bridge and bridge financing conducted
in October 1999;
o 18,988,997 of the shares consist of shares of common stock issuable
upon conversion of the Series B Preferred Stock acquired by the
selling securityholders in a private placement that was completed
in December 1999;
o 6,516,371 of the shares consist of shares of common stock issuable
upon the exercise of warrants acquired by the selling
securityholders in the December 1999 private placement;
o 6,440,629 of the shares consist of shares of common stock issuable
upon the exercise of warrants granted to Commonwealth
Associates L.P. and designees of Commonwealth Associates L.P.
for acting as the placement agent for the December 1999 private
placement;
o 502,383 of the shares consist of shares of common stock issuable
upon the exercise of warrants granted to Commonwealth Associates
L.P., and designees of Commonwealth Associates L.P. in connection
with acting as a financial advisor regarding the April 2000
merger;
o 1,330,000 of the shares consist of shares of common stock issuable
upon the exercise of warrants granted to Commonwealth Associates
L.P. and its designees and certain third parties as a fee in
connection with the April 2000 merger;
40
o 900,000 of the shares consist of shares of common stock issuable
upon the exercise of warrants granted to ComVest Venture Partners
L.P. in connection with making a credit line available to us;
o 18,000,000 of the shares consist of shares of common stock issuable
upon conversion of the 7% convertible notes, including interest
(3,000,000 shares allocated), if any, and/or Series C preferred
stock acquired by selling securityholders in a private placement
that was completed in May 2001;
o 15,000,000 of the shares consist of shares of common stock issuable
upon the exercise of warrants acquired by the selling
securityholders in the May 2001 private placement;
o 4,500,000 of the shares consist of shares of common stock issuable
upon the exercise of agents' options to purchase units of Series C
preferred stock and warrants granted to Commonwealth Associates
L.P. and Gruntal & Co., LLC and their designees for acting as
placement agent for the May 2001 private placement; and
o 1,557,721 of the shares consist of shares of common stock issuable
upon the exercise of warrants other than those described above.
Except as noted below or in the "Beneficial Ownership of Securities"
and "Management" sections of this prospectus, none of the selling
securityholders has, or within the past three years has had, any relationship,
position or office with us or our predecessors or affiliates.
The following table sets forth, as of July 10, 2001: (1) the name of
each selling shareholder, (2) the number of shares of our common stock
beneficially owned by each selling shareholder, including the number of shares
purchasable upon exercise of warrants or conversion of preferred stock, (3) the
maximum number of shares of common stock which the selling securityholders can
sell pursuant to this prospectus and (4) the number of shares of common stock
that the selling securityholders would own if they sold all their shares
registered by this prospectus.
Except as otherwise noted below, the number of shares of our common
stock registered for sale hereunder for a selling shareholder consists of shares
of our common stock either beneficially owned or issuable upon exercise of the
warrants or conversion of the notes or preferred stock described above.
41
Number of Shares Number of shares Number of shares of Percentage of
of common stock of common stock common stock to be our outstanding
Selling beneficially owned being registered in beneficially owned common stock
Securityholder prior to offering this prospectus after offering after offering
- - - --------------------- -------------------- ------------------- ------------------- ------------------
Abatangelo, William P. & Angela K. 21,296 21,296 0 0
Abraham, Dean 11,618 11,618 0 0
Abrahamson, Melissa R. & Paul 4,646 4,646 0 0
Abrams, Beverly 9,297 9,297 0 0
Abrams, Burton R. 9,297 9,297 0 0
Abrams, Richard 51,124 51,124 0 0
Abrams, Rodney A. 72,039 72,039 0 0
Acks, Shannon P. 23,237 23,237 0 0
Adametz, James R. 34,393 34,393 0 0
A'Hearn, Michael F. & Maxine C. 23,237 23,237 0 0
Al-Bahar & Lulwa Al-Khaled, Alya 42,597 42,597 0 0
Alliance Equities, Inc. 116,191 116,191 0 0
Alpine Ventures Capital Partners 5,200,000 5,200,000 0 0
Anders Carlgren SEP-IRA 9,297 9,297 0 0
Anderson, Jack L. 21,296 21,296 0 0
Anderson, Jr., Ferdinand F. 23,237 23,237 0 0
Apodaca Investment Offshore, Ltd. 371,811 371,811 0 0
Apodaca Investment Partners, LP 371,811 371,811 0 0
Appelbaum, Michael L. 67,125 67,125 0 0
Asciutto, Basil 92,034 92,034 0 0
Ashok, Shanthamallappa A. 23,237 23,237 0 0
Astor, Michael 23,237 23,237 0 0
Aubrey J. Ferrao TTEE
Aubrey J. Ferrao Living Trust
u/a/d 6/26/98 42,597 42,597 0 0
Auerbach, A. Phillip 21,296 21,296 0 0
Aukstuolis, Jim G. 46,477 46,477 0 0
Bachner Tally Polevoy 401K
Profit Sharing Plan
dtd 010184 FBO Fran Stoller 9,297 9,297 0 0
Baily, Gary R. 23,237 23,237 0 0
Ballin, Scott 21,296 21,296 0 0
Ballyhoo Partners 85,138 85,138 0 0
Barnes, Jr., Charles A. 21,296 21,296 0 0
Barrington Capital Corp. 18,590 18,590 0 0
Basil J. Ascuitto IRA 8,522 8,522 0 0
Bauer, Thomas W. & Paula S. 37,180 37,180 0 0
Beattie, Edwin J. 21,296 21,296 0 0
Beiser, John W. & Maureen W. 85,194 85,194 0 0
Ben Joseph Partners 200,000 200,000 0 0
Bentley, Hugh P. & Jean J. 17,026 17,026 0 0
Bentley, Italo 34,056 34,056 0 0
Bentley, Mark 17,026 17,026 0 0
Bentley, Richard 136,220 136,220 0 0
Berger, Toby 9,297 9,297 0 0
Berglund, Donald 17,037 17,037 0 0
Berman, Marc G. 11,618 11,618 0 0
42
Bernard Kirsner Trust 17,026 17,026 0 0
Berney, L. Neal 23,237 23,237 0 0
Bernstein, Howard & Sandra 23,237 23,237 0 0
Bertoni, Christopher W. 42,597 42,597 0 0
Bettinger, Robert 46,477 46,477 0 0
Black, Lincoln Edward 11,618 11,618 0 0
Blank, Gerald 9,297 9,297 0 0
Blitz, Craig & Annette 97,750 97,750 0 0
Blomstedt & Susan LaScala,
JTROS, Jeffrey 46,477 46,477 0 0
Bloom, Jack 139,432 139,432 0 0
Bloom, Ron 18,807 18,807 0 0
Blue, Harold 98,853 98,853 0 0
Blue, Robert & Ruth 17,037 17,037 0 0
Blum, Gary 21,296 21,296 0 0
BNB Investment Associates L.P. 218,906 218,906 0 0
Bob K. Pryt -- Ttee BKP Capital
Management LLC 401(k) PSP & MPP,
Dtd. 1/1/92 FBO Bob K. Pryt 85,138 85,138 0 0
Bodmer, Hans C. 370,384 370,384 0 0
Bolding, Jeffrey O. & Deborah R. 23,237 23,237 0 0
Bollag, Michael 91,120 91,120 0 0
Bolognue, Joseph T. 23,237 23,237 0 0
Boris, David 75,008 75,008 0 0
Boris, Marvin 200,000 200,000 0 0
Boyd, John W. & Sandra L. 17,037 17,037 0 0
Briggs, Tom P. 17,037 17,037 0 0
Brigl, Thomas J. & Brenda J. 9,297 9,297 0 0
Brogan, Thomas R. 9,297 9,297 0 0
Brown, Raymond 63,893 63,893 0 0
Brummer, Michael & Mary Jo 46,477 46,477 0 0
Burgess, Paul 21,296 21,296 0 0
Burr Family Trust 10,647 10,647 0 0
Burtt R. Ehrlich, IRA 42,597 42,597 0 0
C.E. Unterberg Towbin Capital
Partners I, LP 185,906 185,906 0 0
Callahan, Daniel J. 46,477 46,477 0 0
Cameron, Jeffrey S. 23,237 23,237 0 0
Campanella, Richard 52,754 52,754 0 0
Campos, Felix & Joyce 139,428 139,428 0 0
Cardoso, Manuel 18,590 18,590 0 0
Cardwell, J.A. 42,597 42,597 0 0
Cardwell, Jr., James A. 21,296 21,296 0 0
Cass, C. Wyllys & Ellen M. 17,037 17,037 0 0
Cavanna, Kieran 4,646 4,646 0 0
Chance, Albert & Doris 21,296 21,296 0 0
Chandra-Sekar, Balasundaram 9,297 9,297 0 0
Chase, Arthur M. 18,590 18,590 0 0
Chesed Congregations of America 2,900,000 2,900,000 0 0
Chimbel, Marvin & Arlene 8,522 8,522 0 0
Circle F. Ventures, LLC 34,859 34,859 0 0
Clark, Martin E. & Glenda F. 13,944 13,944 0 0
43
Cohen Jonathan R. & Shapiro
Nancy D. 21,296 21,296 0 0
Cohen, Alan N. 21,296 21,296 0 0
Cohen, Dr. David 65,068 65,068 0 0
Collier,Timmy M. & Connie A. 9,297 9,297 0 0
Collins, James C. 23,237 23,237 0 0
Commonwealth Associates L.P. 6,581,991 6,581,991 0 0
ComVest Capital Management, LLC 3,462,300 3,462,300 0 0
ComVest Venture Partners L.P. 900,000 900,000 0 0
Conzett Europa Invest Ltd. 285,194 285,194 0 0
Cooper, Stephen 21,296 21,296 0 0
Cooperman, Edwin 10,451 10,451 0 0
Corbin, Bruce 29,818 29,818 0 0
Corbin, Jeff 4,259 4,259 0 0
Corbin, Richard 29,818 29,818 0 0
Coventry, Brian 534,690 534,690 0 0
Cramer Taos Partners 285,194 285,194 0 0
Cranshire Capital, L.P. 1,633,712 1,633,712 0 0
Crown, Robert & Barbara 63,893 63,893 0 0
Cunningham Stephen &
Fleming Wendell 21,296 21,296 0 0
Danieli, Mark 51,741 51,741 0 0
Daphne Astor Grandchildren's Trust 23,237 23,237 0 0
d'Autremont, Hugh 8,522 8,522 0 0
d'Autremont, Sloan 21,296 21,296 0 0
Davenport, James A. & Rebecca C. 65,067 65,067 0 0
David Thalheim c/f Lindsay Thalheim 8,522 8,522 0 0
David Thalheim c/f Marc Thalheim 8,522 8,522 0 0
David Thalheim Revocable Living Trust 21,296 21,296 0 0
DeAtkine, Jr., David 46,477 46,477 0 0
DellaValle, Anthony 13,944 13,944 0 0
Dercher, David J. & Su Ellen 37,180 37,180 0 0
Deshmukh, Sunil M. 85,194 85,194 0 0
DiCesare, Dominick 21,296 21,296 0 0
DiCesare, Louis A. 9,370 9,370 0 0
DiCesare, Paul 9,370 9,370 0 0
Dickey, David L. & Susan M. 8,522 8,522 0 0
DiFatta, Tony 10,647 10,647 0 0
DiLeonardo, Frank L. 21,296 21,296 0 0
Dozier, Robert and Deborah G. 23,241 23,241 0 0
Drapkin, Donald 232,383 232,383 0 0
Dreyfuss, Jerome 37,180 37,180 0 0
Duncan, John 21,296 21,296 0 0
DW Trustees (BVI) Ltd. --
Children's Fund 23,237 23,237 0 0
DW Trustees (BVI) Ltd. B Main Fund 46,477 46,477 0 0
Echo Capital Growth Corp. 69,714 69,714 0 0
Edgewater Ventures LLC 46,477 46,477 0 0
EDJ Limited 570,384 570,384 0 0
Edward J. Rosenthal Profit
Sharing Plan 200,000 200,000 0 0
EFG Reads Trustees Ltd. 13,944 13,944 0 0
44
Elder, James 9,297 9,297 0 0
Engfer, Jodi Abrams 9,297 9,297 0 0
Epstein, Frederick B. 92,955 92,955 0 0
Erinch R. Ozada, IRA Rollover 51,082 51,082 0 0
Ernest J. Genco Retirement Plan 9,297 9,297 0 0
Esformes, Joseph 46,477 46,477 0 0
Evans, Sir Richard 200,000 200,000 0 0
Falk, Michael and Annie 60,216 60,216 0 0
Falk, Michael S. 3,600,196 3,600,196 0 0
Farzaneh, Hamid & Niloufar 134,075 134,075 0 0
Faxon, David P. Jr. 10,647 10,647 0 0
Finkle, S. Marcus 42,597 42,597 0 0
Flavin, Blake Investors, L.P. 439,432 439,432 0 0
Flavin, John P. 123,237 123,237 0 0
Flom, Joseph H. 106,490 106,490 0 0
Flynn Corporation 2,069,130 2,069,130 0 0
FM Grandchildren's Trust 147,253 147,253 0 0
Fox, Karen A. 13,944 13,944 0 0
Frank B. Palazzolo, Jr. - Profit
Sharing Plan 8,522 8,522 0 0
French, Robert A. 13,944 13,944 0 0
Friedlander, Charles L. 23,237 23,237 0 0
Friedman, Philip & Rose 92,955 92,955 0 0
Friedman, Ronald 9,297 9,297 0 0
Friedman, Victor 92,955 92,955 0 0
Fulton, Peter 30,087 30,087 0 0
Funeral Financial Systems, Ltd. 81,332 81,332 0 0
Gaba, Ilya & Alice 8,522 8,522 0 0
Gaffney, Michael F. 23,237 23,237 0 0
Gajeski, Donald K. & Phyllis M. 9,297 9,297 0 0
Gallagher Investment Corporation 1,069,130 1,069,130 0 0
Gaylord, Gregg M. 23,237 23,237 0 0
Geller, Marshall 212,981 212,981 0 0
Generation Capital Associates 52,044 52,044 0 0
George Fox University 23,237 23,237 0 0
Gerald I. Falke, IRA 9,297 9,297 0 0
Gerlach and Company, c/f
Fleming (Jersey) Ltd. 46,477 46,477 0 0
Gianna Falk Trust 46,530 46,530 0 0
Giardina, Anthony J. 68,546 68,546 0 0
Gilfand, David S. 9,297 9,297 0 0
Gittis, Howard 232,383 232,383 0 0
Glaser, Bruce 188,056 188,056 0 0
Glashow, Jonathan 63,893 63,893 0 0
Glasscock, Gary M. 23,237 23,237 0 0
Goddu, Roger V. 185,906 185,906 0 0
Goebel, Gregg R. & Marilyn 18,590 18,590 0 0
Goldberg, Ira 46,477 46,477 0 0
Goldberg, Mark & Joanna 23,237 23,237 0 0
Goldenheim, Paul D. 142,597 142,597 0 0
Gonchar, Andrew 17,026 17,026 0 0
Gottesman, Noam & Geraldine 400,000 400,000 0 0
45
Gould, William S. 27,887 27,887 0 0
Grace, Roger 11,152 11,152 0 0
Graves, Richard W. & Mary J. 12,779 12,779 0 0
Greenspan, Burton E. 11,618 11,618 0 0
Greiper, Scott L. 95,868 95,868 0 0
Gruber, John 24,378 24,378 0 0
Gruber & McBaine Capital
Management Fiduciary Trust 92,955 92,955 0 0
Gruntal & Co., LLC 749,600 749,600 0 0
Grunwald, J. Thomas 46,477 46,477 0 0
Gubitosa, Paul & Linda 17,037 17,037 0 0
Hammerman, Alan H. 121,296 121,296 0 0
Harrison, Judith P. 46,477 46,477 0 0
Hart, Andrew C. 19,356 19,356 0 0
Hart, Steven 9,376 9,376 0 0
Hartman, Roland F. 21,296 21,296 0 0
Hartman, Timothy 12,779 12,779 0 0
Harvard Developments, Inc. 100,000 100,000 0 0
Hayden R. & LaDonna M.
