<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): June 30, 1999
-------------
WEBB INTERACTIVE SERVICES, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
Colorado
----------------------------------------------------
(State or other jurisdiction of incorporation)
0-28462 84-1293864
------- ----------
(Commission File Number) (IRS Employer Identification No.)
1800 Glenarm Place, Suite 700, Denver, CO 80202
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-9200
--------------
ONLINE SYSTEM SERVICES, INC.
----------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
(1) Audited financial statements of Durand Communications, Inc. for
the year ended December 31, 1998.*
(2) Audited financial statements for the years ended December 31,
1997 and 1996. (1)
(b) Pro Forma Financial Information.
Pro forma combined financial information relative to the acquisition.*
(c) Exhibits:
2.1 Agreement and Plan of Merger dated March 19, 1998 among Webb
Interactive Services, Inc., Durand Acquisition Corporation and
Durand Communications, Inc. (2)
- --------------
* Filed herewith.
(1) Filed with our original current report on Form 8-K, filed July 15, 1999,
Commission File No. 0-28462.
(2) Filed with the Form 10-KSB Annual Report for the year ended December 31,
1997, Commission File No. 0-28462.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: September 13, 1999 WEBB INTERACTIVE SERVICES, INC.
By /s/ Lindley S. Branson
----------------------------
Lindley S. Branson
Its: Executive Vice-President/
General Counsel
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Durand Communications, Inc. and Subsidiary
Page No.
--------
Independent Auditors' Report F-2
Consolidated Balance Sheets
December 31, 1998 and 1997 F-3
Consolidated Statements of Operations
Years ended December 31, 1998 and 1997 F-5
Consolidated Statements of Changes in Stockholders'
Deficit - Years ended December 31, 1998 and 1997 F-6
Consolidated Statements of Cash Flow
Years ended December 31, 1998 and 1997 F-9
Notes to Consolidated Financial Statements
for the years ended December 31, 1998 and 1997 F-11
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Durand Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Durand
Communications, Inc. and subsidiary as of December 31, 1998 and 1997 and the
related consolidated statements of operations, changes in stockholders' 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 Durand
Communications, Inc. and subsidiary as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has working capital and stockholders' deficiencies which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG LLP
Los Angeles, California
March 10, 1999
F-2
<PAGE>
DURAND COMMUNICATIONS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
------------------ ------------------
<S> <C> <C>
Current assets:
Cash $ 46,416 86,137
Accounts receivable, net of allowance for doubtful accounts of
$13,987 at December 31, 1998 4,034 --
Other current assets 26,296 10,637
------------------ ------------------
Total current assets 76,746 96,774
Property and equipment, net (notes 2 and 4) 53,307 89,083
Goodwill, net (note 1) 423,009 --
Intangible assets, net (note 3) 27,589 50,783
------------------ ------------------
$ 580,651 236,640
================== ==================
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of convertible debentures (note 4) $ 380,750 727,218
Current portion of long-term debt and capital leases (note 4) 80,433 80,189
Accounts payable 516,966 423,521
Accrued expenses 155,139 189,110
Deferred revenue 13,345 --
Notes payable to related parties (note 5) 911,879 87,549
------------------ ------------------
Total current liabilities 2,058,512 1,507,587
Convertible debentures, less current portion (note 4) -- 385,853
Long-term debt and capital leases, less current portion (note 4) 14,687 34,686
Other liabilities -- 23,035
------------------ ------------------
Total liabilities 2,073,199 1,951,161
------------------ ------------------
Stockholders' deficit (notes 4, 7, 8 and 9):
Common stock, no par value. Authorized 25,000,000 shares;
issued and outstanding 388,475 and 309,152 shares at
December 31, 1998 and 1997, respectively 6,909,799 5,123,666
Treasury stock, 50 shares at December 31, 1998 and 1997 (5,000) (5,000)
Accumulated deficit (8,397,347) (6,833,187)
------------------ ------------------
Total stockholders' deficit (1,492,548) (1,714,521)
</TABLE>
F-3
<PAGE>
<TABLE>
<S> <C> <C>
Commitments and contingencies (note 6)
------------------ ------------------
$ 580,651 236,640
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DURAND COMMUNICATIONS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Revenues (note 1):
Product revenue $ 26,122 37,514
Service revenue 787,400 13,014
License revenue -- 13,180
------------------ -----------------
Total revenues 813,522 63,708
------------------ -----------------
Costs and expenses:
Costs of product revenues 7,652 2,727
Costs of service revenues 379,791 9,119
Research and development 897,655 1,590,274
Selling, general and administrative 837,091 1,077,207
------------------ -----------------
Total costs and expenses 2,122,189 2,679,327
------------------ -----------------
Loss from operations (1,308,667) (2,615,619)
Interest expense, including debt conversion costs (262,551) (428,778)
Other income, net 7,058 24,452
------------------ -----------------
Net loss $ (1,564,160) (3,019,945)
================== =================
Basic and diluted loss per share $ (4.09) (11.04)
================== =================
Weighted average shares outstanding 382,418 273,587
================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DURAND COMMUNICATIONS, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Deficit