Fleming Revocable Trust 34,859 34,859 0 0
Hayden, TIC, Michael D. & Velma J. 9,297 9,297 0 0
Heine, Spencer H. & Margaret 92,955 92,955 0 0
Henry, William O. E. 42,597 42,597 0 0
Herrmann, Frederick J. & Marilyn C. 6,972 6,972 0 0
Herscu, Robert 42,597 42,597 0 0
HFR - 07 Partners 58,096 58,096 0 0
High View Ventures, LLC 162,669 162,669 0 0
Hill, Carol R. Spousal Trust 700,000 700,000 0 0
Hirsch, Allen 4,259 4,259 0 0
Hirsch, Marcia 8,522 8,522 0 0
Hoagland, Gina & Lee 23,237 23,237 0 0
Hodge, David 23,237 23,237 0 0
Holtvogt, Annette 23,237 23,237 0 0
Hornady, James Brooks 13,944 13,944 0 0
Hulas & Savita Kanodia
Revocable Living Trust 116,191 116,191 0 0
Insalaco, Paul 8,522 8,522 0 0
Intercontinental Investment
Services, Inc. 23,237 23,237 0 0
Isbell, Charles E. 9,297 9,297 0 0
Iseli, Andre 46,477 46,477 0 0
Jaber, Jim & Aileen 37,180 37,180 0 0
Jacobs, Paul M. 23,237 23,237 0 0
Jahdi, Nasrollah & Farahnaz 18,590 18,590 0 0
Jahn, Rosalie J. 25,560 25,560 0 0
Jajoor, Nagaraj O. & Sudha N. 23,237 23,237 0 0
Jeffers Family Ltd. Partnership 9,297 9,297 0 0
Jensen, Eric & Julie Patricia 4,646 4,646 0 0
JF Shea & Co., Inc. 5,487,419 5,487,419 0 0
Johnson, Kimber & Susan 13,944 13,944 0 0
Johnson, L. Wayne 46,477 46,477 0 0
Jonathan R. Cohen Retirement Plan 8,522 8,522 0 0
46
Jordan, Bette P. 10,647 10,647 0 0
Jordan, Edward C. 9,297 9,297 0 0
Jordan, Peggy 63,893 63,893 0 0
Joseph Cornacchio Retirement Plan 27,887 27,887 0 0
Joseph, Dr. Ralph 18,590 18,590 0 0
JR Squared, LLC 127,787 127,787 0 0
Kabuki Partners 209,201 209,201 0 0
Kane, Norman 46,477 46,477 0 0
Kanuit, Gary 21,296 21,296 0 0
Keating, Patrick N. & Julie S. 23,237 23,237 0 0
Keeney, Thomas J. & Pamela C. 11,618 11,618 0 0
Kennett, David R. 9,297 9,297 0 0
Kensington Partners II, L.P. 8,888 8,888 0 0
Kensington Partners, L.P. 143,147 143,147 0 0
Keough, Thomas G. 12,779 12,779 0 0
Ketcham, Edward 13,944 13,944 0 0
Keyway Investments Ltd. 340,552 340,552 0 0
Kim M. Beretta 1994 Trust 23,237 23,237 0 0
Kirk, William F., Jr. & Lynn B. 123,237 123,237 0 0
Kleidman, Carl 472,834 472,834 0 0
Klein, Michael 116,191 116,191 0 0
Knollmeyer, Paul P. & Phyllis M. 21,296 21,296 0 0
Koch, Kevin & Susan 23,237 23,237 0 0
Koniver, Garth A. 21,296 21,296 0 0
Kraus, Dennis H. & Daryl B. 9,297 9,297 0 0
Kwiat Capital Corp. 46,477 46,477 0 0
L. Wayne Johnson SEP IRA 23,237 23,237 0 0
LAD Equity Partners 21,296 21,296 0 0
Ladouceur, Philip 10,451 10,451 0 0
Lagunitas Partners LP 371,811 371,811 0 0
Landers, James R. 23,237 23,237 0 0
Lantier, Brian 4,688 4,688 0 0
Latour, Peter 185,957 185,957 0 0
Lay Ventures, L.P. 100,000 100,000 0 0
Lenzo, Christopher 580,736 580,736 0 0
Leon, Martin B. 21,296 21,296 0 0
Lerner, Brian C. 41,831 41,831 0 0
Levitin, Eli 123,237 123,237 0 0
Levy, Stuart J. 69,714 69,714 0 0
Lewis, Lindsay 21,296 21,296 0 0
Liebro Partners LLC 23,237 23,237 0 0
Lightman, Ezra 13,944 13,944 0 0
Lin, Rong-Chung 18,590 18,590 0 0
Linhart, Richard S. 200,000 200,000 0 0
Lipman, Beth (16) 81,083 81,083 0 0
Loegering, Charles J. 139,432 139,432 0 0
Longobardi, Vincent & Carmela Basile 21,296 21,296 0 0
Luck, John 21,296 21,296 0 0
Luxenberg, Arthur 21,296 21,296 0 0
MacDonald, Allan & Eileen 27,887 27,887 0 0
Mallis, Stephen 9,297 9,297 0 0
Manhattan Group Funding 116,191 116,191 0 0
47
Mann, Michael 23,237 23,237 0 0
Manocherian, Jed 21,296 21,296 0 0
Mardale Investments Ltd. 155,013 155,013 0 0
Mark, Laurel Lester 18,590 18,590 0 0
Marsh, Frederic A. 8,522 8,522 0 0
Martell, John A. 46,477 46,477 0 0
Martella, Richard R. & Jennifer K. 10,647 10,647 0 0
Martin W. Gangel Roth IRA 46,477 46,477 0 0
Mateer, Richard B. & Margaret J. 13,944 13,944 0 0
May, Gary D. & Deborah C. 46,477 46,477 0 0
Mazzocchi, Leo F. & Nancy T. 23,237 23,237 0 0
McCaffrey, William T. 400,000 400,000 0 0
McCarthy, John J. & Donna P. 84,585 84,585 0 0
McCleeary, Robert A. 34,859 34,859 0 0
McGary, Lawrence W. 12,779 12,779 0 0
Meinershagen, Alan 23,237 23,237 0 0
Mercy Radiologists of Dubuque,
PC Money Purchase Pension Plan's
Trust f/b/o Roger R. Stenlund, 9,297 9,297 0 0
Meringoff, Stephen J. 42,597 42,597 0 0
Messana, Jerome 179,768 179,768 0 0
Michael S. Falk IRA 46,530 46,530 0 0
Mikaela Falk Trust 46,530 46,530 0 0
Millstein, Gerald Jay 17,037 17,037 0 0
Misher, Sheldon 426,339 426,339 0 0
Monie, Vijaykumar S. 21,296 21,296 0 0
Moraes, Claude & Roshan 8,522 8,522 0 0
Moran, Jr., Charles E. 11,618 11,618 0 0
Moran, Timothy 199,500 199,500 0 0
Morfesis, F.A. & Gail 37,180 37,180 0 0
Moriber, Lloyd A. 42,597 42,597 0 0
Moschetta, Ron 134,653 134,653 0 0
MRL Astor Expectancy Trust 46,477 46,477 0 0
Mulkey II Limited Partnership 378,860 378,860 0 0
Mullery, Gregg Wm. 9,297 9,297 0 0
Nancy Shapiro 8,522 8,522 0 0
Nano-Cap Hyper Growth
Partnership L.P. 19,356 19,356 0 0
Nano-Cap New Millennium
Growth Fund L.P. 9,676 9,676 0 0
Neil A. Chapman, SEP IRA 13,944 13,944 0 0
Nelson, Jody 13,944 13,944 0 0
Nemiroff, Karen 4,646 4,646 0 0
Newmark, Amy L. 42,597 42,597 0 0
Norman, Gregory 42,597 42,597 0 0
Notowitz, Allen 23,237 23,237 0 0
Nowak, Greg A. & Lynn M. 46,477 46,477 0 0
Nussbaum, Jeffrey Kahn 13,944 13,944 0 0
Nussbaum, Samuel R. 46,477 46,477 0 0
Odlivak, Prudence & Andrew 17,026 17,026 0 0
O'Donnell, Edmond 8,522 8,522 0 0
Odyssey Capital, L.P. 851,923 851,923 0 0
48
O'Neill, William and Linda 23,237 23,237 0 0
O'Sullivan, Robert 385,111 385,111 0 0
Overdrive Capital Corp. 185,906 185,906 0 0
Palmer, Richard & Lynne Marie 23,237 23,237 0 0
Pamela Equities Corporation 58,073 58,073 0 0
Pannu, Jaswant Singh & Debra 9,297 9,297 0 0
Parrish, Edward L. 4,259 4,259 0 0
Partoyan, Garo A. 32,534 32,534 0 0
Patel, Sanjiv M. 23,237 23,237 0 0
Patil, Gangadhar 23,237 23,237 0 0
Patil, Jayakumar & Purnima J 162,669 162,669 0 0
Patil, Nagaraja & Shantha 23,237 23,237 0 0
Paulson, Timothy G. 23,237 23,237 0 0
Pecord, Carmen 23,237 23,237 0 0
Perez, Michael 9,297 9,297 0 0
Pesele, Robert 9,297 9,297 0 0
Petrus, Paul F. 12,779 12,779 0 0
Piccolo, August 23,237 23,237 0 0
Piccolo, John 92,955 92,955 0 0
Pickett, George F. & Elizabeth H. 23,237 23,237 0 0
Pinto, James J. 85,194 85,194 0 0
Pobiel, Ronald 9,297 9,297 0 0
Pocisk, Anna M. 32,534 32,534 0 0
Polyviu, P. Tony 17,026 17,026 0 0
Porter Partners, L.P. 855,578 855,578 0 0
Porter, Barry 371,811 371,811 0 0
Porter, Jeffrey 85,194 85,194 0 0
Potamianos, Constintine 2,409 2,409 0 0
Poujol, Michael A. & Angela G. 46,477 46,477 0 0
Priddy, Robert 1,371,227 1,371,227 0 0
Primo, Joseph C. 11,076 11,076 0 0
Prude, Randy 46,477 46,477 0 0
Pryt, Bob 116,191 116,191 0 0
R M and L Burwick Family L.P. 185,906 185,906 0 0
Radichel, William C. 85,190 85,190 0 0
Radix Associates 63,894 63,894 0 0
Rahn & Bodmer 325,338 325,338 0 0
Valentino, Barbara 23,237 23,237 0 0
Rappaport, A.G. 185,906 185,906 0 0
Rasnick, James A. & MaryAnn 23,237 23,237 0 0
Reese-Cole Partnership Ltd. 69,714 69,714 0 0
Reichelt, Kurt V. & Laura M. 34,075 34,075 0 0
Reichenbaum, Mark 1,061,508 1,061,508 0 0
RHL Ventures LLC 92,955 92,955 0 0
Rice, William A. 585,905 585,905 0 0
Richard Corbin IRA 12,779 12,779 0 0
Richmond, Gerald & Amy 46,477 46,477 0 0
Rion, James H., Jr. 27,887 27,887 0 0
RMC Capital, LLC 8,000,000 8,000,000 0 0
Robert E. Gallucci DPM 23,237 23,237 0 0
Roberts, Cindy D. 34,859 34,859 0 0
Rodler, Lawrence 12,779 12,779 0 0
49
Rolling Investment Group 9,297 9,297 0 0
Ronco, Edmund 8,522 8,522 0 0
Ronco, Edmund c/f Todd Ronco 8,503 8,503 0 0
Rosenblatt, Richard 101,571 101,571 0 0
Rosenbloom, Keith 98,245 98,245 0 0
Rosenbloom, Dale 92,955 92,955 0 0
Rosenbloom, Howard 23,237 23,237 0 0
Rosenbloom, Keith 512,603 512,603 0 0
Rosenfield, Laurence 23,237 23,237 0 0
Ross, Adam Ross & Lisa Falk- 21,296 21,296 0 0
RS Emerging Growth Partners LP 149,851 149,851 0 0
RS Pacific Partners 340,842 340,842 0 0
RS Premium Partners 190,416 190,416 0 0
Rubin, Brett 13,944 13,944 0 0
Rubin, Jeffrey 13,944 13,944 0 0
Rubinson, Brett 4,259 4,259 0 0
Runckel, Douglas & Evelyn 79,011 79,011 0 0
Russell, Donnie H 42,597 42,597 0 0
Russo, Paul & Sally 127,787 127,787 0 0
Safier, Jacob 1,000,000 1,000,000 0 0
Salkind, Scott 23,237 23,237 0 0
Sandhu, Avtar S 9,297 9,297 0 0
Santolo, Dennis & Thomas, JTROS 46,477 46,477 0 0
Sax Family Limited Partnership 4,646 4,646 0 0
Scaglione, Domenic G. & Josephine 11,618 11,618 0 0
Scalo, John T 28,968 28,968 0 0
Scalo, JTROS, John F. & Carole M. 21,296 21,296 0 0
Schenker, Monroe H. 23,237 23,237 0 0
Schlank, Lionel 21,296 21,296 0 0
Schneider, Sidney 21,296 21,296 0 0
Schoen, William R. & Barbara J. 23,237 23,237 0 0
Schottenstein, Gary L. 13,944 13,944 0 0
Schroeder, Charles F. A. 23,236 23,236 0 0
Schultz, Gary & Lance 9,297 9,297 0 0
Schultz, Gary D. & Barbara A. 65,068 65,068 0 0
Schwarzwaelder, Douglas 9,297 9,297 0 0
Schwencke, Kim M 92,955 92,955 0 0
Schwickert, Kent 21,296 21,296 0 0
Schwickert, Kim 42,597 42,597 0 0
Scotto, Peter 46,474 46,474 0 0
Seftel, Lawrence & Roslyn 23,237 23,237 0 0
Serra, Jose E. & Cecilia P. 42,597 42,597 0 0
Serubo, John 11,618 11,618 0 0
Shagadelic Partners 19,356 19,356 0 0
Shapiro, J.D. 4,259 4,259 0 0
Shaw, John J. 85,194 85,194 0 0
Sheats , Fred B. 21,296 21,296 0 0
Shrager, Jay J. & Carole B. 83,658 83,658 0 0
Shroff, Burjis N. and Havovi B. 13,944 13,944 0 0
Shubash, May S. 9,297 9,297 0 0
Sica, Joseph L., Jr. & Emilia M. 46,477 46,477 0 0
Siddiqi, Tariq S. 9,297 9,297 0 0
50
Signore, Claude M. & Marie 9,297 9,297 0 0
Silverman, Robert & Lois B. 21,296 21,296 0 0
Simon Asset Management, LLC 278,860 278,860 0 0
Singer, Michael 69,714 69,714 0 0
SIRHC Holdings Limited 34,075 34,075 0 0
Sivak, Cheryl R. and Gary Evan, M.D. 12,779 12,779 0 0
Sivak, George C., M.D. 12,779 12,779 0 0
SJG Management, Inc. 1981
Amended and Restated Profit
Sharing Plan 23,237 23,237 0 0
Skolnick, Kenneth B. & Melissa S. 200,000 200,000 0 0
Skoly, Jr., Stephen T. 23,237 23,237 0 0
Smith, Harlan B. 30,674 30,674 0 0
Spencer, Robert J. 21,296 21,296 0 0
Spiegelberg, Joan 8,522 8,522 0 0
Spielman , Melvin 42,597 42,597 0 0
Spigarelli, Anthony M. & Nancy M. 42,597 42,597 0 0
Spivak, Joel 42,597 42,597 0 0
Stalker, Philip 9,297 9,297 0 0
Starapoli, Fedele 9,297 9,297 0 0
Steele, Michael D. 25,560 25,560 0 0
Stellway, David L. 46,477 46,477 0 0
Stern, Jeremy B. & Wendy B. 23,237 23,237 0 0
Steven B. Greenman IRA 23,237 23,237 0 0
Stransky, Barry & Lauren A. 13,944 13,944 0 0
Strazzulla, Domenic M. 37,180 37,180 0 0
Stuart Schapiro IRA Account 34,056 34,056 0 0
Sullivan, Jesse 23,237 23,237 0 0
Sutton, Patrick 11,618 11,618 0 0
Sybesma, William & Martha Jane 46,477 46,477 0 0
Sybessma Research LLC 46,477 46,477 0 0
Syd Verbin & Helen Verbin,
Trustees under Trust Agreement
dated 12/20/88, FBO Syd Verbin 13,944 13,944 0 0
Tachibana, Glen 18,590 18,590 0 0
Tallur, Inder 237,519 237,519 0 0
Teirstein, Paul 21,296 21,296 0 0
Thau, Clifford 4,646 4,646 0 0
The Bald Eagle Fund Ltd. 33,870 33,870 0 0
The Dexter Corporation Grantor Trust 46,477 46,477 0 0
The DotCom Fund, L.L.C. 232,383 232,383 0 0
The Leo J. Ambrogi II Trust dtd 2/1/95 12,779 12,779 0 0
The Rodney N. Schorlemmer SEP IRA 37,180 37,180 0 0
The William S. Gould, Peter L.
Gould & Deborah Gould Cygler
Irrevocable Trust 9,297 9,297 0 0
Thompson, George L. 23,237 23,237 0 0
Tickner, Todd 23,237 23,237 0 0
Todywala, Sam & Lyla 4,646 4,646 0 0
Toombs, Walter F. 42,597 42,597 0 0
Tradex Commodities 23,237 23,237 0 0
Treitel, David 8,522 8,522 0 0
51
Trombone, Mario 8,522 8,522 0 0
Trupiano, Salvatore 12,779 12,779 0 0
Uday, Kalpana A. & Udayashankar K. 23,237 23,237 0 0
Union Cattle Company 23,237 23,237 0 0
Vainberg, Vladik 60,765 60,765 0 0
Van Le, Linda 23,237 23,237 0 0
Vandewalle, John Joos- 46,477 46,477 0 0
Ventana Partners, L.P. 92,955 92,955 0 0
Virginia R. Nelson Trust 21,296 21,296 0 0
Voigt, Kevin J. & Cindy G. 21,296 21,296 0 0
Voigt, TIC, Bryon & Jacelyn 27,887 27,887 0 0
Voss Limited Partnership 8,522 8,522 0 0
Wasserstrum, Seymour 13,944 13,944 0 0
Waxman, David B. & Waxman, Jeremy 8,522 8,522 0 0
Waye, Thom 45,730 45,730 0 0
Wayne D. Eig Chartered Defined
Benefit Pension Trust 8,522 8,522 0 0
Weidenbener, Erich J. and Diane D. 37,180 37,180 0 0
Weiskopf Silver & Co. L.P. 63,893 63,893 0 0
Weitz, Perry 21,296 21,296 0 0
Weksler, Luiz 13,944 13,944 0 0
Westmont Venture Partners, LLC 212,981 212,981 0 0
Wilkins, Charles P. 46,477 46,477 0 0
Wilkins, Stuart B. 21,296 21,296 0 0
Wilson, Kenneth B. 21,396 21,396 0 0
Wingate Investments Limited 464,766 464,766 0 0
Wisseman, Charles L., III 37,180 37,180 0 0
Wolf, Aizik L. & Robyn 17,037 17,037 0 0
Wolfson Equities 1,161,915 1,161,915 0 0
Wynne, Joanne 13,944 13,944 0 0
Wynne, Joseph 109,259 109,259 0 0
Yalen, Richard 55,424 55,424 0 0
Zale, John H. 21,296 21,296 0 0
Lyons, Jerry 43,890 43,890 0 0
Pappel, Jeffrey 33,250 33,250 0 0
Leeds, Laurence 99,750 99,750 0 0
Leeds, Carey 224,770 224,770 0 0
Kisky School 133,000 133,000 0 0
Kestenbaum, Richard 18,620 18,620 0 0
Goldberg, Joshua R. 18,620 18,620 0 0
Harrison, Gilbert 22,610 22,610 0 0
Traub, Marvin 6,650 6,650 0 0
Treuille, Antoine G. 13,300 13,300 0 0
Smith, William M. 13,300 13,300 0 0
Sperduto, Vito A. 9,310 9,310 0 0
Goodman, Karen 3,990 3,990 0 0
Harrison, Edward D. 6,650 6,650 0 0
MD Investors, Inc. 53,200 53,200 0 0
Byrnes, Christopher 26,600 26,600 0 0
Cephas Capital 10,321 10,321 0 0
Bengraff, Robert 2,014 2,014 0 0
Blitzer, Alfred 2,014 2,014 0 0
52
Brown, Stephanie 2,014 2,014 0 0
Edwards, Daniel 2,014 2,014 0 0
Smith, Scott 2,014 2,014 0 0
Sommer, Cindy 572 572 0 0
Corliss, Robert 6,650 6,650 0 0
Clark, Denis 7,500 7,500 0 0
Donner Corp International 6,000 6,000 0 0
Gailus, Robert 25,000 25,000 0 0
Fragetti, Gerard 26,400 26,400 0 0
Sands Brothers & Co., Ltd. 60,000 60,000 0 0
Trautman, Wasserman & Co. 75,000 75,000 0 0
Virtual Ex', Inc. 27,000 27,000 0 0
Spalding Sports Worldwide, Inc. 300,000 300,000 0 0
Bengal Partners, LLC 25,907 25,907 0 0
Roccus Capital Partners, LLC 40,000 40,000 0 0
Adams Golf, Inc. 100,000 100,000 0 0
InterWorld Corporation 2,189,781 2,189,781 0 0
McKinsey & Company LLC 299,658 299,658 0 0
Hayes, Kevin 215,625 215,625 0 0
Bentley, Joseph 450,000 450,000 0 0
Biehler, Stephane 50,000 50,000 0 0
Carley, Peter 75,000 75,000 0 0
Cisario, Victor L. 50,000 50,000 0 0
Blair, John 100,000 100,000 0 0
Hughes, John J. 50,000 50,000 0 0
Berman, Michael 100,000 100,000 0 0
TOTALS 84,549,195 0 0
DESCRIPTION OF SECURITIES
Authorized capital stock
As of July 13, 2001, our authorized capital stock consisted of
200,000,000 shares of common stock, par value $.0001 per share, 50,000,000
shares of preferred stock of which 2,000 shares have been designated as Series A
preferred stock, par value $.0001 per share, and 4,000,000 shares of which have
been designated Series B preferred stock, par value $.0001 per share. As of such
date, there were approximately 3,000 stockholders of record of our common stock,
one stockholder of record of our Series A Preferred Stock and approximately 530
stockholders of record of our Series B Preferred Stock. Our board of directors
has approved the issuance of 1,750,000 shares of Series C preferred stock and a
certificate of designation of the Series C preferred stock is expected to be
filed in the near future, subject to the approval of the holders of our Series B
preferred stock. To date, no shares of Series C preferred stock have been
issued.
Common stock
As of June 30, 2001, there were approximately 19.0 million shares of
our common stock issued and outstanding. Our common stock is currently listed on
The Nasdaq SmallCap Market under the trading symbol "EBTB". Holders of our
common stock are entitled to one vote for each share owned on all matters
submitted to a vote of stockholders. Holders of our common stock also are
entitled to receive cash dividends, if any, declared by our board of directors
out of funds legally available therefor, subject to the rights of any holders of
preferred stock.
53
Holders of our common stock do not have subscription, redemption, conversion or
preemptive rights. Each share of our common stock is entitled to participate pro
rata in any distribution upon liquidation, subject to the rights of holders of
preferred stock.
Series A preferred stock
We have designated 2,000 shares of preferred stock as "Series A
preferred stock." Our board of directors has the authority to increase or
decrease the number of authorized shares of Series A preferred stock. As of June
30, 2001, there were seven shares of Series A Preferred stock issued and
outstanding. The material terms of the Series A preferred stock are as follows:
Dividends. Holders of Series A preferred stock are entitled to
dividends only to the extent that we declare or pay a dividend on our common
stock, in which case such holders of preferred stock will receive an amount of
dividends as if their shares had been converted to common stock.
Liquidation preference. Upon any liquidation, dissolution or winding up
of our company, the holders of Series A preferred stock shall be entitled to
payment of $1,000 per share plus an amount equal to any accrued and unpaid
dividends, before any distribution is made to the holders of our common stock.
If the assets to be distributed are insufficient to permit such payment, then
the entire assets to be so distributed shall be distributed ratably among the
holders of Series A preferred stock. The Series A preferred stock is of equal
rank with the Series B preferred stock described below.
Optional conversion. A holder of shares of Series A preferred stock may
convert any or all of such shares, at the holder's option at any time, with
respect to each share of Series A Preferred Stock, into 1,330 shares of our
common stock (equivalent to $.75 per common share).
Anti-dilution protection. If we issue or sell any shares of our common
stock for consideration less than the conversion price then in effect, the
conversion price shall be adjusted by dividing (i) the sum of (a) the number of
shares of common stock outstanding prior to such sale (including all shares
issuable upon conversion of the Series A preferred stock) multiplied by the then
existing conversion price and (b) the consideration received in such sale by
(ii) the number of shares of common stock outstanding after such sale (including
all shares issuable upon conversion of the Series A preferred stock). Similarly,
if we issue other convertible securities (other than options granted to our
employees, officers, directors, consultants and/or vendors) with a conversion
price less than the then existing conversion price applicable to the Series A
preferred stock, such conversion price will be appropriately adjusted.
Mandatory Conversion. If we complete an underwritten public offering
involving the sale of common stock at a price per share of not less than $2.82
and providing proceeds of not less than $7,500,000, then the Series A preferred
stock shall be automatically converted into common stock at the conversion price
then in effect.
Voting Rights. On all matters submitted to a vote by our stockholders,
the holders of Series A preferred stock are entitled to one vote for each share
of common stock into which such share of Series A preferred stock is then
convertible.
Series B preferred stock
We have designated 4,000,000 shares of preferred stock, as "Series B
preferred stock". As of June 30, 2001, there were approximately 2,725,000
shares of Series B preferred stock issued and outstanding. The material terms of
the Series B preferred stock are as follows:
54
Dividends. Holders of Series B preferred stock are entitled to
dividends only to the extent that we declare or pay a dividend on our common
stock, in which case such holders will receive an amount of dividends as if
their shares had been converted to common stock.
Liquidation preference. Upon any liquidation, dissolution or winding up
of our company, the holders of Series B preferred stock shall be entitled to
payment of $10 per share plus an amount equal to any accrued and unpaid
dividends, before any distribution is made to the holders of our common stock.
If the assets to be distributed are insufficient to permit such payment, then
the entire assets to be so distributed shall be distributed ratably among the
holders of Series B preferred stock. The Series B preferred stock is of equal
rank with the Series A preferred stock, described above.
Ranking. We will not create or authorize any series of stock ranking
senior to, or of equal rank with, the Series B preferred stock, without the
affirmative vote or the written consent of at least one-third of the outstanding
shares of Series B preferred stock.
Optional conversion. A holder of shares of Series B preferred stock may
convert any or all of such shares, at the holder's option at any time, into
approximately 7.32 shares of our common stock (subject to adjustment as
described below).
Mandatory conversion. The Series B preferred stock will automatically
convert into common stock upon a public offering of our securities raising gross
proceeds in excess of $20 million or the completion of a private placement in an
amount of at least $20 million, provided, in either case, that at the closing of
the public offering or private placement, our market valuation is at least
$122.5 million (determined by multiplying the number of shares of common stock
and common stock equivalents by the per share offering price in the public
offering or private placement) and provided further that the per share offering
price is at least $5.17 (subject to adjustment).
Anti-dilution protection. The Series B preferred stock is protected
against dilution upon the occurrence of certain events, including but not
limited to, sales of shares of common stock for less than fair market value or
$1.366 per share.
Voting rights. On all matters submitted to a vote by our stockholders,
the holders of Series B preferred stock are entitled to one vote for each share
of common stock into which such share of Series B preferred stock is then
convertible.
Right to elect director. The holders of the Series B preferred stock,
voting as a class, are entitled to elect one out of seven.
Capital raising transactions
All issuances of our securities prior to our April 2000 merger
described below were issued by former eB2B, and have been converted to
equivalent securities of our company pursuant to the terms of the April 2000
merger.
In April 1999, former eB2B concluded a private placement offering of
Series A preferred stock and common stock to accredited investors for an
aggregate of $300,000. We issued approximately 300 shares of Series A preferred
stock at $1,000 per share, convertible into 399,000 shares of common stock.
In October 1999, Michael Falk, a member of our board of directors, and
ComVest Partners LLC provided us with an aggregate of $375,000 of "pre-bridge
financing," which consisted of 7% promissory notes, and five-year, immediately
exercisable warrants to purchase an aggregate of 498,659 shares of former eB2B
common stock (equivalent to 1,326,433 shares of our common stock). The
promissory notes and warrants were replaced by promissory notes and warrants in
the subsequent "bridge financing".
55
In October 1999, former eB2B concluded a $1 million of bridge
financing, which included the conversion of the promissory notes and warrants
issued in the pre-bridge financing. Former eB2B issued 7% promissory notes,
which automatically converted into shares of preferred stock in the subsequent
Series B preferred stock private placement, and seven-year immediately
exercisable "bridge warrants" to purchase an aggregate of 717,409 shares of
eB2B common stock (equivalent to 1,908,308 shares of our common stock) at an
exercise price of $4.00 per share ($1.50 reflective of the 2.66 to 1 exchange
ratio in the April 2000 merger). The shares of common stock underlying these
warrants, as well as additional shares resulting from autidilution provisions,
are registered for resale in this prospectus.
In November 1999, we issued to Commonwealth and its designees five-year
warrants to purchase 1,250,200 shares of common stock with an exercise price of
$2.07 per share in consideration for providing us with financial advisory
services during the April 2000 merger. These "advisory warrants" vested upon
completion of the April 2000 merger, at which time they became immediately
exercisable. The shares of common stock underlying these warrants are registered
for resale in this prospectus.
In December 1999, we concluded a private placement offering $33 million
in Series B preferred stock and warrants to accredited investors. We issued
approximately 3,300,000 shares of Series B preferred stock, convertible into
approximately 15,960,000 shares of common stock, and seven-year, immediately
exercisable warrants to purchase approximately 3,990,000 shares with an exercise
price of $2.07 per share. Since issuance, the conversion price of the Series B
preferred stock was also adjusted from $2.07 to $1.366 and the number of
shares of common stock underlying the "Series B private placement warrants" was
adjusted to be increased by 63.3% and the exercise price was lowered to $1.266
per share. Holders of Series B preferred stock, voting as a class, are entitled
to elect one out of seven members of our board of directors. The shares of
common stock to which the Series B preferred stock may convert as well as the
shares of common stock underlying the Series B private placement warrants are
registered for resale in this prospectus.
In connection with the December 1999 private placement, we also issued
seven-year, immediately exercisable warrants to purchase an aggregate of
approximately 3,943,716 shares of common stock to Commonwealth for acting as the
placement agent in connection with the private placement. Since issuance, the
number of shares was adjusted to be increased by 63.3% and the exercise price of
these "agents warrants" were adjusted from $2.07 to $1.266 per share. The
shares of common stock underlying these warrants are registered for resale in
this prospectus.
In May 2001, we completed a private placement of convertible notes and
warrants. The gross proceeds of this financing totaled $7.5 million. Pursuant to
the May 2001 financing, we issued $7,500,000 of principal amount of 7%
convertible notes, convertible into an aggregate of 15,000,000 shares of common
stock, and "Series C warrants" to purchase an aggregate 15,000,000 shares of
common stock at an exercise price of $0.93 per share.
The convertible notes have a term of 18 months, which period may be
accelerated in certain events. Interest is payable quarterly in cash, in
identical convertible notes or in shares of common stock, at our option. In
addition, the convertible notes will automatically convert into Series C
preferred stock with the terms as described below, if we receive the required
consent of the holders of our Series B preferred stock to the issuance of this
new series. The Series C preferred stock would then be convertible into common
stock on the same basis as the convertible notes. The shares of common stock to
which these notes may convert, plus accrued interest, if any, or, alternatively,
the shares of common stock underlying the Series C preferred stock, have been
registered for resale in this prospectus.
We intend to seek shareholder approval of the May 2001 financing, as
required by the rules of Nasdaq. Pending such approval, conversion of the
convertible notes and/or Series C preferred shares, and the Series C warrants is
limited to an aggregate of not more than 19.9% of the number of shares of common
stock outstanding before these securities were issued and the private warrants
will not be exercisable. If we fail to obtain the necessary approval of
shareholders by September 30, 2001, we may be required to redeem all of the
newly issued securities at a redemption price (payable in cash or in stock)
equal to the greater of two times the face amount
56
thereof or the price required to make investors whole in light of the current
market price. Alternatively, the holders may terminate the conversion
limitation, in which case we would face delisting from Nasdaq.
The "Series C warrants" will be exercisable for a period of two years
from the earlier of (i) the date we receive shareholder approval of the May 2001
financing, (ii) the date such shareholder approval is no longer required, either
because our common stock is no longer listed on Nasdaq or otherwise, or (iii)
October 1, 2001.
In connection with the closing of the financing, we canceled a
$2,050,000 line of credit issued in April 2001, pursuant to which we had not
borrowed any funds. We incurred a cash fee amounting to $61,500 in consideration
of the availability of the line of credit. In addition, the issuer of the line
of credit (namely, ComVest Venture Partners LP) was issued warrants to purchase
900,00 shares of common stock at an exercise price $0.50 per share for a
five-year period in consideration of the availability of such line.
Additional terms of warrants
In addition to the terms set forth above, each of the warrants
underlying shares of our common stock offered in this prospectus are subject to
adjustments under certain circumstances, including stock splits,
recapitalizations and other similar structural events or, in most cases, in the
event we issue securities at a price per share less than the current market
price of our common stock or the exercise price of the respective warrant. In
addition, each warrant allows the holder to exercise its warrant without making
any cash payment. Such holder will receive a reduced number of shares based on
the fair market price of our common stock on the date of exercise and the
exercise price then in effect. Each warrant holder may exercise all or any part
of the warrants, at the holder's option. In addition, each warrant provides the
holder with the demand and/or "piggyback" registration rights.
Terms of proposed Series C preferred stock
As of the date of this prospectus, no shares of preferred stock have
yet been designated as "Series C preferred stock". We require the vote of at
least one-third of the voting interest of the holders of our Series B preferred
stock to designate any of our authorized shares of preferred stock as Series C,
and we plan to seek the approval of these Series B securityholders in the near
future. The material terms of the proposed Series C preferred stock are as
follows:
Dividends. Holders of Series C preferred stock are entitled to
dividends only to the extent that we declare or pay a dividend on our common
stock, in which case such holders will receive an amount of dividends as if
their shares had been converted to common stock.
Liquidation preference. Upon any liquidation, dissolution or winding up
of our company, the holders of Series C preferred stock shall be entitled to
payment of $13.33 per share in addition to an amount equal to any accrued and
unpaid dividends, before any distribution is made to the holders of our common
stock. If the assets to be distributed are insufficient to permit such payment,
then the entire assets to be so distributed shall be distributed ratably among
the holders of Series C preferred stock. The Series C preferred stock is senior
in rank to the Series B preferred stock described above.
Ranking. We will not create or authorize any series of stock ranking
senior to, or of equal rank with, the Series C preferred stock, without the
affirmative vote or the written consent of at least one-half of the outstanding
shares of Series C preferred stock, provided that at least 20% of the shares of
Series C preferred stock remain outstanding.
Conversion limitation. Because our May 2001 offering pursuant to which
we issued the 7% convertible notes which may convert into shares of series C
preferred stock could result in the issuance of at least 20% of our outstanding
common stock of such time, Nasdaq rules require that we seek shareholder
approval of such offering.
57
Until we receive such approval, conversion of the Series C preferred stock to
common stock is limited to an aggregate of not more than 19.9% of our common
stock outstanding immediately before the units were issued.
Optional conversion. Subject to the conversion limitation, a holder of
shares of Series C preferred stock may convert any or all of such shares at the
holder's option at any time, with respect to teach share of Series C Preferred
Stock, into 20 shares of our common stock ($.50 per share), subject to
adjustment as described below.
Mandatory conversion upon qualified public offering. Subject to the
conversion limitation, the Series C preferred stock will automatically convert
into common stock upon a public offering of our securities raising gross
proceeds in excess of $25 million at a price per share in excess of $2.00;
provided (i) our common stock is then trading on either the Nasdaq SmallCap,
Nasdaq National Market or a national securities exchange; (ii) either (x) a
registration statement covering the conversion shares has been declared
effective by the Securities and Exchange Commission and remains effective or (y)
a proper exemption is available for resale of the conversion shares; and (iii)
the conversion shares are not subject to more than a six-month lock-up agreement
required by us or our underwriter.
Mandatory conversion based on bid price. We may force conversion of the
Series C preferred stock, subject to the conversion limitation, if (i) the
closing bid price per share of our common stock equals or exceeds 200% of the
conversion price or our common stock at such time; (ii) our common stock is then
trading on either the Nasdaq SmallCap, Nasdaq National Market or a national
securities exchange; (iii) either (x) a registration statement covering the
resale of the Conversion Shares has been declared effective by the SEC and
remains effective or (y) a proper exemption available for resale of the
conversion shares; and (iv) the conversion shares are not subject to any lock-up
agreement required by us or our underwriter or agent.
Anti-dilution protection. The Series C preferred stock is protected
against dilution upon the occurrence of certain events, including but not
limited to, sales of shares of common stock for less than fair market value or
the then current conversion price per share.
Voting rights. On all matters submitted to a vote by our stockholders,
the holders of Series C preferred stock are entitled to one vote for each share
of common stock into which such share of Series C preferred stock is then
convertible.
PLAN OF DISTRIBUTION
The selling securityholders (and their respective pledgees,
transferees, donees or other successors in interest) may offer and sell the
shares of common stock derived from the conversion of our preferred stock and
convertible notes and the exercise of warrants covered by this prospectus from
time to time as follows:
o in the open market;
o on the Nasdaq SmallCap Market;
o in privately negotiated transactions;
o in an underwritten offering; or
o a combination of such methods or any other legally available means.
Such sales may be made at varying prices determined by reference to, among other
things:
o market value prevailing at the time of the sale;
o prices related to the then-prevailing market price; or
o negotiated prices.
58
Negotiated transactions may include:
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which a broker
solicits purchasers; or
o block trades in which a broker-dealer so engaged will attempt to sell
the shares as agent but may take a position and resell a portion of the
block as principal to facilitate the transaction.
In connection with distributions of our common stock, any selling securityholder
may:
o enter into hedging transactions with broker-dealers and the
broker-dealers may engage in short sales of our common stock in the
course of hedging the positions they assume with the selling
securityholders;
o sell our common stock short and deliver the common stock to close out
such short positions;
o enter into option or other transactions with broker-dealers that
involve the delivery of our common stock to the broker-dealers, which
may then resell or otherwise transfer such common stock; and
o loan or pledge our common stock to a broker-dealer which may then sell
our common stock so loaned, and upon a default, the common stock may be
sold or otherwise transferred.
Broker dealers may receive commissions or discounts from the selling
securityholders in amounts to be negotiated immediately prior to the sale. The
selling securityholders and any broker executing selling orders on behalf of the
selling securityholders may be deemed to be an "underwriter" within the meaning
of the Securities Act. Commissions received by any such broker may be deemed to
be underwriting commissions under the Securities Act.
LEGAL MATTERS
The validity of the common stock that we are offering will be passed
upon for us by Kaufman & Moomjian, LLC, Mitchel Field, New York.
EXPERTS
The financial statements of eB2B Commerce, Inc. as of December 31, 2000
and for the year then ended, included in this prospectus, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The financial statements of eB2B Commerce, Inc. (formerly DynamicWeb
Enterprises, Inc.) at December 31, 1999 and for the year then ended, appearing
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The financial statements for the years ended September 30, 1999 and
1998, from DynamicWeb Enterprises Inc.'s annual report on Form 10-KSB for the
year ended September 30, 1999, included in this prospectus, have been audited by
Richard A. Eisner & Company, LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Netlan Enterprises, Inc. for
the years ended December 31, 1999 and 1998, included in this prospectus, have
been audited by Rothstein, Kass & Company, P.C., independent auditors, as stated
in their report appearing herein, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
59
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2, including exhibits, schedules and
amendments filed with the registration statement, under the Securities Act with
respect to the common stock to be sold in this offering. This prospectus does
not contain all of the information set forth in this registration statement. For
further information about us and the shares of common stock to be sold in the
offering, please refer to the registration statement. For additional
information, please refer to the exhibits that have been filed with our
registration statement on Form SB-2.
We are subject to the information and reporting requirements of the
Securities Exchange Act of 1934, and, in accordance with these requirements, we
file periodic reports, proxy statements and other information with the SEC.
You may read and copy all or any portion of the registration statement
or any other information that we file at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C., 20549. You can request copies of these
documents upon payment of a duplicating fee, by writing to the SEC. Please call
the SEC at 1-800-SEC-0330 for further information about the public reference
rooms. Our filings, including the registration statement, are also available on
the SEC website (http://www.sec.gov).
60
INDEX TO FINANCIAL STATEMENTS
Page
----
eB2B Commerce, Inc.
Independent Auditors' Report....................................................................... F-2
Report of Independent Auditors..................................................................... F-3
Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999 (as restated)............ F-4
Consolidated Statements of Operations for the years ended December 31, 2000
1999 (as restated)............................................................................. F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000
and 1999 (as restated)......................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2000 and 1999
(as restated)................................................................................... F-8
Notes to Consolidated Financial Statements......................................................... F-9
Condensed Consolidated Balance Sheet as of March 31, 2001 (unaudited) ............................. F-30
Condensed Consolidated Statements of Operations for the three months ended March 31, 2001
and 2000 (unaudited)........................................................................... F-31
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001
and 2000 (unaudited)........................................................................... F-32
Notes to Condensed Consolidated Financial Statements (unaudited)................................... F-33
Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended
December 31, 2000 and for the three months ended March 31, 2000............................... F-38
Notes to Unaudited Pro Forma Condensed Combined Statements of Operations........................... F-40
Dynamic Web Enterprises, Inc.
Independent Auditors' Report....................................................................... F-41
Balance Sheet as of September 30, 1999............................................................. F-42
Statements of Operations for the years ended September 30, 1999 and 1998........................... F-43
Statements of Changes in Stockholders' Equity for the years ended September 30, 1999 and 1998...... F-44
Statements of Cash Flows for the years ended September 30, 1999 and 1998........................... F-45
Notes to Financial Statements...................................................................... F-46
Introductory Note.................................................................................. F-57
Condensed Balance Sheets as of March 31, 2000 (unaudited) and September 30, 1999................... F-58
Condensed Statements of Operations for the three and six months ended March 31, 2000
and 1999 (unaudited)........................................................................... F-59
Condensed Statements of Cash Flows for the six months ended March 31, 2000 and 1999 (unaudited).... F-60
Notes to Condensed Financial Statements (unaudited)................................................ F-61
Netlan Enterprises, Inc. and Subsidiaries
Independent Auditors' Report....................................................................... F-64
Consolidated Balance Sheets as of December 31, 1999 and 1998....................................... F-65
Consolidated Statements of Operations for the years ended December 31, 1999 and 1998............... F-66
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1999
and 1998....................................................................................... F-67
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997
(unaudited).................................................................................... F-68
Notes to Consolidated Financial Statements......................................................... F-70
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.
/s/ 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.
/s/ 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.
F-29
eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
March 31,
2001
-----------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 4,561
Accounts receivable, net 1,696
Other current assets 314
------------
Total Current Assets 6,571
Property and equipment, net 4,151
Goodwill, net 50,972
Other intangibles, net 2,033
Other assets 1,682
------------
Total Assets $ 65,409
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,000
Accounts payable 2,111
Accrued and other 4,689
Deferred income 469
------------
Total Current Liabilities 8,269
Long-term debt, less current maturities 1,000
Capital lease obligations, less current maturities 183
Other 284
------------
Total Liabilities 9,736
------------
Commitments and contingencies
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 shares issued and outstanding -
Preferred stock, convertible Series B - $.0001 par value;
4,000,000 shares authorized; 2,727,491 shares issued and
outstanding -
Common stock - $.0001 par value; 200,000,000 shares
authorized; 15,816,094 shares issued and outstanding 2
Additional paid-in capital 144,459
Accumulated deficit (87,102)
Unearned stock-based compensation (1,686)
------------
Total Stockholders' Equity 55,673
------------
Total Liabilities and Stockholders' Equity $ 65,409
============
See accompanying notes to condensed consolidated financial statements.
F-30
eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended
March 31,
---------
2001 2000
---- ----
Revenue $ 1,864 $ 415
--------- ---------
Costs and expenses
Cost of revenue 874 249
Marketing and selling (exclusive of
stock-based compensation expense of
$107 and $652 for the three months
ended March 31, 2001 and 2000,
respectively) 834 351
Product development costs (exclusive
of stock-based compensation expense
of $2 and $63 for three months
ended March 31, 2001 and 2000,
respectively) 1,145 658
General and administrative
(exclusive of stock-based
compensation expense of $573 and
$2,382 for the three months ended
March 31, 2001 and 2000,
respectively) 3,060 2,556
Amortization of goodwill and other
intangibles 3,401 88
Stock-based compensation expense 682 3,097
--------- ---------
Total costs and expenses 9,996 6,999
--------- ---------
Loss from operations (8,132) (6,584)
Interest and other, net 35 277
--------- ---------
Net loss $(8,097) $(6,307)
========== ==========
Basic and diluted net loss per common
share $ (0.52) $ (0.85)
========== ==========
Weighted average number of common
shares outstanding 15,562,775 7,430,550
========== ==========
See accompanying notes to condensed consolidated financial statements.
F-31
eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
Operating Activities
Net loss $ (8,097) $(6,307)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 3,907 783
Stock-based compensation expense 682 3,097
Management of operating assets and liabilities
Accounts receivable, net (248) (157)
Accounts payable 295 496
Accrued expenses and other liabilities (281) (95)
Other 76 (4)
---------- ----------
Net cash used in operating activities (3,666) (2,187)
---------- ----------
Investing Activities
Product development expenditures (896) (499)
Purchase of property and equipment (195) (156)
Proceeds from maturity of investments available-for-sale - 2,970
Acquisitions, net of cash acquired - (585)
---------- ----------
Net cash (used in) provided by investing activities (1,091) 1,730
---------- ----------
Financing Activities
Repayment of borrowings (250) (2,116)
Proceeds from borrowings - 2,500
Payment of capital lease obligations (82) (14)
---------- ----------
Net cash (used in) provided by financing activities (332) 370
---------- ----------
Net decrease in cash and cash equivalents (5,089) (87)
Cash and cash equivalents at beginning of period 9,650 9,907
---------- ----------
Cash and cash equivalents at end of period $ 4,561 $ 9,820
========== ==========
Non-cash transactions
Common stock, options and warrants issued or exchanged in
connection with acquisition $ - $ 3,347
Cash paid during the period for
Interest $ 43 $ -
See accompanying notes to condensed consolidated financial statements.