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common stock Treasury stock Total
--------------------------- ------------------------ Accumulated stockholders'
Shares Amount Shares Amount deficit deficit
------------ -------------- ---------- ------------ ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 249,451 3,412,544 50 $ (5,000) (3,813,242) $ (405,698)
Sale of common stock, net (note 44,272 883,765 -- -- -- 883,765
7)
Conversion of debt to common 9,934 462,882 -- -- -- 462,882
stock
Common stock issued as dividends 5,495 -- -- -- -- --
(note 7)
Warrants issued with convertible -- 106,185 -- -- -- 106,185
debt
Options issued to settle -- 18,600 -- -- -- 18,600
compensation expense
Capital contribution to settle
compensation
expense -- 83,032 -- -- -- 83,032
Stock option compensation (note -- 156,658 -- -- -- 156,658
9)
Net loss -- -- -- -- (3,019,945) (3,019,945)
------------ -------------- ---------- ------------ ---------------- -----------------
Balance at December 31, 1997 309,152 5,123,666 50 (5,000) (6,833,187) (1,714,521)
Sale of common stock (note 7) 2,857 100,000 -- -- -- 100,000
Conversion of debt to common 39,664 912,267 -- -- -- 912,267
stock (note 4)
Common stock issued in business
acquisition
(note 1) 20,253 506,325 -- -- -- 506,325
Common stock issued for stock
and debt issuance
costs (note 7) 2,000 46,000 -- -- -- 46,000
</TABLE>
F-6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Common stock issued as dividends 14,549 -- -- -- -- --
(note 7)
</TABLE>
F-7
<PAGE>
DURAND COMMUNICATIONS, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Deficit (continued)
Years ended December 31, 1998 and 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Warrants issued for services -- 57,301 -- -- -- 57,301
(note 8)
Warrants issued to extend -- 58,430 -- -- -- 58,430
convertible debt (note 8)
Capital contribution to settle
compensation
expense (note 7) -- 80,500 -- -- -- 80,500
Stock option compensation (note 9) -- 25,310 -- -- -- 25,310
Net loss -- -- -- -- (1,564,160) (1,564,160)
------------ ----------- -------- --------- ------------- --------------
Balance at December 31, 1998 388,475 6,909,799 50 $ (5,000) (8,397,347) (1,492,548)
============ =========== ======== ========= ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
DURAND COMMUNICATIONS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flow
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,564,160) (3,019,945)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 275,748 73,054
Loss on sale of property and equipment 455 --
Warrants issued for services 57,301 --
Interest expense related to warrants issued with convertible
debt 125,981 57,779
Induced debt conversion costs -- 182,945
Compensation costs settled with stock 80,500 --
Compensation costs settled with options -- 18,600
Compensation costs settled with warrants -- 83,032
Stock option compensation 25,310 156,658
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable 41,286 4,000
Other current assets 13,331 (2,192)
Accounts payable and accrued expenses (210,287) 290,710
Deferred revenue (31,811) --
Other liabilities 24,360 --
------------------ ------------------
Net cash used in operating activities (1,161,986) (2,155,359)
------------------ ------------------
Cash flows used in investing activities:
Cash acquired in business combination 148,370 --
Proceeds from sale of property and equipment 1,500 --
Purchase of property and equipment (9,179) (13,958)
Purchase of intangible assets -- (54,213)
------------------ ------------------
Net cash provided by (used in) investing activities 140,691 (68,171)
------------------ ------------------
Cash flows from financing activities:
Repayment of long-term debt and capital leases (19,756) (29,129)
Repayment of notes payable to related party (11,154) --
Repayment of convertible debentures -- (220,000)
Proceeds from issuance of common stock 100,000 904,925
Proceeds from issuance of convertible debentures 65,000 1,480,624
Proceeds from issuance of notes payable to related party 847,484 --
Proceeds from issuance of long-term debt -- 147,549
------------------ ------------------
</TABLE>
F-9
<PAGE>
DURAND COMMUNICATIONS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flow (continued)
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Net cash provided by financing activities 981,574 2,283,969
------------------ ------------------
Net increase (decrease) in cash (39,721) 60,439
Cash at beginning of year 86,137 25,698
------------------ ------------------
Cash at end of year $ 46,416 86,137
================== ==================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 33,020 5,064
State income taxes 1,900 2,400
================== ===================
Supplemental schedule of noncash activities:
Stock issued to settle accounts payable $ 46,000 --
Conversion of debt to equity 912,267 279,938
Property and equipment returned and liability canceled 2,279 --
Warrants issued with convertible debt 58,430 48,406
Common stock issued in business combination 506,325 --
Accrued convertible debt discount costs to be settled with stock -- 19,147
Capital lease obligations incurred in purchasing equipment -- 37,901
Accrued stock issuance costs to be settled with stock -- 21,160
================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
DURAND COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
Durand Communications, Inc. was incorporated in the state of
California in August 1993 and commenced operations in December
1993 for the purpose of marketing intranet and internet working
tools, applications and services for use by the on-line community.