F-32
eB2B COMMERCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ORGANIZATION AND PLAN OF OPERATION
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
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 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 thus far in 2001. While the Company continues
to add large customers to its service, it is focused primarily on adding trading
partners who transact business with its largest existing customers.
To address the continuing loss from operations and negative cash flows from
operations, management enacted a plan for the Company, which included various
cost cutting measures, principally staffing reductions and discretionary
spending reductions in selling, marketing, general and administrative areas,
during the third and fourth quarter of 2000 and into 2001.
Additionally, during May 2001, the Company received financing of $7.5 million in
the form of convertible notes and warrants (see Note 3, Financing). The Company
has also agreed to issue approximately 2.5 million shares of currently
unregistered Company common stock in lieu of $1.5 million of payments to certain
vendors.
NOTE 2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
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 unaudited condensed consolidated financial
statements. All significant intercompany balances and transactions have been
eliminated in consolidation and certain other prior period balances have been
reclassified to conform to the current period presentation. The accompanying
unaudited condensed consolidated financial statements are not necessarily
indicative of full year results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations; however, management believes that the disclosures are
adequate to make the information presented not misleading. This report should be
read in conjunction with the consolidated financial statements and footnotes
therein included in the audited annual report on Form 10-KSB for the fiscal year
ended December 31, 2000.
F-33
NOTE 3. FINANCING
On May 2, 2001, the Company completed a private placement of convertible notes
and warrants (the "Financing"). The gross proceeds of the Financing totaled $7.5
million. Pursuant to the Financing, the Company issued $7,500,000 of principal
amount of 7% convertible notes ("Convertible Notes"), convertible into an
aggregate of 15,000,000 shares of Company common stock ($0.50 per share), and
warrants to purchase an aggregate 15,000,000 shares of Company common stock at
$0.93 per share (the "Private Warrants").
The Convertible Notes have a term of 18 months, which period may be accelerated
in certain events. Interest is payable quarterly in cash, in identical
Convertible Notes or in shares of common stock, at the option of the Company. In
addition, the Convertible Notes will automatically convert into Series C
preferred stock if the Company receives the required consent of the holders of
the Company's Series B preferred stock to the issuance of this new series. The
Series C preferred stock would be convertible into common stock on the same
basis as the Convertible Notes. The Series C preferred stock have (i)
antidilution provisions, (ii) a liquidation preference, and (iii) can be
automatically converted by the Company in certain circumstances.
The Private Warrants will be exercisable for a period of two years from the
earlier of (i) the date the Company receives shareholder approval of the
Financing, (ii) the date such shareholder approval is no longer required, either
because the common stock of the Company is no longer listed on NASDAQ or
otherwise, or (iii) October 1, 2001.
The Company intends to seek shareholder approval of the Financing, as required
by the rules of NASDAQ.
In connection with the closing of the Financing, the Company canceled a
$2,050,000 line of credit issued in April 2001 (the "Line of Credit"), pursuant
to which it had not borrowed any funds. The Company incurred a cash fee
amounting to $61,500 in consideration of the availability of the Line of Credit.
In addition, the issuer of the Line of Credit was issued warrants to purchase
900,000 shares of Company common stock at $0.50 per share for a period of five
years in consideration of the availability of such line. These warrants were
valued using the Black-Scholes option pricing model at $549,000.
In connection with the Financing, the Company incurred a cash fee amounting to
$750,000 and issued (i) warrants to purchase 2,250,000 shares of Company common
stock with an exercise price of $0.93 for a period of five years and (ii) unit
purchase options to purchase Series C preferred stock convertible into an
aggregate of 2,250,000 shares of Company common stock with an exercise price of
$0.50 per share for a period of five years. These warrants and unit purchase
options were valued using the Black-Scholes option pricing model at $675,000 and
$810,000, respectively. Additionally, other expenses directly related the
Financing were approximately $400,000.
The assumptions used by the Company in determining the fair value of the above
warrants and unit purchase options were as follows: dividend yield of 0%,
risk-free interest of 6.5%, expected volatility of 80%, and expected life of 2
to 5 years.
F-34
NOTE 4. ACQUISITIONS
DynamicWeb Enterprises, Inc.
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.". Pursuant to the Agreement and Plan of Merger between eB2B and DWeb, 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. 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 management of eB2B remained the management of
the Company.
Netlan Enterprises, Inc.
On February 22, 2000, eB2B completed its acquisition of Netlan Enterprises, Inc.
and subsidiaries ("Netlan"). The acquisition was accounted for using the
purchase method.
At March 31, 2001, accumulated amortization related to the goodwill and other
intangibles acquired in the Netlan and DWeb acquisitions totaled approximately
$13.2 million.
The following represents the summary unaudited pro forma condensed consolidated
results of operations for the three-month period ended March 31, 2000 as if the
acquisitions had occurred at the beginning of the period presented (in
thousands, except per share data):
Three Months Ended
March 31, 2000
-------------------
Revenue $1,870
Net loss (21,820)
Basic and diluted net loss per common share (1.75)
The pro forma results are not necessarily indicative of what would have occurred
if the acquisitions had been in effect for the period presented. In addition the
pro forma results are not necessarily indicative of the results that will occur
in the future and do not reflect any potential synergies that might arise from
the combined operations.
NOTE 5. 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
loss per common share has not been reflected since the assumed conversion of
options, warrants and preferred shares would have been antidilutive. Had the
Company reported net income at March 31, 2001 and 2000, options and warrants to
purchase 23,255,737 and 14,026,554 common shares, and preferred shares
convertible into 13,200,448 and 16,358,995 common shares, respectively, would
have been
F-35
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.
NOTE 6. PRODUCT DEVELOPMENT
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" requires companies to
capitalize qualifying computer software costs incurred during the application
development stage. All other costs incurred in connection with internal use
software were expensed as incurred. The useful life assigned to capitalized
product development costs should be based on the period such product is expected
to provide future utility to the Company. As of March 31, 2001, capitalized
product development costs, which have been classified as other assets in the
Company's balance sheet, were $1,565,000. Total product development costs
were approximately $1,145,000 and $658,000, as expensed, for the three-month
periods ended March 31, 2001 and 2000, respectively.
NOTE 7. RELATED PARTIES
A principal and Chief Executive Officer of a financial advisor (the "Financial
Advisor") is a director of the Company.
In connection with the closing of the Financing described in Note 3 herein, the
Financial Advisor and its affiliate received a cash fee in the amount of $61,500
in consideration of the availability of the Line of Credit. In addition, the
Financial Advisor was issued warrants to purchase 900,000 shares of Company
common stock at $0.50 per share for a period of five years in consideration of
the availability of such line. These warrants were valued using the
Black-Scholes option pricing model at $549,000.
For acting as a placement agent for the Financing, the Financial Advisor
received a cash fee in the amount of $637,500 and was issued (i) warrants to
purchase 1,875,000 shares of Company common stock with an exercise price of
$0.93 for a period of five years and (ii) unit purchase options to purchase
Series C preferred stock convertible into an aggregate of 1,875,000 shares of
Company common stock with an exercise price of $0.50 per share for a period of
five years. These warrants and unit purchase options were valued using the
Black-Scholes option pricing model at $562,500 and $675,000, respectively.
F-36
NOTE 8. SEGMENT REPORTING
The following information is presented in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which established standards for reporting
information about operating segments in the Company's financial statements (in
thousands):
Three Months Ended March, 31
----------------------------
2001 2000
---- ----
Revenue from external customers
Transaction processing and related services $ 1,165 $ 177
Training and client educational services 699 238
-------- --------
$ 1,864 $ 415
======== ========
EBITDA (1)
Transaction processing and related services $ (3,642) $ (2,794)
Training and client educational services 93 29
-------- --------
EBITDA (3,549) (2,765)
Depreciation and amortization (3,907) (783)
Stock-related compensation (682) (3,097)
Interest 41 338
-------- --------
Net Loss $ (8,097) $ (6,307)
======== ========
(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.
Transaction processing and related services include revenue for processing
transactions and consulting services. Revenue from transaction processing is
recognized on a "pay per transaction" basis or based on a monthly subscription
charge related to the overall number of transactions during the period. The
revenue from these services is recognized in the month in which the services are
rendered. Revenue from consulting services is recognized as services are
rendered over the contract term. The revenue derived from training and client
educational services is recognized as services are rendered for the respective
seminars, typically one to five days. Deferred income includes amounts billed
for the unearned portion of certain consulting contracts and training seminars.
F-37
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
The unaudited pro forma condensed combined statements of operations should be
read in conjunction with the historical financial statements of eB2B Commerce,
Inc. ("eB2B" or the "Company") and notes thereto for the year ended December 31,
2000 and for the three-month period ended March 31, 2001. The pro forma
financial information is presented for illustrative purposes only and is not
necessarily indicative of the results of operations of the consolidated company
that would have actually occurred had the acquisition of Netlan Enterprises,
Inc. and Subsidiaries ("Netlan") and the merger with and into DynamicWeb
Enterprises, Inc. ("DWeb") been effected as of January 1, 2000, nor are they
indicative of the results of operations for any future periods.
The historical financial statements of eB2B reflect the acquisition of Netlan
and the merger with and into DWeb on February 22, 2000 and April 18, 2000,
respectively. The unaudited pro forma condensed combined statements of
operations are based on available information and certain assumptions and
adjustments as described in the notes thereto, which management believes is
reasonable under the circumstances.
The following represents the unaudited pro forma condensed combined results of
operations for the year ended December 31, 2000 and the three-month period ended
March 31, 2000 as if the above acquisitions had occurred at the beginning of
each of the periods presented (in thousands, except share and per share data):
F-38
Unaudited Pro Forma Condensed Combined Statement of Operations for the year
ended December 31, 2000
eB2B DYNAMICWEB NETLAN
COMMERCE, ENTERPRISES, ENTERPRISES, INC. PRO FORMA PRO FORMA
INC. INC. AND SUBSIDIARIES ADJUSTMENTS COMBINED
[a] [b]
Revenue $ 5,468 $ 1,174 $ 763 $ (332)[c] $ 7,073
Costs and expenses
Cost of revenue 2,839 569 409 -- 3,817
Marketing & selling 2,804 483 76 -- 3,363
Product development costs 2,698 306 -- -- 3,004
General & administrative 13,438 2,536 443 (113)[c] 16,304
Amortization of goodwill and
other intangibles 9,829 -- -- 3,936 [d] 13,765
Stock-based compensation expense 16,027 -- -- 406 [e] 16,433
------ ------ --- ----- ------
Total costs and expenses 47,635 3,894 928 4,229 56,686
====== ====== === ===== ======
Loss from operations (42,167) (2,720) (165) (4,561) (49,613)
Financing and other, net 832 57 19 -- 908
------ ------ --- ----- --------
Net loss $(41,335) $(2,663) $ (146) $(4,561) $ (48,705)
====== ====== === ===== ========
Basic and dilutive net loss per
common share $ (3.61) $ (3.77)
Weighted average number of shares
outstanding 11,461,496 12,931,613
Unaudited Pro Forma Condensed Combined Statement of Operations for the three
months ended March 31, 2000
eB2B DYNAMICWEB NETLAN
COMMERCE, ENTERPRISES, ENTERPRISES, INC. PRO FORMA PRO FORMA
INC. INC. AND SUBSIDIARIES ADJUSTMENTS COMBINED
[f] [b]
Revenue $ 415 $ 1,024 $ 763 $ (332)[c] $ 1,870
Costs and expenses
Cost of revenue 249 522 409 -- 1,180
Marketing & selling 351 440 76 -- 867
Product development costs 658 276 -- -- 934
General & administrative 2,556 2,382 443 (113)[c] 5,268
Amortization of goodwill and
other intangibles 88 -- -- 3,310 [g] 3,398
Stock-based compensation expense 3,097 -- -- 9,297 [h] 12,394
--------- --------- -------- -------- --------
Total costs and expenses 6,999 3,620 928 12,494 24,041
========= ========= ======== ======== ========
Loss from operations (6,584) (2,596) (165) (12,826) (22,171)
Financing and other, net 277 55 19 -- 351
--------- --------- -------- --------- --------
Net loss $ (6,307) $(2,541) $(146) $ (12,826) $ (21,820)
========= ========= ======== ======== ========
Basic and dilutive net loss per
common share $ (0.55) $ (1.75)
Weighted average number of
shares outstanding 11,461,496 12,433,908
F-39
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
Adjustments:
[a] The pro forma adjustment represents the historical financial
information of DWeb for the period from January 1, 2000 to April 18,
2000, the date of the merger with eB2B.
[b] The pro forma adjustment represents the historical financial
information of Netlan for the period from January 1, 2000 to March 1,
2000, the date at which the results of operations of Netlan have been
included in the Company's results of operations.
[c] Elimination of revenue transactions generated between eB2B and both
Netlan and DWeb, and elimination of the related gross profit realized
by both Netlan and DWeb on professional services and consulting
arrangements with eB2B for the period from January 1, 2000 to the date
of their respective acquisition by eB2B.
[d] The pro forma adjustment represents additional amortization of goodwill
and other intangibles that would have been recorded during the period
covered by the pro forma statement of operations related to the
acquisition of Netlan for approximately $182,000 for the period from
January 1, 2000 to March 1, 2000, and the merger with and into DWeb for
approximately $3,754,000 for the period from January 1, 2000 to April
18, 2000.
[e] The pro forma adjustment represents additional amortization of
stock-based compensation that would have been recorded during the
period covered by the pro forma statement of operations related to the
acquisition of Netlan.
[f] The pro forma adjustment represents the historical financial
information of DWeb for the period from January 1, 2000 to March 31,
2000.
[g] The pro forma adjustment represents additional amortization of goodwill
and other intangibles that would have been recorded during the period
covered by the pro forma statement of operations related to the
acquisition of Netlan for approximately $182,000 for the period from
January 1, 2000 to March 1, 2000, and the merger with and into DWeb for
approximately $3,128,000 for the period from January 1, 2000 to March
31, 2000.
[h] The pro forma adjustment represents an additional charge of
stock-based compensation that would have been recorded during the
period covered by the pro forma statement of operations related to the
acquisition of Netlan for approximately $406,000 and the merger with
and into DWeb for approximately $8.8 million. The former Chief
Executive Officer of the Company was granted options to purchase
1,330,000 shares of Company common stock at an exercise price of $2.07
per share. These options were to vest upon the completion of the merger
with and into DWeb.
F-40
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
DYNAMICWEB ENTERPRISES, INC.
Fairfield, New Jersey
We have audited the accompanying balance sheet of DynamicWeb Enterprises,
Inc. and subsidiaries as of September 30, 1999 and the related consolidated
statements of operations, changes in stockholders' equity (capital deficiency)
and cash flows for the years ended September 30, 1999 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of DynamicWeb Enterprises, Inc.
and subsidiaries as of September 30, 1999 and the results of its operations and
its cash flows for the years ended September 30, 1999 and 1998, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A, the Company
has incurred net losses and cash outflows from operations for each of the years
ended September 30, 1999 and 1998. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note A. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ RICHARD A. EISNER & COMPANY, LLP
New York, New York
November 19, 1999
With respect to Note M(3)
November 23, 1999
With respect to Note M(4)
December 17, 1999
F-41
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
BALANCE SHEET
SEPTEMBER 30, 1999
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 418,000
Accounts receivable, net of allowance for doubtful
accounts of $102,000.................................. 627,000
Prepaid expenses and other current assets............... 40,000
-----------
Total current assets................................ 1,085,000
Property and equipment, net................................. 459,000
Patents and trademarks, net of accumulated amortization of
$19,000................................................... 23,000
Customer list, net of accumulated amortization of $57,000... 43,000
Software license agreements, net of accumulated amortization
of $113,000............................................... 73,000
Cost in excess of fair value of net assets acquired, net of
accumulated amortization of $72,000....................... 436,000
Other assets................................................ 14,000
-----------
$ 2,133,000
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................ $ 305,000
Accrued expenses........................................ 396,000
Other liabilities....................................... 12,000
Current portion of capital lease obligations............ 32,000
Deferred revenue........................................ 95,000
-----------
Total current liabilities........................... 840,000
Capital lease obligations, net of current portion........... 24,000
-----------
Total liabilities................................... 864,000
-----------
Commitments, contingency and other matters (Notes K, L and
M)
Stockholders' Equity:
Preferred stock -- par value to be determined with each
issue; 5,000,000 shares authorized: Series A -- 6%
cumulative, convertible, $.001 par value; 1,375 shares
issued and outstanding, aggregate liquidation value
$1,787,500............................................ 1,110,000
Series B -- 6% cumulative, convertible, $.001 par value;
1,500 shares issued and outstanding, aggregate
liquidation value $2,025,000.......................... 1,027,000
Common stock -- $.0001 par value; 50,000,000 shares
authorized; 2,637,076 shares issued and outstanding
Additional paid-in capital.............................. 8,508,000
Unearned portion of compensatory stock options.......... (78,000)
Accumulated deficit..................................... (9,298,000)
-----------
Total stockholders' equity.......................... 1,269,000
-----------
$ 2,133,000
-----------
-----------
See notes to financial statements
F-42
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
-------------------------
1999 1998*
---- -----
Revenues:
Transaction subscription processing..................... $ 882,000 $ 419,000
Consulting services..................................... 1,494,000 601,000
Network development..................................... 669,000 167,000
----------- -----------
3,045,000 1,187,000
----------- -----------
Cost of Revenues:
Transaction subscription processing..................... 598,000 240,000
Consulting services..................................... 893,000 427,000
Network development..................................... 299,000 52,000
----------- -----------
1,790,000 719,000
----------- -----------
1,255,000 468,000
----------- -----------
Expenses:
Marketing and sales..................................... 1,638,000 734,000
General and administrative.............................. 1,876,000 1,925,000
Research and development................................ 534,000 412,000
----------- -----------
4,048,000 3,071,000
----------- -----------
Loss from operations before gain on sale of asset, interest
expense and income........................................ (2,793,000) (2,603,000)
Gain on sale of asset....................................... 12,000
Interest expense (including amortization of debt discount
and deferred financing fees of $310,000 in 1998).......... (5,000) (374,000)
Interest income............................................. 20,000 23,000
----------- -----------
Net loss.................................................... (2,766,000) (2,954,000)
Cumulative dividends on preferred stock, including imputed
dividends................................................. (1,699,000) (77,000)
----------- -----------
Net loss attributed to common stockholders.................. $(4,465,000) $(3,031,000)
----------- -----------
----------- -----------
Net loss per common share -- basic and diluted.............. $(1.81) $(1.56)
Weighted average number of shares outstanding -- basic and
diluted................................................... 2,460,287 1,944,132
----------- -----------
----------- -----------
- - - ---------
* Reclassified to conform to current year's presentation
See notes to financial statements
F-43
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE COMMON STOCK -- UNEARNED
PREFERRED STOCK PREFERRED STOCK PAR VALUE $.0001 ADDITIONAL PORTION OF
------------------- ------------------- ---------------- PAID-IN COMPENSATORY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK OPTIONS
------ ------ ------ ------ ------ ------ ------- -------------
Balance -- October 1, 1997..... 2,074,710 $3,131,000 $(204,000)
Contribution of common shares
from officers/ stockholders... (654,597)
Proceeds from public offering
(net of costs of
$1,221,000)................... 733,334 3,179,000
Shares issued and issuable to
acquire subsidiary............ 102,500 526,000
Compensation expense for stock
options....................... 115,000
Proceeds from private placement
of Series A preferred shares
and warrants (net of costs of
$96,000)...................... 875 $ 335,000 444,000
Imputed dividend on Series A
preferred stock............... 67,000 (67,000)
Dividend accrued on Series A
preferred stock............... (10,000)
Options issued for investor
relations services............ 205,000
Correction of shares issuable
to acquire subsidiary......... 12,936
Net loss.......................
----- ---------- ------ ---------- --------- ---------- ---------- ---------
Balance -- September 30,
1998.......................... 875 402,000 2,268,883 -- 7,408,000 (89,000)
Proceeds from private placement
of Series A preferred shares
(net of costs of $85,000...... 625 415,000
Proceeds from private placement
of Series B preferred shares
(net of costs of $370,000..... 1,500 $ 550,000 580,000
Conversion of Series A
preferred shares to common
stock......................... (125) (83,000) 95,420 83,000
Imputed dividends on Series A
preferred stock............... 376,000 (376,000)
Imputed dividends on Series B
preferred stock............... 477,000 (477,000)
Stock options granted.......... 113,000 (113,000)
Compensation expense for stock
options....................... 124,000
Proceeds from exercise of
common stock options.......... 20,728 50,000
Options issued for investor
related services.............. 94,000
Shares issued for investor
related services.............. 16,750 85,000
Options issued for consulting
related services.............. 16,000
Options issued for settlement
of a lawsuit.................. 140,000
Proceeds from issuance of
common stock in private
placement..................... 235,295 940,000
Dividends accrued on Series A
and B preferred stock......... (148,000)
Net loss.......................
----- ---------- ------ ---------- --------- ---------- ---------- ---------
Balance -- September 30,
1999.......................... 1,375 $1,110,000 1,500 $1,027,000 2,637,076 -- $8,508,000 $ (78,000)
----- ---------- ------ ---------- --------- ---------- ---------- ---------
----- ---------- ------ ---------- --------- ---------- ---------- ---------
ACCUMULATED
DEFICIT TOTAL
------- -----
Balance -- October 1, 1997..... $(3,578,000) $ (651,000)
Contribution of common shares
from officers/ stockholders...
Proceeds from public offering
(net of costs of
$1,221,000)................... 3,179,000
Shares issued and issuable to
acquire subsidiary............ 526,000
Compensation expense for stock
options....................... 115,000
Proceeds from private placement
of Series A preferred shares
and warrants (net of costs of
$96,000)...................... 779,000
Imputed dividend on Series A
preferred stock............... 0
Dividend accrued on Series A
preferred stock............... (10,000)
Options issued for investor
relations services............ 205,000
Correction of shares issuable
to acquire subsidiary.........
Net loss....................... (2,954,000) (2,954,000)
----------- -----------
Balance -- September 30,
1998.......................... (6,532,000) 1,189,000
Proceeds from private placement
of Series A preferred shares
(net of costs of $85,000...... 415,000
Proceeds from private placement
of Series B preferred shares
(net of costs of $370,000..... 1,130,000
Conversion of Series A
preferred shares to common
stock......................... 0
Imputed dividends on Series A
preferred stock............... 0
Imputed dividends on Series B
preferred stock............... 0
Stock options granted.......... 0
Compensation expense for stock
options....................... 124,000
Proceeds from exercise of
common stock options.......... 50,000
Options issued for investor
related services.............. 94,000
Shares issued for investor
related services.............. 85,000
Options issued for consulting
related services.............. 16,000
Options issued for settlement
of a lawsuit.................. 140,000
Proceeds from issuance of
common stock in private
placement..................... 940,000
Dividends accrued on Series A
and B preferred stock......... (148,000)
Net loss....................... (2,766,000) (2,766,000)
----------- -----------
Balance -- September 30,
1999.......................... $(9,298,000) $ 1,269,000
----------- -----------
----------- -----------
F-44
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
-------------------------
1999 1998
---- ----
Cash Flows from Operating Activities:
Net loss................................................ $(2,766,000) $(2,954,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 221,000 115,000
Amortization of compensatory stock options.......... 124,000 115,000
Gain on sale of asset............................... (12,000)
Provision for bad debts............................. 61,000
Amortization of debt discount and deferred financing
fees.............................................. 310,000
Options and shares issued for services.............. 335,000 205,000
Changes in:
Accounts receivable............................. (417,000) (124,000)
Prepaid expenses and other current assets....... (14,000) (1,000)
Accounts payable................................ 66,000 57,000
Other assets.................................... (5,000)
Other liabilities............................... 12,000
Accrued expenses................................ 130,000 (71,000)
Deferred revenue................................ 78,000 2,000
----------- -----------
Net cash used in operating activities....... (2,187,000) (2,346,000)
----------- -----------
Cash Flows from Investing Activities:
Acquisition of property and equipment................... (191,000) (207,000)
Proceeds from sale of equipment......................... 205,000
Acquisition of patents and trademarks................... (11,000)
Acquisition of software licenses........................ (36,000) (150,000)
Acquisition of subsidiary, net of $3,000 of cash
acquired.............................................. (22,000)
----------- -----------
Net cash used in investing activities....... (22,000) (390,000)
----------- -----------
Cash Flows from Financing Activities:
Payment of long-term debt............................... (11,000) (7,000)
Proceeds from issuance of common stock.................. 990,000 3,307,000
Proceeds from loans -- banks............................ 73,000
Payment of loans -- banks............................... (187,000) (97,000)
Loans from officer/stockholder.......................... 100,000 115,000
Payment of officer/stockholder loans.................... (100,000) (232,000)
Proceeds from issuance of preferred stock and
warrants.............................................. 1,545,000 779,000
Payment of subordinated notes payable................... (1,100,000)
----------- -----------
Net cash provided by financing activities... 2,337,000 2,838,000
----------- -----------
Net increase in cash and cash equivalents................... 128,000 102,000
Cash and cash equivalents, beginning of year................ 290,000 188,000
----------- -----------
Cash and cash equivalents, end of year...................... $ 418,000 $ 290,000
----------- -----------
----------- -----------
Supplemental Disclosures of Noncash Investing and Financing
Activities:
On May 1, 1998, the Company acquired Design Crafting,
Inc. in exchange for common stock (see Note D)
Acquisition of fixed assets through capital leases...... $ 67,000
Conversion of Series A preferred shares to common
stock................................................. $ 83,000
Dividends accrued on Series A and B preferred shares.... $ 148,000
Accretion of Series A and B preferred shares............ $ 1,551,000 $ 67,000
Stock options granted................................... $ 113,000
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the year.................. $ 5,000 $ 89,000
See notes to financial statements
F-45
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE A -- BASIS OF PRESENTATION
On September 30, 1998, the Company merged with its subsidiaries, accordingly
the accompanying financial statements for the year ended September 30, 1998
include the accounts of DynamicWeb Enterprises, Inc. and its wholly owned
subsidiaries. All significant intercompany balances and transactions were
eliminated.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has incurred net
losses of $2,766,000 and $2,954,000 for the years ended September 30, 1999 and
1998, respectively, and also incurred substantial negative cash flows from
operations during such years. Accordingly, although the Company has a positive
stockholders' equity and working capital at September 30, 1999 and obtained
additional proceeds from sale of preferred and common shares as described in
Note H, the Company's resources may be depleted before the Company markets and
derives significant revenues from its products and services. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability to
obtain additional financing and ultimately to attain profitability through the
successful marketing of its products and services. The Company has entered into
a merger agreement as described in Note M. There is no assurance that the
Company will obtain additional financing or that the Company's products and
services will be commercially successful.
NOTE B -- THE COMPANY
The Company is primarily in the business of providing services, including
developing, marketing and supporting software products that enable business
entities to engage in electronic commerce utilizing the Internet and traditional
Electronic Data Interchange ('EDI').
NOTE C -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) REVENUE RECOGNITION:
The Company's revenues, which are derived primarily from services, include
implementation fees, transaction fees and consulting fees. Implementation fees,
which relate to the installation of software enabling use of EDI, are recognized
upon completion of installation. Transaction fees, which are earned on a per
transaction basis, are recognized when transactions are processed and consulting
fees are recognized as services are performed. The Company also sells computer
equipment and software and recognizes revenue upon shipment.
In October 1997, the AICPA issued Statement of Position ('SOP') No. 97-2,
'Software Revenue Recognition,' which the Company adopted, effective October 1,
1997. Such adoption had no effect on the Company's methods of recognizing
revenue from its service and sales activities.
Deferred revenue represents revenue billed in advance for consulting and
implementation services.
(2) CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
(3) DEPRECIATION:
Property and equipment are recorded at cost. Depreciation is provided using
a straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is provided by the straight-line method
over the shorter of the lease term or the estimated useful life of the asset.
F-46
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(4) INTANGIBLE ASSETS:
(a) Cost in excess of fair value of net assets acquired:
The cost in excess of the fair value of identifiable net assets acquired
relates to the acquisition of Design Crafting, Inc. (see Note D) and is
being amortized over ten years.
(b) Customer list:
Customer list relates to the acquisition of Software Associates, Inc.
(see Note D) and is being amortized over five years.
(c) Patents and trademarks:
Costs to obtain patents and trademarks have been capitalized. The
Company has submitted numerous applications which are currently pending.
These costs are being amortized over five years.
(d) Software license agreements:
Software license agreements acquired by the Company are being amortized
over the periods of the license agreements which range from two to five
years.
(5) IMPAIRMENT OF LONG-LIVED ASSETS:
Impairment losses are recognized for long-lived assets, including certain
intangibles, used in operations when indicators of impairment are present.
Management estimates that the undiscounted future cash flows generated by those
assets are sufficient to recover the assets' carrying amount. An impairment loss
would be measured by comparing the fair value of the asset to its carrying
amount.
(6) RESEARCH AND DEVELOPMENT:
Development costs incurred to establish the technological feasibility of
computer software are expensed as incurred. The Company capitalizes costs
incurred in producing such computer software, in accordance with current
accounting standards, after capitalization criteria have been met.
(7) ADVERTISING AND PROMOTION COSTS:
Advertising and promotion costs are expensed as incurred. Such costs
amounted to approximately $156,000 and $260,000 for the years ended September
30, 1999 and 1998, respectively.
(8) INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, 'Accounting for Income Taxes' ('SFAS
No. 109'). SFAS No. 109 measures deferred income taxes by applying enacted
statutory rates in effect at the balance sheet date to net operating loss
carryforwards and to the differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements.
(9) LOSS PER SHARE OF COMMON STOCK:
The Company adopted Statement of Financial Accounting Standards No. 128
'Earnings Per Share' ('SFAS No. 128'), for the year ended September 30, 1998.
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. In addition, contingently issuable shares
are included in basic earnings per share when all necessary conditions have been
satisfied. Diluted earnings per share is very similar to fully
F-47
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
diluted earnings per share and gives effect to all dilutive potential common
shares outstanding during the reporting periods.
In 1999, net loss per share of common stock is based on the weighted average
number of shares outstanding. In 1998, net loss per share of common stock also
included, prior to their issuance, shares which were issuable in connection with
interim financings and after giving retroactive effect to (i) the reverse stock
split effected in January 1998 (see Note H[1]) and (ii) the contribution of
654,597 common shares back to the Company in exchange for warrants in
December 1997 (see Note H). Contingent shares issuable in connection with the
acquisition of Software Associates, Inc. (see Note H) are excluded from the
weighted average shares outstanding. Net loss has been increased by dividends
accrued on cumulative convertible preferred stock, including imputed dividends
attributable to a beneficial conversion feature and the value of warrants issued
together with the preferred stock, to determine net loss per share of common
stock (see Note H).
(10) USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company considers the carrying amount of its financial assets and
obligations, to approximate fair value due to the near-term due dates and
variable interest rates.
(12) STOCK-BASED COMPENSATION:
The Company has elected to account for its stock-based compensation plans
under Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued
to Employees' ('APB No. 25'). As such, compensation expense is recorded if the
market price of the underlying stock on the date of grant exceeds the exercise
price of the options. In addition, the Company provides pro forma disclosure of
net loss and net loss per share as if the fair value method defined in Statement
of Financial Accounting Standards No. 123, 'Accounting for Stock-Based
Compensation' ('SFAS No. 123') had been applied.
NOTE D -- ACQUISITIONS
On November 30, 1996, the Company acquired all the outstanding stock of
Software Associates, Inc. in exchange for 224,330 shares of common stock.
Software Associates is a service bureau engaged in the business of helping
companies realize the benefits of expanding their data processing and electronic
communication infrastructure through the use of EDI. The Company further agreed
to issue up to 178,420 additional shares of its common stock in the event that
the average closing bid price of the Company's common stock does not equal
$21.565 per share for the five trading days immediately prior to January 30,
2000. The acquisition agreement also required the Company to issue options for
the purchase of 6,521 shares of its common stock to employees of Software
Associates, Inc., which were issued in August 1997. The acquisition, which was
accounted for as a purchase, was recorded at a total cost of $885,000, including
related expenses, of which $714,000 was allocated to purchased research and
development which was charged to operations upon acquisition.
On May 1, 1998, the Company purchased all the outstanding stock of Design
Crafting, Inc., a provider of electronic commerce consulting services, in
exchange for 102,500 shares of common stock. The acquisition, which was
accounted for as a purchase, was recorded at a total cost of $551,000,
F-48
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
including related expenses, of which $508,000 was allocated to cost in excess of
fair value of the identifiable net assets acquired.
The results of operations of the purchased businesses were included in the
consolidated statements of operations from their respective dates of
acquisition.
NOTE E -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of September 30, 1999:
ESTIMATED
USEFUL
LIFE
----
Office equipment.................................. $ 104,000 5 years
Computer equipment (includes a capitalized lease 283,000 5 years
of $67,000).....................................
Automobiles....................................... 16,000 5 years
Leasehold improvements............................ 38,000 Shorter of life
of lease or
useful life
of asset
Capitalized software.............................. 226,000 3 years
---------
667,000
Less accumulated depreciation and amortization.... (208,000)
---------
$ 459,000
---------
---------
NOTE F -- LINES OF CREDIT
The Company has two lines of credit aggregating $ 117,000 which are
personally guaranteed by an officer/stockholder of the Company and have interest
rates of 2 1/4% and 4 1/4% above the bank's prime lending rate. There was no
debt outstanding as of September 30, 1999.
NOTE G -- OBLIGATIONS
(1) The Company has capital leases consisting of the following:
The Company entered into capital leases with interest rates ranging from
2.7% to 13.6%. Monthly installments due in fiscal 2000 and 2001 total
$32,000 and $24,000, respectively.
(2) During fiscal year 1999, the Company paid off an existing mortgage that
was due July 2019 that had been payable at an interest rate of the lower of
prime plus 2%. The Company also paid off an auto loan that was due in June 1999.
NOTE H -- STOCKHOLDERS' EQUITY AND INTERIM FINANCING
(1) On March 7, 1997, the Board of Directors approved a reverse stock split
for each share of common stock to be converted into .2608491 of a share and
authorized 5,000,000 shares of preferred stock. On June 12, 1997, the
stockholders approved such transactions which were completed on January 9, 1998.
Cash of $332 was paid to the stockholders for fractional shares. The
accompanying financial statements and footnotes give retroactive effect to the
reverse stock split and accordingly, the number of shares and per share amounts
are stated on a post-split basis.
(2) On April 30, 1997, pursuant to Regulation D, the Company completed a
private placement whereby it sold 24 units for an aggregate amount of $600,000.
The placement agent received a fee and nonaccountable expense allowance
aggregating $78,000 or 13% of the private placement offering.
F-49
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
Financing fees in this transaction were approximately $108,000. Each unit
consisted of a $25,000 subordinated promissory note bearing interest at 8% and
3,115 shares of the Company's common stock. The notes were repaid from the net
proceeds of the Company's public offering in February 1998. The 3,115 shares of
common stock in each unit, issued on November 6, 1997, aggregate to 74,760
shares of common stock. The common stock was valued at a fair value of $450,000
and $150,000 was allocated to the notes. Debt discount of $450,000 and deferred
financing fees of $108,000 were amortized over the period to the expected
completion date (October 31, 1997) of the Company's public offering of
securities. The Company completed its public offering in February 1998. During
the year ended September 30, 1998, financing costs attributable to this offering
of $93,000 were charged to operations. The effective interest rate on the note
was approximately 191%.
(3) On August 27, 1997, pursuant to Regulation D, the Company completed a
private placement whereby it sold 20 units for an aggregate amount of $500,000.
The placement agent received a fee and nonaccountable expense allowance
aggregating $65,000 or 13% of the private placement offering. Financing fees in
this transaction were approximately $72,500. Each unit consisted of a $25,000
subordinated promissory note bearing interest at 8% and 3,333 shares of the
Company's common stock. In connection with this transaction, two officers of the
Company contributed 66,660 shares of the Company's common stock valued at
$400,000 back to the Company which then, on November 6, 1997, reissued such
shares in the private placement. The notes were repaid from the net proceeds of
the Company's public offering in February 1998.
The common stock was valued at a fair value of $400,000 and $100,000 was
allocated to the notes. Debt discount of $400,000 and deferred financing fees of
$72,500 were amortized over the period to the expected completion date (October
31, 1997) of the Company's public offering of securities. The Company completed
its public offering in February 1998. During the year ended September 30, 1998,
financing costs attributable to this offering of $255,000 were charged to
operations. The effective interest rate on the notes was approximately 525%.
(4) On December 23, 1997, in connection with a contemplated public offering,
certain of the Company's existing stockholders contributed 654,597 shares of the
Company's common stock back to the Company and received 125,000 warrants. The
warrants, which expire on December 23, 2007, entitle the holder to purchase the
Company's common stock at $6.00 per share. The contributed shares were canceled
and retired. In addition, contingent shares issuable in connection with the
acquisition of Software Associates, Inc. (see Note D) were reduced from 297,367
shares to 178,420 shares.
(5) On February 6, 1998, the Company completed a public offering of 733,334
shares of its common stock at $6.00 per share and received net proceeds of
approximately $3,179,000.
(6) On August 7, 1998, the Company completed a private placement for net
proceeds of approximately $779,000, which consisted of 875 shares of Series A,
6% cumulative, convertible preferred stock, par value $0.001 per share, together
with 87,500 Common Stock Purchase Warrants which expire on August 7, 2001 and
have an exercise price of $6.00 per share. The preferred shares have a
liquidation preference of the stated face value of $875,000 plus 30% of the
stated face value plus cumulative dividends. Dividends, which are payable in
cash or common shares at the option of the Company, are due quarterly,
commencing September 30, 1998, based upon the liquidation value. The holder is
eligible to convert 33 1/3% of the preferred shares to common stock after 60
days from the closing date increasing to 100% of the preferred shares after 120
days from the closing date. Each preferred share is convertible at the lesser of
(i) $5.50 or (ii) 85% of the market price of the common stock, as defined
(Market Price) within 180 days, 80% of the Market Price between 180 and 360 days
and 78% of the Market Price after 360 days. The holder of preferred shares may
not convert to the extent that the holder will be the beneficial owner of 5% or
more of the outstanding common shares. The Company may redeem all the remaining
outstanding preferred shares at 125% of the stated value together with all
accrued and unpaid dividends thereon.
F-50
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
Proceeds from the private placement were allocated to the warrants based
on their estimated fair value and to the beneficial conversion feature of the
preferred shares based on that feature's intrinsic value assuming the conversion
terms most beneficial to the investor. Amounts allocated aggregating $444,000
were credited to additional paid-in capital and are being accounted for as
imputed dividends to the preferred stockholders over a one year period from date
of issuance. Imputed dividends accreted, which amounted to $376,000 and $67,000,
respectively, through September 30, 1999 and 1998, increases the carrying value
of the preferred shares.
On December 3, 1998, the Company completed a private placement for net
proceeds of approximately $455,000 which consisted of 625 shares of Series A, 6%
cumulative, convertible preferred stock having a stated value of $500,000
together with 50,000 common stock purchase warrants which expire on December 1,
2001 and have an exercise price of $6.00 per share. The shares are convertible
into common stock. For purposes of conversion, these preferred shares are deemed
to have been outstanding as of August 7, 1998 and the buyer may convert at the
lesser of (i) $5.50 or (ii) 80% of the Market Price between 180 and 360 days
after August 7, 1998 and 78% of the Market Price after 360 days from such date.
On December 3, 1998, 125 preferred shares were converted to 95,420 shares of
common stock. Imputed dividends accreted, which amounted to $416,000 through
September 30, 1999 increasing the carrying value of the preferred stock.
(7) On February 12, 1999, pursuant to Regulation D, the Company completed a
private placement of 500 shares of Series B, 6% cumulative, convertible
preferred stock, par value $0.001 per share (the 'preferred stock') and 45,000
common stock purchase warrants (the 'Common Stock Purchase Warrants') for an
aggregate amount of $500,000. The placement agent received a $50,000 fee on the
private placement offering. The warrants expire on February 12, 2004 and have an
exercise price of $8.93 per share. The Series B preferred stock has a conversion
value of $1,000 per share. The Series B preferred stock will be converted
automatically on February 12, 2002.
(8) On May 12, 1999, pursuant to Regulation D, the Company completed a
private placement of 1,000 shares of Series B, 6% cumulative, convertible
preferred stock, par value $0.001 per share and 90,000 common stock purchase
warrants for an aggregate amount of $1,000,000. The placement agent received a
$75,000 fee on the private placement offering. Other expenses of the offering
amounted to $175,000. The warrants expire on May 12, 2004 and have an exercise
price of $8.93 per share. The Series B preferred stock has a conversion value of
$1,000 per share. The Series B preferred stock will be converted automatically
on May 12, 2002.
(9) On April 22, 1999, the Company completed a private placement of 235,295
shares of its common stock at $4.25 per share and received net proceeds of
approximately $940,000.