The Company commenced marketing its newest product, Community Ware
Internet services and tools program, in March 1997. The Company's
target markets are businesses, associations, schools, educational
organizations and social organizations which may benefit from
using the Internet and "on-line community" to facilitate and
promote communications, information sharing and commerce amongst
various groups (each an on-line community).
On January 1, 1998, the Company acquired the assets and
liabilities of CompuLearning Systems (d/b/a Electronic University
Network (EUN)), a Florida C Corporation which offers accredited
college and university courses and services on-line, in exchange
for 20,253 shares of common stock valued at $506,325. The
acquisition of these assets and liabilities was recorded using the
purchase method of accounting whereby the consideration paid was
allocated based on the relative fair values of the assets and
liabilities acquired with the excess consideration of $646,513
recorded as goodwill. The results of operations of EUN are
included in the Company's operating results from the date of
acquisition. All significant intercompany balances and
transactions have been eliminated in consolidation. Unaudited pro
forma results of operations for 1997 are presented below as if the
acquisition of EUN occurred on January 1, 1997:
Total revenues $ 740,739
Total costs and expenses 3,247,792
Total loss from operations (2,507,053)
Net loss (2,867,973)
Net loss per share (9.76)
===================
In February 1998, the Board of Directors approved the acquisition
of the Company by Online System Services, Inc. (OSS). The
acquisition was not completed as of December 31, 1998, but is
expected to close during the second quarter of 1999. OSS plans to
acquire 100% of the outstanding stock of Durand Communications,
Inc. in exchange for 955,649 shares of OSS common stock.
(b) Going Concern
The accompanying consolidated financial statements have been
prepared on a going-concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the
normal course of business. As shown in the accompanying
consolidated financial statements, the Company had working capital
and stockholders' deficiencies of $1,981,766 and $1,492,548 as of
December 31, 1998, respectively, and incurred a net loss of
$1,564,160 and $3,019,945 during the years ended December 31, 1998
and 1997, respectively. The Company has historically relied upon
private placements of its stock and issuance of debt to generate
funds to meet its operating needs. Beginning in 1998, OSS became
the Company's primary source
F-11
<PAGE>
of financing to fund operations. The Company expects to continue
to receive funds from OSS to finance operations during 1999 until
the merger is completed. However, there are no guarantees that the
planned merger will be consummated. Additionally, the Company has
not secured separate financing in the event that the merger is not
consummated. Therefore, there are no assurances that financing
will be available when and as needed to satisfy current
obligations.
(c) Revenue Recognition
Service revenue primarily consists of contract services provided
to OSS, which is recognized as earned, and course sales, which are
recognized upon commencement of the course. The Company recognizes
revenue from product sales upon shipment to the customer. The
license revenues are recognized when earned, in accordance with
the contractual provisions.
Contract services provided to OSS aggregated $553,000 in 1998.
(d) Goodwill
Goodwill, which represents the excess of purchase price over fair
value of net liabilities acquired, is amortized on a straight-line
basis over the expected periods to be benefited, three years. The
Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over
its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of
goodwill impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of
the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
(e) Intangible Assets
Intangible assets consist of capitalized trademark expenses,
organizational expenses and software license fees, which are
amortized on a straight-line basis over their estimated useful
lives as follows:
Trademark 3 years
Organizational costs 5 years
Software license fees 1 to 5 years
(f) Property and Equipment
Property and equipment are stated at cost. Equipment under capital
lease is stated at the present value of the minimum lease
payments.
Depreciation and amortization of property and equipment is
computed using the straight-line method over the estimated useful
lives of the related assets as follows:
Computers and office equipment 3 to 5 years
Furniture and fixtures 7 years
Property and equipment held under capital lease are amortized
straight line over the estimated useful life of the asset.
(g) Research and Development and Advertising
Research and development and advertising costs are expensed as
incurred.