(10) The Company's outstanding warrants as of September 30, 1999 is as
follows:
EXERCISE EXPIRATION
DESCRIPTION SHARES PRICE DATE
----------- ------ ----- ----
Warrants issued in connection with contribution
of stock..................................... 125,000 $6.00 December 23, 2007
Warrants issued with first issuance of
preferred stock Series A..................... 87,500 $6.00 August 7, 2001
Warrants issued with second issuance of
preferred stock Series A..................... 50,000 $6.00 December 1, 2001
Warrants issued with first issuance of
preferred stock Series B..................... 45,000 $8.93 February 12, 2004
Warrants issued with second issuance of
preferred stock Series B..................... 90,000 $8.93 May 12, 2004
-------
397,500
-------
-------
F-51
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
NOTE I -- STOCK OPTION PLANS
(1) DIRECTOR STOCK OPTION PLAN:
On April 28, 1997, the Board of Directors adopted a stock option plan for
outside directors (the 'Director Plan') under which nonqualified stock options
may be granted to outside directors to purchase up to 78,254 shares of the
Company's common stock. The Director Plan was approved by the stockholders on
June 12, 1997. Pursuant to the Director Plan, each director is to be granted
options to purchase 3,912 shares of the Company's common stock at each annual
meeting of stockholders at which directors are elected. Options may be exercised
for ten years and one month after the date of grant and may not be exercised
during an eleven-month period following the date of grant unless there is a
change in control, as defined, or the compensation committee waives the
eleven-month continuous service requirement. During each of the years ended
September 30, 1999 and 1998, 11,736 options were granted to directors to
purchase the Company's common stock pursuant to the Director Plan; such options,
which were granted at prices equivalent to the market value of the common stock
at dates of grant, are exercisable immediately and expire on September 9, 2009
and October 31, 2008.
(2) EMPLOYEE STOCK OPTION PLAN:
On March 7, 1997, the Board of Directors adopted the Company's 1997 employee
stock option plan (the 'Plan'), which was amended by the Board of Directors on
April 29, 1997, under which incentive stock options and nonqualified stock
options may be granted to purchase up to 334,764 shares of the Company's common
stock. The Plan was approved by the stockholders on June 12, 1997. Incentive
stock options are to be granted at a price not less than the market value of the
common stock on the date of grant, or 110% of such market value to an individual
who owns more than ten percent of the voting power of the outstanding stock.
Nonqualified stock options are to be granted at a price determined by the
Company's compensation committee. On August 8, 1997, the Company granted 105,575
nonqualified options to its employees to purchase the Company's common stock.
The options, which were granted at an exercise price below market value, expire
on August 7, 2007. On September 11, 1997, the Company granted options to its
President to purchase 104,338 shares of the Company's common stock at $3.83 per
share which expire in ten years and vest over a three-year period. The market
value of the stock at date of grant was $4.55 per share. The Company recorded
$494,000 of unearned compensation relating to options granted to the President
and other employees, of which $124,000 and $115,000 was charged to operations
for the years ended September 30, 1999 and 1998, respectively, and $78,000 is to
be charged to operations over the remaining vesting periods of the options.
(3) OTHER GRANTS, AWARDS AND EQUITY ISSUANCES:
In April 1998, the Company granted options to purchase 90,000 shares of
common stock at $5.50 per share as compensation to individuals other than
employees for investment relation services. The options are exercisable
immediately and expire in April 2000. The estimated fair value of the options
which amounted to $205,000 was charged to operations during fiscal 1998.
During fiscal year 1999, the Company granted options to employees and
nonemployees to purchase 83,000 shares of common stock at exercise prices
ranging from $2.63 to $5.9375, of those, 50,000 options were in the money when
granted. The options exercise immediately and expire ranging from November 2003
to November 2009. The estimated fair value of the options which amounted to
$250,000 was charged to operations during fiscal year 1999.
During fiscal year 1999, the Company issued 16,750 shares of common stock as
compensation for investment related services. The market value of the shares
issued amounted to $85,000 and was charged to operations during fiscal 1999.
F-52
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
A summary of the Company's stock option activity and related information for
the years ended September 30 is as follows:
1999 1998
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
Balance outstanding -- at beginning of year..... 320,776 $3.78 219,040 $3.06
Granted......................................... 247,173 4.03 101,736 5.35
Exercised....................................... (46,956) 3.22
Returned/cancelled.............................. (17,999) 1.94
------- -------
Balance outstanding -- at end of year........... 502,994 4.02 320,776 3.78
------- -------
------- -------
Exercisable at end of year...................... 451,910 4.05 252,090 3.86
------- -------
------- -------
WEIGHTED
AVERAGE
NUMBER OF CONTRACTUAL NUMBER OF
EXERCISE OPTIONS REMAINING OPTIONS
PRICE OUTSTANDING LIFE (IN YEARS) EXERCISEABLE
----- ----------- --------------- ------------
$ 0.00 -- $1.99 $ 88,840 1.2-7.9 $ 63,840
$ 2.00 -- $2.99 25,000 4.1 25,000
$ 3.00 -- $3.99 175,569 7.9-9.9 149,485
$ 4.00 -- $4.99 74,284 8-10 74,284
$ 5.00 -- $5.99 97,700 .5-9.6 97,700
$ 6.00 -- $6.99 40,801 5-9.6 40,801
$ 7.00 -- $7.99 800 9.6 800
-------- --------
$502,994 $451,910
-------- --------
-------- --------
As indicated in Note C(12), the Company elected to account for its employee
stock based compensation under APB 25. Had compensation cost for stock option
grants been determined based on the fair value at the grant dates for awards
consistent with the method provided by SFAS No. 123, the Company's loss and loss
per share attributable to common stockholders would have been increased to the
pro forma amounts indicated below.
YEAR ENDED
SEPTEMBER 30,
-------------------------
1999 1998
---- ----
Net loss attributable to common
stockholders................................ As reported $(4,465,000) $(3,031,000)
Pro forma $(5,123,000) $(3,311,000)
Net loss attributable to common stockholders As
per share -- basic and diluted.............. reported... $(1.81) $(1.56)
Pro forma $(2.08) $(1.70)
The resulting pro forma effect on net loss and net loss per share disclosed
above is not necessarily representative of the effects on reported operations
for future years due to, among other things: (1) the vesting period of the stock
options and the (2) fair value of additional stock options in future years. The
weighted average fair value of the options granted to employees during the years
ended September 30, 1999 and 1998 is estimated at $2.66 and $3.33, respectively,
using the Black-Scholes option-pricing model with the following assumptions:
F-53
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
YEAR ENDED
SEPTEMBER 30,
----------------
1999 1998
---- ----
Risk free interest rates.................................. 4.39-5.99% 5.43%
Dividend yield............................................ 0% 0%
Volatility................................................ 70% 70%
Expected life of options (in years)....................... 2-10 10
NOTE J -- INCOME TAXES
The Company has a federal net operating loss carryforward of approximately
$7,380,000 as of September 30, 1999 of which $1,966,000 expires through 2012,
$2,632,000 expires in 2018 and $2,782,000 expires in 2019.
The Tax Reform Act of 1986 contains provisions which limits the net
operating loss carryforwards available for use in any given year should certain
events occur, including significant changes in ownership interests. The
utilization of approximately $3,257,000 of the Company's net operating loss
carryover is limited to approximately $466,000 per year as a result of the
Company's public offering (see Note (5)).
The tax effects of principal temporary differences and net operating loss
carryforwards are as follows as of September 30, 1999:
Asset:
Federal operating loss carryforwards.................... $ 2,509,000
Compensation expense -- stock options................... 114,000
Accounts receivable allowance........................... 21,000
Accrual basis to cash basis adjustments................. 4,000
-----------
2,648,000
Valuation allowance......................................... (2,648,000)
-----------
Net deferred tax asset...................................... $ 0
-----------
-----------
A valuation allowance has been provided for the deferred tax asset as the
likelihood of realization of the future tax benefits cannot be determined. The
increase in the valuation allowance during fiscal 1999 and 1998 was
approximately $530,000 and $988,000, respectively.
The differences between the statutory federal income tax rate and the
effective tax rate are as follows:
SEPTEMBER 30,
-----------------
1999 1998
---- ----
Tax benefit at statutory rate....................... (34.0)% (34.0)%
Nondeductible items................................. .3 .4
Increase in valuation allowance..................... 33.7 33.6
----- -----
Effective tax rate benefit.......................... $ 0% $ 0%
----- -----
----- -----
F-54
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
NOTE K -- COMMITMENTS AND OTHER MATTERS
(1) LEASES:
Future minimum lease payments under all leases as at September 30, 1999 are
as follows:
YEAR ENDING CAPITAL OPERATING OFFICE
SEPTEMBER 30, LEASES LEASES LEASES
------------- ------ ------ ------
2000................................ $32,000 $23,000 $100,000
2001................................ 24,000 11,000 86,000
2002................................ 4,000 52,000
2003................................ 12,000
------- ------- --------
$56,000 $38,000 $250,000
------- ------- --------
------- ------- --------
Rent expense for the years ended September 30, 1999 and 1998 was $97,000 and
$94,000, respectively.
(2) EMPLOYMENT CONTRACTS:
During 1999, the Company entered into a three-year employment contract with
its President for an annual salary of $180,000 per year with an annual
escalation of $20,000. Upon expiration of the employment contract, the term
shall be automatically renewed for one year unless either party gives written
notice prior to ninety days before the expiration date.
In connection with the acquisition of Software Associates, Inc., the Company
entered into an employment contract with Software Associates, Inc.'s sole
stockholder/president. The agreement expires on November 30, 2001 and provides
for annual salary of approximately $136,000 with a discretionary bonus as
determined by the Board of Directors.
In connection with the acquisition of Design Crafting, Inc., the Company
entered into a one-year employment contract with Design Crafting, Inc.'s former
stockholder for an annual salary of $140,000 plus commission. The employment
contract expired on April 30, 1999 and automatically renews each year unless
either party gives written notice prior to the annual renewal date.
(3) CONCENTRATION OF CREDIT RISK:
The Company places its cash and cash equivalents at various financial
institutions. At times, such amounts might be in excess of the FDIC insurance
limit. As of September 30, 1999, the Company's bank balance exceeded
approximately $195,000.
The Company routinely evaluates the credit worthiness of its customers to
limit its concentration of credit risk with respect to its trade receivables.
(4) SIGNIFICANT CUSTOMERS:
The Company had one customer that accounted for $888,000 or 29% of net sales
for the year ended September 30, 1999 and one customer that accounted for
$315,000 or 26% of net sales for the year ended September 30, 1998.
NOTE L -- RELATED PARTY TRANSACTIONS
(1) The Company leases its office space through December 31, 2002 from a
partnership whose partners are the Executive Vice President/stockholder of the
Company and his wife. The lease provides for an annual increase in rent of three
percent and requires the Company to pay condominium maintenance fees. Rent
expense under the lease amounted to approximately $44,000 in 1999 and $43,000 in
1998.
F-55
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(2) In March 1999, the Company received a short-term loan from a stockholder
of $100,000 which the Company repaid from the net proceeds of the private
placement described in Note H. During the year ended September 30, 1998, the
Company received loans of $115,000 from its CEO/stockholder. The entire loan
balance was repaid from the net proceeds of the public offering disclosed in
Note H.
NOTE M -- SUBSEQUENT EVENTS
(1) MERGER:
On November 10, 1999 the Company signed a binding letter agreement to enter
into a merger agreement with a privately held company also engaged in the
business-to-business e-commerce. The merger is subject to certain closing
conditions including stockholder approval of both companies. For accounting
purposes, the privately held company is expected to be treated as the acquirer.
In conjunction with the merger agreement, the Company received loans from
the privately held company totaling $750,000. Additional loans are anticipated.
The loans accrue simple interest at the rate of 8% per year and are due on
March 12, 2000. If loans are not repaid when due, the privately held company may
choose to convert the value of the loans into shares of the Company's common
stock. As additional consideration, the Company issued 2,500,000 warrants to
purchase the Company's common stock and upon execution of the definitive merger
agreement, an additional 5,000,000 warrants to purchase the Company's common
stock.
(2) CONVERSION OF PREFERRED SHARES:
Subsequent to September 30, 1999, 930 shares of Series A preferred stock had
been converted to 354,328 shares of common stock and all Series B preferred
shares had been converted to 574,914 shares of common stock.
(3) SETTLEMENT OF CONSULTING AGREEMENT:
In November 1999, the Company issued warrants to purchase 27,000 shares of
its common stock, valued at $140,000, and paid $17,000 in satisfaction of all
claims arising from a consulting agreement entered into by the Company. The
financial statements at September 30, 1999 provide for this transaction.
(4) CONTINGENT MATTER:
On December 17, 1999, an investment banker sued the Company for $3,500,000
which it claims it is due for introducing the parties in the merger referred to
in Note M[1]. The Company has made no provision in connection with this claim.
F-56
INTRODUCTORY NOTE
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation ("eB2B"), merged
with and into DynamicWeb Enterprises, Inc., a New Jersey corporation (the
"Company"), with the surviving company using the name `eB2B Commerce, Inc.'
(the "Combined Company"). Pursuant to the Agreement and Plan of Merger between
the Company and eB2B, the shareholders of the Company retained their shares in
the Company, while the shareholders of eB2B received shares, or derivative
securities convertible into common stock, of the Company representing
approximately 88% of the Combined Company, on a fully diluted basis. eB2B
is engaged in business-to-business e-commerce. After the merger, the Company
changed its Cusip number and its ticker symbol to `EBTB'. For more information
relating to the merger or eB2B, a Registration Statement (Form S-4) relating to
the merger was filed with the Securities and Exchange Commission on March 20,
2000 and became effective March 22, 2000. 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 the Company is the legal acquirer.
As a result of the reverse acquisition, the financial statements on a go
forward basis will be that of the accounting acquirer (eB2B), the net assets
of the legal acquirer (the Company) will be revalued and the purchase price
will be allocated to those assets acquired and liabilities assumed.
Subsequent to the merger on April 18, 2000, the Company was required to file a
quarterly financial statement (on 10-QSB) under the Securities Exchange Act
of 1934, as amended ("Securities Exchange Act"), for the quarter ended
March 31, 2000. In that the merger was completed after March 31, 2000,
the financial statements and other information contained in this Form 10-QSB
are reflective of business operations of the Company, and do not include
the financial information of eB2B. The Combined Company will begin to report
combined financial results for the quarter ended June 30, 2000.
F-57
eB2B COMMERCE, INC.
CONDENSED BALANCE SHEETS
MARCH 31, SEPTEMBER 30,
2000 1999
ASSETS (UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 1,413,000 $ 418,000
Accounts receivable, net of allowance for doubtful accounts
of $107,000 and $102,000 666,000 627,000
Prepaid expenses and other current assets 74,000 40,000
------------ -----------
TOTAL CURRENT ASSETS 2,153,000 1,085,000
------------ -----------
PROPERTY AND EQUIPMENT, less accumulated depreciation
of $288,000 and $208,000 460,000 459,000
------------ -----------
OTHER ASSETS
Patents and trademarks, less accumulated amortization of $25,000 and $19,000 17,000 23,000
Customer list, less accumulated amortization of $67,000 and $57,000 33,000 43,000
Software costs, less accumulated amortization of $152,000 and $113,000 221,000 73,000
Cost in excess of fair value of net assets acquired, net of accumulated
amortization of $97,000 and $72,000 738,000 436,000
Other assets 9,000 14,000
------------ -----------
TOTAL OTHER ASSETS 1,018,000 589,000
------------ -----------
$ 3,631,000 $ 2,133,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligations $ 59,000 $ 32,000
Loans payable 2,000,000 --
Accounts payable 471,000 305,000
Accrued expenses 721,000 396,000
Other current liabilities -- 12,000
Deferred revenue 85,000 95,000
------------ -----------
TOTAL CURRENT LIABILITIES 3,336,000 840,000
------------ -----------
CAPITAL LEASE OBLIGATIONS, net of current portion 27,000 24,000
------------ -----------
STOCKHOLDERS' EQUITY
Preferred stock - par value to be determined with each issue: 5,000,000 shares
authorized
Series A, 6% cumulative, convertible preferred stock, aggregate liquidation
value $1,787,500, $.001 par value, 0 and 1,375 shares issued and outstanding
at March 31, 2000 and September 30, 1999 -- 1,110,000
Series B, 6% cumulative, convertible preferred stock, aggregate liquidation
value $650,000, $.001 par value, 0 and 1,500 shares issued and outstanding
at March 31, 2000 and September 30, 1999 -- 1,027,000
Common stock, $.0001 par value, 50,000,000 shares authorized;
4,087,048 and 2,637,076 shares issued and outstanding at March 31, 2000
and September 30, 1999 -- --
Additional paid-in capital 12,977,000 8,508,000
Unearned portion of compensatory stock options (44,000) (78,000)
Accumulated deficit (12,665,000) (9,298,000)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 268,000 1,269,000
------------ -----------
$ 3,631,000 $ 2,133,000
============ ===========
See accompanying notes to condensed financial statements.
F-58
eB2B COMMERCE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
REVENUES
Transaction/subscription processing $ 370,000 $ 205,000 $ 751,000 $ 345,000
Consulting services 482,000 355,000 856,000 697,000
Network development 172,000 142,000 425,000 199,000
----------- ----------- ----------- -----------
1,024,000 702,000 2,032,000 1,241,000
COST OF REVENUES
Transaction/subscription processing 210,000 142,000 394,000 260,000
Consulting services 203,000 216,000 423,000 416,000
Network development 109,000 74,000 201,000 140,000
----------- ----------- ----------- -----------
522,000 432,000 1,018,000 816,000
GROSS PROFIT 502,000 270,000 1,014,000 425,000
----------- ----------- ----------- -----------
EXPENSES
Marketing and selling 440,000 372,000 880,000 721,000
General and administrative (including a
$653,000 write-down of assets for the
three and six months ended March 31, 2000) 1,602,000 425,000 2,296,000 812,000
Merger related expenses 780,000 -- 780,000 --
Research and development 276,000 97,000 477,000 192,000
----------- ----------- ----------- -----------
3,098,000 894,000 4,433,000 1,725,000
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (2,596,000) (624,000) (3,419,000) (1,300,000)
OTHER INCOME 89,000 -- 89,000 --
INTEREST (EXPENSE) INCOME AND OTHER, NET (34,000) 2,000 (37,000) 18,000
----------- ----------- ----------- -----------
NET LOSS (2,541,000) (622,000) (3,367,000) (1,282,000)
DIVIDENDS ON CUMULATIVE PREFERRED
STOCK, INCLUDING IMPUTED DIVIDENDS
OF $414,000 AND $558,000 FOR THE THREE
MONTHS AND SIX MONTHS ENDED
MARCH 31, 1999, RESPECTIVELY, AND $73,000 FOR
THE SIX MONTHS ENDED MARCH 31,
2000. -- (450,000) (97,000) (614,000)
----------- ----------- ----------- -----------
NET LOSS ATTRIBUTED TO COMMON
STOCKHOLDERS $(2,541,000) $(1,072,000) $(3,464,000) $(1,896,000)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE
BASIC AND DILUTED $ (0.66) $ (0.46) $ (0.99) $ (0.82)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 3,855,875 2,351,737 3,505,786 2,320,370
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
F-59
eB2B COMMERCE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
MARCH 31,
2000 1999
----------- -----------
OPERATING ACTIVITIES:
Net loss $(3,367,000) $(1,282,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of assets (2,000) (15,000)
Provision for bad debts 187,000 --
Depreciation and amortization 173,000 72,000
Write-down of assets 653,000 --
Stock options issued for compensation 34,000 86,000
Options and shares issued for services 221,000 --
Increase (decrease) in cash and cash equivalents attributable
to changes in operating assets and liabilities:
Accounts receivable, net (226,000) (296,000)
Prepaid expenses and other current assets (34,000) (14,000)
Other assets 5,000 --
Accounts payable 166,000 336,000
Accrued expenses 482,000 35,000
Other current liabilities (12,000) --
Deferred revenue (10,000) 191,000
----------- -----------
Net cash used in operating activites (1,730,000) (887,000)
----------- -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment (40,000) (19,000)
Acquisition of patents and trademarks -- (8,000)
Proceeds from sale of property, net of selling expense 5,000 189,000
Increase in software costs (187,000) (65,000)
----------- -----------
Net cash provided by (used in) investing activities (222,000) 97,000
----------- -----------
FINANCING ACTIVITIES:
Proceeds from loans 2,000,000 --
Proceeds from exercise of common stock options and warrants 917,000 --
Proceeds from issuance of preferred stock and warrants -- 795,000
Payment of long-term debt -- (187,000)
Payment of capital lease obligation (27,000) --
Proceeds from issuance of common stock 57,000 --
Loans from stockholders/officers -- 100,000
----------- -----------
Net cash provided by financing activities 2,947,000 708,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 995,000 (82,000)
CASH AND CASH EQUIVALENTS, beginning of period 418,000 290,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,413,000 $ 208,000
=========== ===========
See accompanying notes to condensed financial statements.