F-12
<PAGE>
(h) Computer Software Costs
Pursuant to Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed," the Company is to capitalize certain
software development costs and production costs once technological
feasibility has been achieved. Software development costs incurred
prior to achieving technological feasibility are expensed as
incurred. Technological feasibility of the Company's products is
generally established at the beta phase. Costs incurred subsequent
to achieving technological feasibility have historically been
minor and, accordingly, have not been capitalized.
(i) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(j) Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" (SFAS No. 121). This
statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future undiscounted operating cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
(k) Stock Option Plan
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations, in accounting for its fixed plan stock options.
As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock
exceeded the exercise price.
(l) Reporting of Comprehensive Income
The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income" (SFAS No. 130), on January 1, 1998. SFAS No.
130 establishes standards for reporting and display of
comprehensive income and its components in a full set of financial
statements. The Company does not have any components of other
comprehensive income. Therefore, comprehensive income (loss) is
the same as net loss in 1998 and 1997.
(m) Business Segments and Related Information
The Company adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS No.
131), on January 1, 1998. SFAS No. 131
F-13
<PAGE>
establishes standards for the way public business enterprises are
to report information about operating segments in annual financial
statements and requires enterprises to report selected information
about operating segments in interim financial reports issued to
stockholders. Is also establishes standards for related disclosure
about products and services, geographic areas and major customers.
Prior to the acquisition of EUN in January 1998, the Company had
one operating segment, services related to intranet and internet
on-line communities. Subsequent to the acquisition of EUN, the
Company began providing on-line college and university courses and
related services.
(n) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of assets and liabilities at the balance sheet
date and the reporting of revenues and expenses during the
reporting periods to prepare these consolidated financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(o) Loss Per share
On December 31, 1997, the Company retroactively adopted the
provisions of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128) which replaces the
presentation of primary and fully diluted earnings (loss) per
share with a presentation of basic and diluted earnings (loss) per
share. Basic earnings (loss) per share is computed by dividing net
income (loss) available to common stockholders by the weighted
average number of common shares outstanding during the period.
Diluted earnings (loss) per shared reflects the potential dilution
that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of
the entity. Diluted earnings (loss) per share is computed
similarly to fully diluted earnings (loss) per share pursuant to
Accounting Principles Board (APB) Opinion No. 15. The following
table presents contingently issuable shares, options and warrants
to purchase shares of common stock that were outstanding during
1998 and 1997 which were not included in the computation of
diluted loss per share because the impact would have been
antidilutive.
1998 1997
------------------- -------------------
Options $ 34,054 35,104
Warrants 59,762 28,671
=================== ===================
(2) Property and Equipment
Property and equipment balances, recorded at cost, at December 31, 1998
and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
Computers and office equipment $ 225,779 228,065
Furniture and fixtures 27,943 11,233
------------------- -------------------
253,722 239,298
Less accumulated depreciation and amortization (200,415) (150,215)
------------------- -------------------
$ 53,307 89,083
=================== ===================
</TABLE>
F-14
<PAGE>
At December 31, 1998 and 1997, the amount of computer equipment under
capital lease included in property and equipment was $74,679. The related
accumulated amortization of equipment under capital lease was $40,490 and
$28,153 at December 31, 1998 and 1997, respectively.
(3) Intangible Assets
Intangible asset balances at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
Software licenses $ 65,613 65,613
Organizational costs 10,343 10,343
Trademark 1,874 1,874
------------------- -------------------
77,830 77,830
Less accumulated amortization (50,241) (27,047)
------------------- -------------------
$ 27,589 50,783
=================== ===================
</TABLE>
The Company records software licenses at the respective cost to acquire
the license. Legal fees incurred during the incorporation of the Company
and to acquire the MindWire NT(R) trademark have been capitalized as
organizational costs and trademark, respectively. Statement of Position
No. 98-5, "Reporting on the Costs of Start-up Activities," effective for
financial statements for fiscal years beginning after December 15, 1998,
requires costs of start-up activities and organization costs to be
expensed as incurred. Since organizational costs were fully amortized as
of December 31, 1998, there would be no impact on net income (loss) or on
the related per share amounts upon adoption by the Company. In July 1997,
the Company acquired all of the assets of Electric Minds, including the
trademarks, application and systems content, for $54,213. The intangible
assets acquired from Electric Minds are included in software licenses at
December 31, 1998 and 1997.
(4) Convertible Debentures, Long-Term Debt and Capital Lease Obligations
Convertible debentures consist of the following:
<TABLE>
<CAPTION>
December 31
------------------------------------------
1998 1997
-------------------- -------------------
<S> <C> <C>
9.5% to 12% convertible debentures, principal and interest payable on
demand, convertible into common stock at holder's option at a price
determined by the first closing of the Company's next private
placement equity financing
14% convertible debentures, payable on demand, interest payable monthly $ 380,750 888,071
and convertible into common stock at holders' option at a price
determined by the first closing of the Company's next private
placement equity financing -- 225,000
-------------------- -------------------
380,750 1,113,071
Less current portion 380,750 727,218
-------------------- -------------------
$ -- 385,853
==================== ===================
</TABLE>
F-15
<PAGE>
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
December 31
------------------------------------------
1998 1997
-------------------- -------------------
<S> <C> <C>
Capital lease obligations, secured by equipment, interest rates ranging
from 14% to 16.8%, interest and principal payable in monthly
installments of $1,829 through September 2000 $ 27,522 44,718
10% notes payable, accrued interest and principal payable on demand
60,000 60,000
14.55% notes payable, secured by equipment, interest and principal payment
of $350, payable monthly through December 2000
7,598 10,157
-------------------- -------------------
95,120 114,875
Less current portion 80,433 80,189
-------------------- -------------------
$ 14,687 34,686
==================== ===================
</TABLE>
Aggregate maturities of long-term debt and capital lease obligations for
each of the years subsequent to December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital lease Long-term debt
obligation Total
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Year ending December 31:
1999 $ 19,980 63,523 83,503
2000 11,370 4,075 15,445
-------------------- -------------------- -------------------
Total maturities 31,350 $ 67,598 98,948
==================== ===================
Less amounts representing interest 3,828
--------------------
Present value of minimum lease
payments 27,522
Less current installments of obligations
under capital leases 16,910
--------------------
Obligations under capital leases,
excluding current installments
$ 10,612
====================
</TABLE>
For the years ended December 31, 1998 and 1997, interest expense relating
to convertible debentures and notes payable aggregated $116,789 and
$41,177, respectively.
During 1997, the Company issued $180,000 of 12% convertible debentures
which were convertible into common stock of the Company at $85.60 per
share or the Company's next private placement value. In December 1997,
the conversion price was reduced to $20.00 per share as a condition of an
agreement to raise equity financing from the holder. As a result, the
Company recorded the fair value of the incremental additional shares
issued upon conversion of $182,944, which is included in
F-16
<PAGE>
"interest expense" in the accompanying consolidated statement of
operations for 1997. The $180,000, 12% convertible debentures were
converted into 9,000 shares of common stock in December 1997.
Additionally, $100,000 of 12% convertible debentures were converted into
934 shares of common stock, net of related fees, in 1997.
During 1998, the Company issued $65,000 of convertible debentures bearing
interest, payable monthly, at 9.5% with principal payable in full on
October 6, 1998. All principal and interest past due bear interest at a
penalty rate of 18%. As of December 31, 1998, the principal balance
remained outstanding. In February 1998, $912,267 of 10%, 12% and 14%
convertible debentures were converted into 39,664 shares of common stock.
(5) Notes Payable to Related Parties
In February 1997, the Company issued a $110,000 10% note payable to a
company which is owned by certain stockholders of the Company. The note
is payable upon demand and $64,395 was outstanding at December 31, 1998
and 1997. In December 1997, the Company issued a $11,154, 9.5% note
payable to a former employee of the Company under a severance agreement
which was fully repaid in May 1998. Also in December 1997, the Company
issued a $12,000 10% note payable due May 11, 1998 to CompuLearning
Systems (d/b/a Electronic University Network), which the Company acquired
in January 1998. This note was eliminated in consolidation in 1998.
On March 2, 1998, OSS agreed to loan the Company up to $1,500,000, due
September 9, 1999, bearing interest at a rate of 10% per annum. Further,
the entities have agreed that all contract services provided by the
Company to OSS will be applied against total borrowings and accrued
interest. As of December 31, 1998, the Company had outstanding net
borrowings from OSS of $847,484.
(6) Operating Leases
The Company has a noncancelable operating lease for its main office space
through March 31, 1999 with a monthly payment of $5,050 or $15,150
through the end of the lease.
Rent expense amounted to $73,340 and $77,935 during the years ended
December 31, 1998 and 1997, respectively.
(7) Stockholders' Equity
During the years ended December 31, 1998 and 1997, the Company sold 2,857
and 43,468 shares of common stock, respectively, through private
placement offerings which generated proceeds of $100,000 and $904,925,
respectively. In February 1998, the Company issued 3,000 warrants to
purchase an equivalent number of shares of common stock as payment for
stock issuance costs. The Company issued 804 shares of common stock as
payment for stock issuance costs related to the 1997 private placements.