F-60
eB2B COMMERCE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A. 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 (the "Company"), with the surviving company
using the name "eB2B Commerce, Inc." (the "Combined Company").
Pursuant to the Agreement and Plan of Merger between the
Company and eB2B, the shareholders of the Company retained their
shares in the Company, while the shareholders of eB2B received
shares, or derivative securities convertible into common stock,
of the Company representing approximately 88% of the Combined
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 the
Company is the legal acquirer. As a result of the reverse
acquisition, the financial statements on a go forward basis will
be that of the accounting acquirer (eB2B), the net assets of the
legal acquirer (the Company) will be revalued and the purchase
price will be allocated to those assets acquired and liabilities
assumed. In that the merger was completed after March 31, 2000,
the financial statements and other information contained herein
are reflective of business operations of the Company, and do not
include the financial information of eB2B.
The accompanying unaudited condensed financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information (and with the
instructions to Form 10-QSB and Article 3 of Regulation S-B).
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included.
The balance sheet at September 30, 1999 has been derived from the
audited financial statements at that date but does not include all
the information and footnotes required by generally accepted
accounting principles for complete financial statements. For
further information, refer to the audited financial statements and
footnotes thereto included in the annual report on Form 10-KSB.
The Company provides services and software that facilitate
business-to-business e-commerce between buyers and sellers.
The Company's services include the provision of the necessary
infrastructure and operational services to facilitate electronic
transactions between buyers and sellers and consulting services
to businesses that wish to build and/or operate their own
e-commerce infrastructure.
NOTE B. LOSS PER SHARE
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings (loss) per share is computed
by dividing net income (loss) by a diluted weighted average
number of common shares outstanding during the period. Such
dilution is computed using the treasury stock method for the
assumed conversion of stock options, warrants and other
convertible securities whose exercise price was less than
the average market price of the common shares during the
respective period, and certain additional dilutive effect of
exercised, terminated and cancelled stock options.
For the six and three month periods ended March 31, 2000 and 1999,
diluted weighted-average common and common equivalent shares
outstanding were the same as basic weighted-average common and
common equivalent shares as all common share equivalents were
antidilutive given that the Company had a net loss for these
periods.
Options and warrants to purchase 1,027,277 and 901,606 common
shares at March 31, 2000 and 1999, respectively, were excluded
from the computation of diluted earnings per share because of
their antidilutive effect caused by the net loss during such
periods.
F-61
eB2B COMMERCE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C. SOFTWARE COSTS
Costs relating to the conceptual formulation and design of
software are expensed as research and development. Costs incurred
subsequent to establishment of technological feasibility to
produce the finished product are generally capitalized.
Technological feasibility was established when a product design
and a working model were completed. Capitalized software costs,
including certain license fees, are amortized by the straight-line
method over a maximum of three years or the expected life of the
product whichever is less.
NOTE D. USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
NOTE E. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
SIX MONTHS ENDED
MARCH 31,
2000 1999
---- ----
Equipment acquired under capital lease $ 57,000 $ --
---------- ----------
---------- ----------
Conversion of Series A preferred shares to common stock $1,110,000 $ --
---------- ----------
---------- ----------
Conversion of Series B preferred shares to common stock $1,027,000 $ --
---------- ----------
---------- ----------
Dividends accrued and converted to common stock $ 157,000 $ --
---------- ----------
---------- ----------
Issuance of 80,000 shares of common stock as additional
purchase price consideration for prior acquisition $ 980,000 $ --
---------- ----------
---------- ----------
During the quarter ended March 31, 2000, the Company issued 80,000
shares of common stock valued at $980,000 as additional purchase
price consideration for a prior acquisition. The Company recorded
the $980,000 as Cost in excess of fair value of net assets
acquired. The Company reviewed the assets previously acquired,
primarily a customer list, and determined the fair value of such
assets as of March 31, 2000 to be approximately one-third of the
shares issued. The determination was based primarily upon the
current and expected revenues from such customers. Accordingly
the Company recorded a $653,000 write-down. The remaining
$327,000 will be amortized over twenty months starting April 1,
2000.
During the period ended December 31, 1999 all 1,375 shares of
Series A and 1,500 shares of Series B cumulative, convertible
preferred stock, issued and outstanding at September 30, 1999,
were converted into 1,073,888 shares of common stock.
NOTE F. SUBSEQUENT EVENTS
On April 18, 2000, pursuant to an Agreement and Plan of Merger,
dated December 1, 1999, as amended by Amendment No. 1, dated as of
February 29, 2000 (the "Merger Agreement"), the Company merged
with eB2B, a company engaged in business-to-business e-commerce.
Pursuant to the Merger Agreement, each share of common stock of
the Company remained outstanding and each share of eB2B capital
stock was exchanged for the equivalent of 2.66 shares of the
Company's common stock. In addition, each share of eB2B preferred
stock was exchanged for a like share of preferred stock in the
Company. In accordance with the terms of the Merger Agreement,
eB2B shareholders own approximately 88% of the Combined
Company, on a fully diluted basis. The transaction is a tax-free
merger and reorganization. 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 the
Company was the legal acquirer. As a result of the reverse
acquisition, the financial statements on a go forward basis will
be that of the accounting acquirer (eB2B), the net assets of
the legal acquirer (the Company) will be revalued and the purchase
price will be allocated to those assets acquired and liabilities
assumed. In addition, the Combined Company's year-end will change
to a calendar year ending December 31st.
F-62
eB2B COMMERCE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F. SUBSEQUENT EVENTS (CONTINUED)
The Company entered into a loan agreement with eB2B, dated
November 12, 1999, as amended by Amendment No. 1, dated November
19, 1999, as amended by Amendment No. 2 dated February 29, 2000
(the "Loan Agreement"). Details about the Merger Agreement and
Loan Agreement are contained in the Company's financial statements
as of September 30, 1999, included in Form 10-KSB and the
registration statement on Form S-4.
Under the Loan Agreement, eB2B loaned the Company $2,000,000
subject to certain conditions. The Company received $250,000 in
November 1999 and $1,750,000 in December 1999. All loans under the
Loan Agreement accrue simple interest at the rate of eight percent
(8%) per year. The loans had a maturity date of May 12, 2000. The
Loan Agreement contains standard termination provisions, as well
as representations, warranties and covenants from the Company to
eB2B. As of April 18, 2000, the above loans were deemed cancelled
in connection with the merger.
As additional consideration for the loans, the Company also issued
to eB2B warrants to purchase, under certain conditions, an
aggregate of 7,500,000 shares of the Company's common stock at an
exercise price of $2.00 per share. As of April 18, 2000, the
above warrants were deemed cancelled in connection with the
merger.
F-63
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
NETLAN ENTERPRISES, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of NETLAN
Enterprises, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NETLAN
Enterprises, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
February 22, 2000, except for the
last paragraph of Note 17, which is
as of February 24, 2000
F-64
NETLAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------
1999 1998
---- ----
ASSETS
Current assets
Cash........................................................ $ 83,324 $ 804,680
Accounts receivable, less allowance for doubtful accounts of
$93,000 in 1999 and $115,000 in 1998...................... 387,769 2,259,585
Inventories................................................. 52,736 132,156
Other current assets........................................ 3,932 158,965
----------- ----------
Total current assets................................ 527,761 3,355,386
----------- ----------
Property and equipment, net................................. 648,713 749,153
----------- ----------
Other assets
Intangible assets, net.................................. 734,195 1,003,706
Restricted cash......................................... 501,929
Other................................................... 48,619 54,500
----------- ----------
782,814 1,560,135
----------- ----------
$ 1,959,288 $5,664,674
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Line of credit, bank...................................... $ 582,704 $ 60,131
Loan payable.............................................. 1,500,000 2,000,000
Accounts payable and accrued expenses..................... 1,626,598 2,023,617
Obligations under capital leases, current portion......... 173,381 77,292
Deferred revenues......................................... 198,121 968,404
Commissions payable....................................... 97,067 211,057
Other current liabilities................................. 61,458 167,242
----------- ----------
Total current liabilities........................... 4,239,329 5,507,743
----------- ----------
Long-term liabilities,
Obligations under capital leases, less current portion.... 64,448 96,292
----------- ----------
Commitments and contingencies
Stockholders' equity (deficit)
Class A common stock, .01 par value,
authorized 2,500,000 shares, issued and outstanding
2,403,300 shares in 1999 and 1,098,000 in 1998.......... 24,033 10,980
Class B common stock, .01 par value, authorized 200,000
shares, no shares issued or outstanding
Capital in excess of par value............................ 866,915 814,703
Accumulated deficit....................................... (3,235,437) (765,044)
----------- ----------
Total stockholders' equity (deficit)................ (2,344,489) 60,639
----------- ----------
$ 1,959,288 $5,664,674
----------- ----------
----------- ----------
See accompanying notes to consolidated financial statements.
F-65
NETLAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------
1997
1999 1998 (UNAUDITED)
---- ---- -----------
Revenues
Internet applications................................ $ 1,949,101 $1,067,267 $ 51,000
Educational services................................. 2,254,090 2,602,088 2,333,681
Other................................................ 19,163 44,579 39,706
----------- ---------- ----------
4,222,354 3,713,934 2,424,387
----------- ---------- ----------
Cost of revenues
Internet applications................................ 1,364,795 422,472 30,000
Educational services................................. 1,391,849 1,304,693 1,029,659
----------- ---------- ----------
2,756,644 1,727,165 1,059,659
----------- ---------- ----------
Gross profit............................................. 1,465,710 1,986,769 1,364,728
Operating expenses....................................... 2,919,700 2,119,850 1,104,213
----------- ---------- ----------
Income (loss) from operations............................ (1,453,990) (133,081) 260,515
----------- ---------- ----------
Other expense
Interest expense..................................... 244,240 220,953 13,241
Other................................................ 66,125
----------- ---------- ----------
244,240 220,953 79,366
----------- ---------- ----------
Income (loss) from continuing operations................. (1,698,230) (354,034) 181,149
Loss from discontinued operations, net of income tax
(benefit) of approximately ($10,000) in 1998 and
$23,000 in 1997........................................ (772,163) (476,898) (37,140)
----------- ---------- ----------
Net income (loss)........................................ $(2,470,393) $ (830,932) $ 144,009
----------- ---------- ----------
----------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-66
NETLAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
CLASS A CLASS A CAPITAL RETAINED
COMMON STOCK COMMON IN EXCESS EARNINGS
------------------- STOCK OF PAR (ACCUMULATED SUBSCRIPTION
SHARES AMOUNT SUBSCRIBED VALUE DEFICIT) RECEIVABLE
------ ------ ---------- ----- -------- ----------
Balances, January 1, 1997
(unaudited)................ 1,026,700 $10,267 $ 200 $397,616 $ 311,879 $(18,000)
Issuance of common stock
(unaudited)................ 11,300 113 (200) 17,687 18,000
Dividends (unaudited)........ (190,000)
Net income (unaudited)....... 144,009
--------- ------- ----- -------- ----------- --------
Balances, January 1, 1998.... 1,038,000 10,380 -- 415,303 265,888 --
Issuance of common stock..... 60,000 600 399,400
Dividends.................... (200,000)
Net loss..................... (830,932)
--------- ------- ----- -------- ----------- --------
Balances, January 1, 1999.... 1,098,000 10,980 -- 814,703 (765,044) --
Issuance of common stock..... 1,305,300 13,053 52,212
Net loss..................... (2,470,393)
--------- ------- ----- -------- ----------- --------
Balances, December 31,
1999....................... 2,403,300 $24,033 $-- $866,915 $(3,235,437) $ --
--------- ------- ----- -------- ----------- --------
--------- ------- ----- -------- ----------- --------
See accompanying notes to consolidated financial statements.
F-67
NETLAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
---- ---- ----
(UNAUDITED)
Cash flows from operating activities
Net income (loss)..................................... $(2,470,393) $(830,932) $ 144,009
Deduct loss from discontinued operations.............. (772,163) (476,898) (37,140)
----------- --------- ---------
Income (loss) from continuing operations.............. (1,698,230) (354,034) 181,149
Adjustments to reconcile income (loss) from continuing
operations to net cash used in operating activities:
Provision for allowance for doubtful accounts..... 55,504 7,344
Depreciation and amortization..................... 330,131 174,392 112,164
Other non-cash items.............................. 65,265 180,000 47,600
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.... 582,140 (361,663) (307,595)
(Increase) decrease in inventories............ 11,839 6,886 (32,709)
(Increase) decrease in other current assets... (618) 5,752 (3,150)
(Increase) decrease in other assets........... (26,019) 10,275 5,898
Increase in accounts payable and accrued
expenses.................................... 353,381 127,983 157,856
Increase (decrease) in deferred revenues...... (106,282) 105,031 (3,084)
Increase (decrease) in commissions payable.... (70,250) 91,437
Increase in other current liabilities......... 67,969 5,237 1,526
----------- --------- ---------
Net cash provided by (used in) operating activities of
continuing operations................................... (435,170) (8,704) 166,999
Net cash provided by (used in) operating activities of
discontinued operations................................. (563,043) 514,208 828,663
----------- --------- ---------
Net cash provided by (used in) operating activities....... (998,213) 505,504 995,662
----------- --------- ---------
Cash flows from investing activities
Purchases of property and equipment................... (83,484) (263,334) (235,078)
Acquisition of business, net of cash acquired......... (249,430)
Proceeds from sales of property and equipment......... 4,854
Purchases of software................................. (55,733)
----------- --------- ---------
Net cash used in investing activities..................... (83,484) (568,497) (230,224)
----------- --------- ---------
Cash flows from financing activities
Payments for deferred loan costs...................... (184,110)
Repayments of line of credit, bank.................... (250,000) (300,000)
Proceeds from line of credit, bank.................... 522,573 60,131
Proceeds from loan payable............................ 2,000,000
(Increase) decrease in restricted cash................ 1,929 (501,929)
Repayments of obligations under capital leases........ (164,161) (114,901) (151,032)
Repayments of assumed liabilities..................... (252,618)
Repayments of loans payable, stockholders............. (43,478)
Proceeds from issuance of common stock................ 18,000
Dividends paid to stockholders........................ (200,000) (190,000)
----------- --------- ---------
Net cash provided by (used in) financing activities....... 360,341 556,573 (666,510)
----------- --------- ---------
Net increase (decrease) in cash........................... (721,356) 493,580 98,928
Cash, beginning of year................................... 804,680 311,100 212,172
----------- --------- ---------
Cash, end of year......................................... $ 83,324 $ 804,680 $ 311,100
----------- --------- ---------
----------- --------- ---------
See accompanying notes to consolidated financial statements.
F-68
NETLAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
---- ---- ----
(UNAUDITED)
Supplemental disclosures of cash flow information, cash paid
during the year for:
Interest................................................ $252,240 $119,324 $ 13,241
-------- -------- --------
-------- -------- --------
Income taxes............................................ $ -- $ 30,017 $ 18,525
-------- -------- --------
-------- -------- --------
Supplementary schedule of non-cash investing and financing
activities
Property and equipment recorded pursuant to obligations
under capital leases.................................. $228,406 $ 66,876 $239,586
-------- -------- --------
-------- -------- --------
Common stock issued in connection with acquisition
(Note 6).............................................. $ -- $400,000 $ --
-------- -------- --------
-------- -------- --------
See accompanying notes to consolidated financial statements.
F-69
NETLAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Netlan Enterprises Inc. and Subsidiaries (NETLAN) provides its client base
strategic technology and education solutions. NETLAN designs, develops and
implements collaborative computing applications providing client organizations
the ability to replace paper-based processes with enhanced computer-based
applications. In addition, NETLAN provides authorized technical education for
Citrix, Lotus Development Corporation, Microsoft Corporation, and Novell Inc. to
its client base. NETLAN designs and delivers custom technical education for the
same client base and provides education through delivery of custom
computer-based training and internet-based on-line training. In addition, NETLAN
provides services related to the expanding internet marketplace through its
Interactive Applications Division. These services include internet strategy
development and analysis, internet marketing strategy development and
implementation, web site development, development and implementation and
CD-ROM-based and web-based custom training applications. NETLAN's services and
products are provided to commercial, government and not-for-profit
organizations. Substantially all of NETLAN's revenues are derived from customers
in the New York Metropolitan area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of NETLAN
Enterprises, Inc. and its wholly owned subsidiaries: Netlan Inc., Netlan II
Inc., and Netlan Acquisition Corp. (collectively 'the Company'). On November 3,
1998, stockholders of Netlan Inc. and Netlan II Inc. contributed 100% of their
stock to NETLAN Enterprises, Inc. in exchange for 1,038,000 shares under a
reorganization. Accordingly, the transaction has been accounted for as a merger
of entities under common control, similar to a pooling of interests.
Simultaneous with the above transaction, Netlan Enterprises, Inc. assumed the
net liabilities of a company in exchange for 60,000 shares of common stock. The
transaction has been recorded for under the purchase method of accounting. All
significant intercompany transactions and balances have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value,
determined on the 'first-in, first-out' (FIFO) basis. At December 31, 1999,
inventories solely consisted of course materials. At December 31, 1998,
inventories consisted of approximately $67,000 of spare parts and $65,000 of
course materials.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over
estimated useful lives ranging from 3 to 7 years. Leasehold improvements are
amortized using the straight-line method over the terms of the respective
leases.
INTANGIBLE ASSETS
Goodwill and deferred software costs are amortized using the straight-line
method over estimated useful lives of 5 and 3 years, respectively.
INCOME TAXES
The Company's stockholders have elected to treat the Company as an 'S'
Corporation for federal and state income tax purposes. Accordingly, the
individual stockholders are liable for taxes on corporate income and are receive
the benefit of allowable corporate losses.
F-70
NETLAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Internet applications revenue is recognized on a percentage-of-completion
method. The revenues and costs related to the unearned portion of a contract are
treated as deferred revenues and prepaid expenses, respectively, in the
accompanying consolidated balance sheets. In addition, educational service
revenue is recognized upon completion of the seminar and is based upon the class
attended. Deferred revenues include amounts billed for training seminars and
classes that have not been completed.
3. PROPERTY AND EQUIPMENT
At December 31, 1999 and 1998, property and equipment consists of the
following:
1999 1998
---- ----
Furniture and fixtures...................................... $ 300,257 $ 300,257
Office, classroom and lab equipment......................... 1,992,003 1,739,332
Leasehold improvements...................................... 102,542 102,542
---------- ----------
2,394,802 2,142,131
Accumulated depreciation and amortization................... 1,746,089 1,392,978
---------- ----------
$ 648,713 $ 749,153
---------- ----------
---------- ----------
Depreciation and amortization expense from continuing operations for the
years ended December 31, 1999, 1998 and 1997 was approximately $142,000,
$135,000 and $112,000 (unaudited), respectively.
4. INTANGIBLE ASSETS
At December 31, 1999 and 1998 , intangible assets consist of the following:
1999 1998
---- ----
Goodwill.................................................... $941,717 $ 941,717
Deferred software costs..................................... 97,403
-------- ----------
941,717 1,039,120
Accumulated amortization.................................... 207,522 35,414
-------- ----------
$734,195 $1,003,706
-------- ----------
-------- ----------
Amortization expense from continuing operations for the years ended December
31, 1999, 1998 and 1997 was approximately $188,000, $40,000 and nil (unaudited),
respectively.
F-71
NETLAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. OBLIGATIONS UNDER CAPITAL LEASES
At December 31, 1999, obligations under capital leases consist of the
following:
Various leases with monthly payments aggregating $15,518
with inputed interest ranging from 9.2% to 17.4% per
annum..................................................... $261,303
Less amount representing interest........................... 23,474
--------
Present value of lease payments............................. 237,829
Less current portion........................................ 173,381
--------
$ 64,448
--------
--------
Scheduled future minimum aggregate payments on obligations under capital
leases are as follows:
YEAR ENDING DECEMBER 31,
- - - ------------------------
2000........................................................ $173,381
2001........................................................ 64,448
--------
$237,829
--------
--------
At December 31, 1999 and 1998, property and equipment includes assets
acquired under capital leases with a cost of approximately $658,000 and
$466,000, respectively, and accumulated depreciation of approximately $391,000
and $290,000, respectively.