On February 2, 1998, the Company issued 3,500 shares of common stock to
certain individuals affiliated with the Company for their contributions
and efforts made for the Company. The shares were given to the employees
from shares owned by the president of the Company. As a result, $80,500
was recognized as a charge to earnings and a capital contribution from
the president of the Company based upon the estimated market value of the
stock on the date of issuance.
On March 25, 1997, the Company issued 776 shares of common stock to a
founder and former employee of the Company as part of a severance
package. The shares were given to the employee from the shares owned by
the president of the Company. As a result, $83,032 was recognized as a
charge to earnings and a capital contribution from the president of the
Company based upon the estimated market value of the stock on the date of
issuance.
F-17
<PAGE>
The Company has an agreement with two stockholders, whereby their
original stock purchase agreements contain price protection provisions.
The Company was required to distribute 14,549 additional shares to these
stockholders under these price protection provisions in 1998. The Company
has an agreement with two directors, whereby their original stock
purchase agreement contains certain antidilution provisions. Common stock
is issued in the form of a stock dividend under these antidilution
provisions. As a result, the Company issued 5,495 shares of common stock
as dividends to the directors during 1997.
The Company issued 2,000 shares of common stock in February 1998, at an
estimated market price of $23 per share, as payment of costs of raising
capital in 1997. As of December 31, 1997, the Company accrued the value
of the shares to be issued and allocated the fair value of the shares pro
rata among the debt and equity raised. As a result, $21,160 was recorded
as stock issuance costs, $19,147 as a discount of convertible debt and
$5,693 as interest expense in 1997. During 1998, the discount of
convertible debt of $19,147 was recorded as interest expense.
(8) Warrants
In June 1997, the Company granted 1,580 options and 3,271 warrants to
purchase an equivalent number of shares of common stock in connection
with the placement of $180,000 of 12% convertible debentures. The options
are exercisable at $58.85 per share, 1,168 of the warrants are
exercisable at $107 per share and 2,103 of the warrants are exercisable
at $85.60 per share until June 19, 1999. The fair value of the options
and warrants on the date of grant was estimated to be $0 using the
minimum value option-pricing model with the following assumptions:
dividend yield of 0%; risk-free interest rate of 6.04%; and an expected
life of two years. On December 26, 1997, as part of an agreement to raise
equity financing, the Company repriced the options and warrants to $25
per share, the then current market value, and issued an additional 5,500
warrants to purchase an equivalent number of shares of common stock
exercisable at $25 per share. The debentures were converted into common
stock in December 1997 and the related fair value of the options and
warrants was recorded as stock issuance costs. The weighted average fair
value of the options and warrants on December 26, 1997 was estimated to
be $3.40 per option/warrant using the minimum value option-pricing model
with the following weighted average assumptions: dividend yield of 0%;
risk-free interest rate of 6.04% and an expected life of 4.9 years. The
fair value of the repriced options and warrants and additional 5,500
warrants granted of $35,424 was recorded as stock issuance costs in the
accompanying consolidated financial statements.
On August 12, 1997, the Company granted 1,500 warrants to a founder and
former employee to purchase an equivalent number of shares of common
stock in connection with a severance agreement. The warrants are
exercisable at $15 per share until August 12, 2000. The fair value of the
warrants on the date of grant was estimated to be $12.40 for each warrant
using the minimum value option-pricing model with the following
assumptions: dividend yield of 0%; risk-free interest rate of 5.90% and
an expected life of three years. As a result, the Company recognized
$18,600 of compensation expense during the year ended December 31, 1997
related to these warrants.
On September 8, 1997, the Company granted 4,000 warrants to purchase an
equivalent number of shares of common stock in connection with the
placement of $220,000 of 14% promissory notes payable. The warrants are
exercisable at $16.25 per share until September 7, 2004. The fair value
of the warrants on the date of grant was estimated to be $14.32 for each
warrant using the minimum value option-pricing model with the following
assumptions: dividend yield of 0%; risk-free interest rate of 6.08% and
an expected life of seven years. The debt was repaid in 1997 and the
Company recognized $48,097 of interest expense related to the warrants
during the year ended December 31, 1997.
During December 1997, the Company granted 11,400 warrants to purchase an
equivalent number of shares of common stock in connection with the
placement of $285,000 of 9.5% convertible debentures. The warrants are
exercisable at $25.00 per share until December 2002. The fair value
F-18
<PAGE>
of the warrants on the date of grant was estimated to be $6.40 for each
warrant using the minimum value option-pricing model with the following
assumptions: dividend yield of 0%; risk-free interest rate of 6% and an
expected life of five years. As a result, the Company recognized an
additional $9,136 of related interest expense during the year ended
December 31, 1997 and had an unamortized convertible debt discount of
$48,406 at December 31, 1997 which was recognized as interest expense
during the year ended December 31, 1998.
On January 1, 1998, the Company granted 11,000 warrants to purchase an
equivalent number of shares of common stock as settlement of obligations
regarding the termination of a 1997 financing agreement. The warrants are
exercisable at $25.00 per share until January 1, 2001. The fair value of
the warrants on the date of grant was estimated to be $3.82 for each
warrant using the minimum value option-pricing model with the following
assumptions: dividend yield of 0%; risk-free interest rate of 5.61% and
an expected life of three years. As a result, the Company recognized
$42,053 of compensation expense during the year ended December 31, 1997
related to these warrants.
On January 27, 1998, the Company granted 1,500 warrants to purchase an
equivalent number of shares of common stock as payment of consulting
services. The warrants are exercisable at $25.00 per share until January
27, 2000. The fair value of the warrants on the date of grant was
estimated to be $2.55 for each warrant using the minimum value
option-pricing model with the following assumptions: dividend yield of
0%; risk-free interest rate of 5.46% and an expected life of two years.
As no financing was obtained from these efforts, the Company recognized
$3,825 of compensation expense during the year ended December 31, 1998
related to these warrants.
On March 19, 1998, the Company granted 1,591 warrants to purchase an
equivalent number of shares of common stock as payment of finders' fee
for the OSS merger. The warrants are exercisable at $22.00 per share
until March 19, 2003. The fair value of the warrants on the date of grant
was estimated to be $7.18 for each warrant using the minimum value
option-pricing model with the following assumptions: dividend yield of
0%; risk-free interest rate of 5.44% and an expected life of five years.
The Company recognized $11,423 of merger costs during the year ended
December 31, 1998 related to these warrants which are included in general
and administrative expenses in the accompanying consolidated statement of
operations.
On June 6, 1998, the Company granted 14,000 warrants to purchase an
equivalent number of shares of common stock to extend the maturity dates
of $350,000 of 9.5% convertible debentures from June 9, 1998 to October
6, 1998. The warrants are exercisable at $25.00 per share until June 6,
2003. The fair value of the warrants on the date of grant was estimated
to be $5.01 for each warrant using the minimum value option-pricing model
with the following assumptions: dividend yield of 0%; risk-free interest
rate of 5.57% and an expected life of five years. As a result, the
Company recognized $58,430 of interest expense during the year ended
December 31, 1998.
(9) Stock Options
In August 1996, the Board of Directors adopted the 1996 Limited Stock
Option Plan and the 1996 Stock Option Plan (the Plans) which reserved
8,200 and 9,800 shares of the Company's common stock, respectively, for
issuance to directors, officers, employees and consultants as stock
awards or as stock options. During 1998 and 1997, 3,000 and 800 stock
options and 5,100 and 6,000 stock options were granted under the
respective Plans, respectively, at an exercise price below the estimated
market price of the Company's stock on date of grant. Stock options
forfeited during 1998 were 1,600 and 2,000 under the respective Plans.
There were no forfeited stock options during 1997. As a result, $25,310
and $45,050 of compensation expense was recognized for the years ended
December 31, 1998 and 1997, respectively, using the intrinsic-value
method. At December 31, 1998 and 1997, unamortized compensation expense
related to these option grants was $12,640 and $28,450, respectively.
F-19
<PAGE>
The weighted average fair value of stock options granted during 1997 was
$14.85 per share on the date of grant using the minimum value
option-pricing model with the following weighted average assumptions:
expected dividend yield of 0%; risk-free interest rate of 6.03% and an
expected life of approximately ten years.
The weighted average fair value of stock options granted during 1998 was
$15.63 per share on the date of grant using the minimum value
option-pricing model with the following weighted average assumptions:
expected dividend yield of 0%, risk-free interest rate of 5.63% and an
expected life of approximately ten years.