6. ACQUISITION
On November 3, 1998, the Company assumed the net liabilities of Interactive
Communications International, Inc., ('ICI') in exchange for 60,000 shares of the
Company's common stock (valued at $400,000) and payment of costs associated with
the acquisition of $259,280. Goodwill recorded in the acquisition amounted to
$941,717. The acquisition has been recorded under the purchase method of
accounting. The net liabilities assumed were recorded at their approximate fair
values, and are summarized as follows:
Cash........................................................ $ 9,850
Accounts receivable......................................... 97,125
Property and equipment...................................... 84,543
Intangible assets........................................... 941,717
Accounts payable............................................ (221,338)
Loans payable............................................... (107,000)
Other current liabilities................................... (145,617)
---------
$ 659,280
---------
---------
The following unaudited pro forma information for 1998 and 1997 gives effect
to the acquisition of ICI as if it had occurred on January 1, 1997:
1998 1997
---- ----
Revenues.................................................... $4,631,000 $3,691,000
---------- ----------
---------- ----------
Income (loss) from continuing operations.................... $ (560,000) $ 105,000
---------- ----------
---------- ----------
7. LINE OF CREDIT, BANK
During 1999, the Company obtained a $2.5 million revolving line of credit
which bears interest at the bank's base rate plus .6%. The line of credit is
collateralized by substantially all of the Company's assets and is personally
guaranteed by certain stockholders of the Company. The maximum amount the
Company can borrow on the line of credit is the lesser of $2.5 million or 85% of
the net amount of
F-72
NETLAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Acceptable Accounts Receivable, as defined in the line of credit agreement. In
February 1999, the bank froze the borrowings of approximately $583,000 under the
line of credit (Note 17).
8. LOAN PAYABLE
On November 3, 1998, the Company obtained financing in the form of a loan
payable of $2,000,000 which bears interest at 10.25% and matures November 3,
2005. Interest is payable in monthly installments beginning on December 1, 1998.
Principal is payable in monthly installments of $33,333 beginning on November 1,
2000 through the maturity date. The loan agreement contains various restrictions
and covenants. The loan includes warrants to purchase 102,000 shares or 8.5% of
the Company's common stock at $14.42 per share through June 30, 2009. On or
after November 3, 2003, the Company may repurchase the warrant at a call price
as defined in the agreement. In addition, the lender may require the Company to
repurchase the warrant at a put price, as defined in the agreement. The Company
was required to establish and maintain an escrow fund of $500,000 in accordance
with an agreement with the lender. On July 22, 1999, balance of the escrow fund
of $500,000 was applied to the outstanding balance of the $2,000,000 loan
payable (Note 17).
In exchange for professional services rendered in connection with the
financing, the Company has granted an unrelated consulting firm a warrant to
purchase 137,000 shares of the Company's common stock at $14.42 per share
through October 3, 2008.
On March 31, 1999, the Company issued a warrant to the lender of the
$2,000,000 loan payable to purchase 4,000 shares or .3323% of the Company's
common stock at $6.25 per share through June 30, 2009.
9. STOCKHOLDERS' EQUITY (DEFICIT)
On July 19, 1999, the Company amended its certificate of incorporation
increasing the authorized shares of common stock to 2,700,000 of which 2,500,000
shares are designated as voting (class A) and 200,000 shares are designated as
non-voting (class B). As a result of the amendment, the stockholders approved to
issue 99 voting shares of common stock for each of the 10,980 voting shares then
outstanding. The accompanying consolidated financial statements have been
restated to give effect to this transaction.
On December 1, 1999, the Company issued 1,305,300 additional shares of its
common stock to certain of its existing stockholders/employees and to one of its
employees as compensation for services. Accordingly, the statement of operations
for the year ended December 31, 1999 includes a charge to compensation of
approximately $65,000 for the fair value of the shares issued.
10. STOCK OPTIONS
On July 19, 1999, the Company amended its incentive stock option plan (the
'Plan') which provides for the granting of stock options, for up to 83,700 class
B common shares, to key employees at a price not less than fair market value at
the date of the grant. The stock options expire and terminate automatically upon
the earlier of thirty days following cessation of employment by the Company,
three months following effective date of the grantee's retirement, one year
following the date on which the grantee's services cease with the Company due to
death or disability or the date of expiration of the option determined by the
Board of Directors of the Company. The Company granted 27,967 stock options at
$1.50 per share, the fair value at the date of the grant. Had compensation cost
for the Plan been determined based on the fair value at the grant date,
consistent with SFAS No. 123, the Company's
F-73
NETLAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 net loss (no stock options were granted in 1998 or 1997) would have been
adjusted to the pro forma amounts indicated below:
Loss from continuing operations, as reported................ $(1,698,000)
-----------
-----------
Loss from continuing operations, pro forma.................. $(1,717,000)
-----------
-----------
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1999: risk-free interest rate of 6%; no dividend
yield; expected lives of 10 years; and zero volatility.
11. CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances in financial institutions located in
the New York Metropolitan area. At various times during the years ended December
31, 1999 and 1998, the Company's cash balances may have exceeded the federally
insured deposit limits of $100,000.
12. RELATED PARTY TRANSACTIONS
At December 31, 1999 and 1998, the Company has loans payable to stockholders
of approximately $33,000 and $40,000, which are included in other current
liabilities. The loans bear interest at 3.20% and are due on demand.
For the year ended December 31, 1999, internet application revenues include
approximately $59,000 relating to internet web-based services provided to an
affiliate.
13. PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan, which covers substantially all
employees that meet certain eligibility requirements. The participants of the
plan are permitted to defer up to 15% of their compensation annually; however,
the deferral may not exceed limits imposed by the Internal Revenue Code. The
Company will also make an annual contribution matching up to three percent of
the participant's total compensation. Any additional contributions to the plan
by the Company will be made at the discretion of the Board of Directors.
Contributions under this plan were approximately $55,000, $63,000, and $57,000
(unaudited) for the years ended December 31, 1999, 1998 and 1997, respectively.
14. DISCONTINUED OPERATIONS
On October 31, 1999, the Company discontinued its services relating to
computer network design, consulting, implementation, integration, procurement
and support. For the years ended December 31, 1999, 1998 and 1997, the loss from
discontinued operations was approximately $773,000, $477,000 and $37,000
(unaudited) and revenues from discontinued operations were approximately
$5,954,000, $12,846,000 and $14,065,000 (unaudited), respectively. The
accompanying consolidated financial statements have been restated to reflect the
revenues and expenses relating to these operations as loss from discontinued
operations.
Management negotiated with its vendors to pay its trade payables at a
discount. For the year ended December 31, 1999, loss from discontinued
operations includes a gain of approximately $415,000. In addition, the Company
sold its rights relating to service and maintenance contracts to a third party
for a nominal amount. For the year ended December 31, 1999, loss from
discontinued operations includes a gain of approximately $209,000 relating to
the write off of the unearned portion of these contracts.
15. SEGMENT INFORMATION
The Company has two reportable segments: Netlan II Inc. and Netlan
Acquisition Corp. ('ICI').
F-74
NETLAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Netlan II Inc. segment provides authorized technical education and training.
The ICI segment provides services relating to internet strategy development and
analysis, internet marketing strategy development and implementation, web site
development, CD-ROM-based and web-based custom training applications and design,
development and implementation of collaborative computing applications. Some
business activities cannot be classified in the aforementioned segments and are
shown under 'Corporate'.
Operating segment information for the years ended December 31, 1999, 1998
and 1997 is summarized as follows (in thousands):
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------
NETLAN
ACQUISITION
CORP.
NETLAN II INC. ('ICI') CORPORATE CONSOLIDATED
-------------- ------- --------- ------------
Revenues................................ $2,284 $1,938 $ -- $4,222
------ ------ ---- ------
------ ------ ---- ------
Operating loss.......................... $ 296 $ 422 $736 $1,454
------ ------ ---- ------
------ ------ ---- ------
Interest expense........................ $ 16 $ -- $228 $ 244
------ ------ ---- ------
------ ------ ---- ------
Depreciation and amortization........... $ 106 $ 183 $ 41 $ 330
------ ------ ---- ------
------ ------ ---- ------
Total assets............................ $ 609 $ 944 $176 $1,729
------ ------ ---- ------
------ ------ ---- ------
Capital expenditures.................... $ 83 $ -- $ -- $ 83
------ ------ ---- ------
------ ------ ---- ------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------
NETLAN
ACQUISITION
CORP.
NETLAN II INC. ('ICI') CORPORATE CONSOLIDATED
-------------- ------- --------- ------------
Revenues................................ $2,647 $1,067 $ -- $3,714
------ ------ ------ ------
------ ------ ------ ------
Operating income (loss)................. $ 91 $ (139) $ (85) $ (133)
------ ------ ------ ------
------ ------ ------ ------
Interest expense........................ $ 11 $ 11 $ 209 $ 231
------ ------ ------ ------
------ ------ ------ ------
Depreciation and amortization........... $ 124 $ 39 $ 11 $ 174
------ ------ ------ ------
------ ------ ------ ------
Total assets............................ $ 815 $1,978 $1,345 $4,138
------ ------ ------ ------
------ ------ ------ ------
Capital expenditures.................... $ 45 $ 2 $ -- $ 4
------ ------ ------ ------
------ ------ ------ ------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
NETLAN
ACQUISITION
CORP.
NETLAN II INC. ('ICI') CORPORATE CONSOLIDATED
-------------- ------- --------- ------------
Revenues................................ $2,373 $ 51 $ -- $2,424
Operating income (loss)................. $ 318 $ (58) $ -- $ 260
Interest expense........................ $ 13 $ -- $ -- $ 13
Depreciation and amortization........... $ 112 $ -- $ -- $ 112
Total assets............................ $ 837 $ 79 $ -- $ 916
Capital expenditures.................... $ 87 $ -- $ -- $ 87
------ ------ ------ ------
------ ------ ------ ------
The total assets in the above table include the assets from continuing
operations only, total assets of Netlan Inc., the discontinued segment, were
$230, $1,527 and $3,504 at December 31, 1999, 1998 and 1997, respectively. In
addition, Netlan Inc. incurred capital expenditures of $216 and $148 (unaudited)
for the years ended December 31, 1998 and 1997, respectively.
F-75
NETLAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities under four operating leases
expiring in 2001. The leases provide for minimum annual rent plus adjustments
for increases in the Consumer Price Index and certain expenses over based period
amounts. Aggregate future minimum rental payments are as follows:
YEAR ENDING
DECEMBER 31,
------------
2000............................................ $297,200
2001............................................ 194,200
--------
$491,400
--------
--------
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $193,000, $87,000, and $75,000 (unaudited), respectively.
The Company is a defendant in various lawsuits related to matters arising in
the normal course of business. It is the opinion of management that the
disposition of these lawsuits will not, individually or in the aggregate,
materially adversely affect the consolidated financial position, results of
operations or cash flows of the Company.
17. SUBSEQUENT EVENTS
On January 27, 2000, the Company amended its certificate of incorporation
increasing the number of authorized shares of common stock to 5,000,000, of
which 4,800,000 shares are designated as voting (class A) and 200,000 shares are
designated as non-voting (class B).
On February 18, 2000, one of the Company's stockholders exercised his
preemptive right, as a result of the issuance of common stock on December 1,
1999 (Note 9), to purchase 13,573 shares of common stock at a price of five
cents per share.
On February 22, 2000, the Company entered into a plan of merger with eB2B
Commerce, Inc. ('eB2B.com') whereby the Company's stockholders will exchange
100% of their common stock for 122,182 equivalent shares, as defined in the
agreement, of eB2B.com's common stock.
On February 22, 2000, eB2B.com repaid the loan payable of $1.5 million (Note
8).
As of February 22, 2000, the Company is in violation of certain covenants
set forth in the line of credit agreement. On February 24, 2000, eB2B.com repaid
the $583,000 line of credit (Note 7).
F-76
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this
prospectus. We have not authorized anyone to provide prospective investors with
different or additional information. This prospectus is not an offer to sell nor
is it seeking an offer to buy in any jurisdiction where such offer, or sale is
not permitted. The information contained in this prospectus is correct only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of these shares.
------------------------------------
TABLE OF CONTENTS
Prospectus Summary..................................................2
Risk Factors........................................................4
Forward Looking Statements.........................................13
Use of Proceeds....................................................13
Price Range of Common Stock........................................13
Dividend Policy....................................................14
Selected Financial Data............................................15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................................................16
Business...........................................................23
Management.........................................................31
Beneficial Ownership of Securities.................................37
Certain Transactions...............................................39
Selling Securityholders............................................40
Description of Securities..........................................53
Plan of Distribution...............................................58
Legal Matters......................................................59
Experts............................................................59
Where You Can Find Additional
Information ..................................................60
Index to Financial Statements.....................................F-1
87,549,195 shares
eB2B Commerce, Inc.
------------------------------------
Prospectus
------------------------------------
, 2001
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
Information not required in prospectus
Item 24. Indemnification of directors and officers.
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.
Item 25. Other expenses of issuance and distribution
The estimated expenses of the distribution, all of which are to be
borne by the Registrant, are as follows:
SEC Registration Fee.................................................................... $ 9,929
Blue Sky Fees and Expenses*............................................................. *
Accounting Fees and Expenses*........................................................... *
Legal Fees and Expenses*................................................................ *
Miscellaneous........................................................................... *
Total............................................................................ $ *
============
- - - ----------
* To be provided by amendment.
Item 26. Recent sales of unregistered securities
In April 1999, former eB2B Commerce, Inc., a Delaware corporation
("former eB2B"), a predecessor of the Registrant, concluded a private placement
offering of Series A preferred stock and common stock to 13 accredited investors
for an aggregate of $300,000. Investors were issued 300 shares of Series A
preferred stock at
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$1,000 per share, convertible into an aggregate of 399,000 shares of common
stock. The issuance of these shares was exempt from registration pursuant to
Rule 506 promulgated under Section 4(2) of the Securities Act.
In October 1999, Michael Falk, a member of the Registrant's board of
directors, and ComVest Partners LLC, each an accredited investor, in exchange
for $375,000, received 7% promissory notes and five-year, immediately
exercisable warrants to purchase an aggregate of 1,326,433 shares of common
stock with an exercise price of $1.50 per share. These promissory notes and
warrants were replaced by promissory notes and warrants in the subsequent bridge
financing. The issuance of these securities was exempt from registration
pursuant to Rule 506 promulgated under Section 4(2) of the Securities Act.
In October 1999, in exchange for an aggregate of $1 million, (which
included the replacement of promissory notes and warrants previously issued in
the pre-bridge financing) ComVest Partners LLC, Commonwealth and nine additional
accredited investors were issued 7% promissory notes automatically convertible
into the shares of preferred stock in the subsequent Series B preferred stock
private placement and seven-year immediately exercisable warrants to purchase an
aggregate of 717,409 shares of common stock at an exercise price of $4.00 per
share ($1.50 reflective of the 2.66 to 1 exchange ratio in the Registrant's
April 2000 Merger. In May 2001, these warrants were adjusted to become warrants
to purchase an aggregate of 5,724,904 shares of common stock with an exercise
price of $.50 per share. The issuance of these securities was exempt from
registration pursuant to Rule 506 promulgated by Section 4(2) of the Securities
Act.
In November 1999, Commonwealth and its designees were issued five-year
warrants to purchase the equivalent of 1,250,200 shares of the Registrant's
common stock at an exercise price of $2.0677 per share in consideration for
providing former eB2B with financial advisory services. These warrants vested
upon completion of the Registrant's April 2000 merger, at which time they became
immediately exercisable. The granting of these warrants was exempt from
registration pursuant to Rule 506 promulgated by Section 4(2) of the Securities
Act.
In December 1999, the Registrant concluded a private placement offering
of $33 million in Series B preferred stock and warrants to approximately 530
accredited investors. The Registrant issued approximately 3,300,000 shares of
Series B preferred stock, convertible into approximately 15,960,000 shares of
common stock, and seven-year, immediately exercisable warrants to purchase
approximately 3,990,000 shares with an exercise price of $2.0677 per share.
Since issued, the number of underlying shares of these warrants was adjusted to
increase by 63.3% and the exercise price was adjusted to $1.266 per share. The
issuance of these securities was exempt from registration pursuant to Rule 506
promulgated by Section 4(2) of the Securities Act.
In connection with the December 1999 private placement, the Registrant
also issued seven-year, immediately exercisable warrants to purchase an
aggregate of approximately 3.9 million shares of common stock to Commonwealth
for acting as the placement agent in connection with such private placement with
an exercise price of $2.0677 per share. Since issuance, the number of shares was
adjusted to increase by 63.3% and the exercise price was adjusted to $1.366 per
share. The granting of these warrants was exempt from registration pursuant to
Rule 506 promulgated by Section 4(2) of the Securities Act.
In connection with the Series B private placement, the Registrant also
engaged Commonwealth as a finder in connection with merger and acquisition
transactions. As part of the finder's fee agreement, the Registrant issued
Commonwealth 720,282 shares of common stock and seven-year immediately
exercisable warrants to purchase 502,383 shares of common stock with an exercise
price of $5.50 per share ($2.07 reflective of the 2.66 to 1 exchange ratio in
the Registrant's April 2000 merger. The granting of these warrants was exempt
from registration by Rule 506 promulgated pursuant to Section 4(2) of the
Securities Act.
In May 2001, the Registrant completed a private placement of
convertible notes and warrants to seven accredited investors. Pursuant to the
financing, the Registrant issued $7,500,000 of principal amount of 7%
convertible notes, convertible into an aggregate of 15,000,000 shares of common
stock, and warrants to purchase an
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aggregate 15,000,000 shares of common stock at an exercise price of $0.93 per
share. The issuance of these securities was exempt from registration by Rule 506
promulgated pursuant to Section 4(2) of the Securities Act.
In May 2001, the Registrant issued 299,658 and 2,189,781 shares of
common stock, respectively, to McKinsey & Company, Inc. United States and
Interworld Corporation as payment for services provided to us. The issuance of
these shares to these accredited investors was exempt from registration by Rule
506 promulgated by Section 4(2) of the Securities Act.
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Item 27. Exhibits
Number Description
- - - ------ -----------
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
("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, 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 Bylaws 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).
5.1 Opinion and Consent of Kaufman & Moomjian, LLC regarding the
legality of the securities being registered.
10.1 Agreement of Sub-Lease between 757 Third Avenue LLC and eB2B
Commerce, Inc., dated July 28 2000. Incorporated by reference to
Exhibit 10.1 filed with the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 2000 ("2000 Form
10-KSB").
10.2 Employment Agreement between eB2B Commerce, Inc. and Alan J.
Andreini, dated effective as of July 1, 2000 (Incorporated by
reference to Exhibit 10.2 filed with the Registrant's 2000 Form
10-KSB) and amendment thereto effective as of May 14, 2001.
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) and amendment thereto effective as of
April 2001.
10.4 Employment Agreement between Richard S. Cohan and eB2B Commerce,
Inc., dated effective as of May 4, 2001.
10.5 Employment Agreement between eB2B Commerce, Inc. and Steven
Rabin, dated effective as of October 31, 2000 (Incorporated by
reference to Exhibit 10.6 as filed with the Registrant's 2000
Form 10-KSB) and amendment thereto effective as of April 2001.
10.6 eB2B Commerce, Inc. 2000 Stock Option Plan. (Incorporated by
reference to Exhibit 99.1 as filed with the Registrant's Form
S-4).
10.7 Form of Series A Preferred Stock Subscription Agreement.
10.8 Form of Unit Subscription Agreement relating to Series B
preferred stock and warrants.
10.9 Form of Unit subscription agreement relating to convertible
notes and warrants.
23.1 Independent Auditors' Consent - Deloitte & Touche LLP.
23.2 Independent Auditors' Consent - Ernst & Young LLP.
23.3 Independent Auditors' Consent - Richard A. Eisner & Company, LLP
23.4 Independent Auditor's Consent - Rothstein, Kass & Company, P.C.
23.5 Consent of Kaufman & Moomjian, LLC (included in legal opinion
filed as Exhibit 5.1).
24 Power of Attorney (set forth on the signature page of this
Registration Statement on Form SB-2).
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Item 28. Undertakings.
The Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts of events which, individually
or together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement for the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of New
York, State of New York on the 13th day of July, 2001.
eB2B Commerce, Inc.
By: /s/ Richard S. Cohan
-----------------------------------------
Richard S. Cohan
President
Each person whose signature appears below constitutes and appoints
Peter J. Fiorillo, with full power of substitution, his/her true and lawful
attorney-in-fact and agent to do any and all acts and things in his/her name and
on his/her behalf in his/her capacities indicated below which he may deem
necessary or advisable to enable eB2B Commerce, Inc. to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but not limited to, power and authority to
sign for him/her in his/her name in the capacities stated below, any and all
amendments (including post-effective amendments) thereto, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in such connection, as
fully to all intents and purposes as we might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities
indicated on July 13, 2001.
Signatures Title
/s/ Richard S. Cohan
- - - --------------------------------------- President
Richard S. Cohan (Principal Executive Officer)
/s/ Peter J. Fiorillo
- - - -------------------------------------- Chief Financial Officer and Chairman of the Board of
Peter J. Fiorillo Directors (Principal Financial and Accounting Officer)
/s/ Stephen J. Warner Director
- - - ---------------------------------------
Stephen J. Warner
/s/ Harold S. Blue Director
- - - ---------------------------------------
Harold S. Blue
Director
- - - ---------------------------------------
Michael S. Falk
/s/ Bruce J. Haber Director
- - - ---------------------------------------
Bruce J. Haber
/s/ Mark Reichenbaum Director
- - - ---------------------------------------
Mark Reichenbaum
Director
- - - ---------------------------------------
Timothy J. Flynn
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