The Company applies APB Opinion No. 25 in accounting for stock options
granted to employees and directors. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
------------------- --------------------
<S> <C> <C>
Net loss - as reported $ (1,564,160) (3,019,945)
Net loss - pro forma (1,597,104) (3,231,594)
=================== ====================
<CAPTION>
The following is a summary of stock option activity:
Weighted average
Number of shares exercise price
------------------- --------------------
<S> <C> <C>
Balance at December 31, 1996 17,180 $ 49.04
Granted 26,100 22.52
Canceled (8,176) 64.00
-------------------
Balance at December 31, 1997 35,104 21.70
Granted 3,800 16.32
Canceled (4,850) 24.02
-------------------
Balance at December 31, 1998 34,054 20.76
=================== ====================
</TABLE>
The following table summarizes information about shares under option at
December 31, 1998:
<TABLE>
<CAPTION>
Weighted
average
Range of remaining Weighted Weighted
exercise Number contractual average Number average
prices outstanding life exercise price exercisable exercise price
--------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 10.59-15.00 10,750 7.64 $ 13.26 9,314 $ 12.99
21.25-25.00 23,304 5.09 24.23 21,096 24.54
--------------- ---------------
34,054 20.76 30,410 21.00
=============== =============== =============== ===============
</TABLE>
F-20
<PAGE>
(10) Income Taxes
Income tax expense for the years ended December 31, 1998 and 1997
represents the California state minimum franchise tax of $1,600 and
$2,400, respectively, and is included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
The Company has no items which give rise to deferred tax assets or
liabilities other than potential future benefits from tax loss and credit
carryforwards. Management has determined that it is more likely than not
that any potential benefit from these tax loss carryforwards will not be
realized through anticipated profitable operations. Such potential future
benefits have been fully reserved.
As of December 31, 1998, the Company has approximately $6,228,351 of net
operating loss carryforwards and $297,995 tax credit carryforwards
available for Federal and state income tax purposes, respectively, which
expire in 1999 through 2018. The ultimate realization of the net
operating loss carryforwards may be limited by Section 382 of the
Internal Revenue Code in the event of a change of control.
(11) Segment Reporting
Prior to the acquisition of EUN in January 1998, the Company had one
operating segment, services related to intranet and internet on-line
communities provided by Durand. Subsequent to the acquisition of EUN, the
Company began providing on-line college and university courses and
related services.
The following table presents information about reported segment revenues,
losses, other operating activities and segment assets as of and for the
year ended December 31, 1998:
<TABLE>
<CAPTION>
Consolidated
Durand EUN total
------------------- ------------------- --------------------
<S> <C> <C> <C>
Revenues from external customers $ 570,468 243,054 813,522
Interest income -- 1,473 1,473
Interest expense (264,024) -- (264,024)
Depreciation and amortization 275,420 328 275,748
Net loss (1,261,869) (302,291) (1,564,160)
Segment assets 624,521 485,455 1,109,976
Expenditures for segment assets (9,179) -- (9,179)
=================== =================== ====================
</TABLE>
The following is a reconciliation of reportable segment assets to the
Company's consolidated total assets:
Total assets for reportable segments $ 1,109,976
Corporate eliminations (529,325)
-------------------
Consolidated total assets $ 580,651
===================
F-21
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
<S> <C>
Basis of Presentation F-22
Unaudited Condensed Pro Forma Statement of Operations for the year ended December 31, 1998 F-23
Unaudited Condensed Pro Forma Statement of Operations for the six months ended June 30, 1999 F-24
Notes to Unaudited Condensed Pro Forma Financial Information F-25
</TABLE>
Basis of Presentation
The following unaudited condensed pro forma combined financial
statements give effect to the acquisition by Webb Interactive Services, Inc.
("WEBB") of all of the outstanding stock of Durand Communications, Inc. ("DCI").
This acquisition was accounted for using the purchase method of accounting.
These statements are based on the historical financial statements of WEBB and
DCI and assumptions set forth below and in the notes to the unaudited condensed
pro forma combined financial statements. The unaudited condensed pro forma
combined statements of operations give effect to the DCI acquisition as if it
had occurred on January 1, 1998. The pro forma adjustments are based upon
estimates, currently available information and certain assumptions that
management deems appropriate. In management's opinion, the estimates regarding
allocation of the purchase price of the DCI are not expected to materially
differ from the final adjustments. The unaudited condensed pro forma combined
financial data presented herein are not necessarily indicative of the results
that WEBB would have obtained had such events occurred at the beginning of the
period, as assumed, or of the future results of WEBB. The unaudited condensed
pro forma combined financial statements should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this Form
8-K/A, together with the audited financial statements and the notes thereto
included in the WEBB Form 10-KSB and with WEBB' Form 10-QSB for the period ended
June 30, 1999.
F-22
<PAGE>
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF
OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Historical WEBB
------------------------------------- Pro Forma Pro Forma
WEBB DCI Adjustments Combined
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net revenues $1,589,380 $ 813,522 $ (243,054) (4) $1,606,896
Cost of revenues 1,291,537 387,443 (552,952) (2) 1,221,479
(186,349) (4)
(271,152) (2)
----------------- ---------------- ---------------- ----------------
Gross margin 297,843 426,079 (338,505) 385,417
Operating expenses 11,053,912 1,734,746 (360,469) (4) 12,146,389
(281,800) (2)
Amortization of intangible assets - - 4,556,414 (1) 4,556,414
----------------- ---------------- ---------------- ----------------
Loss from operations (10,756,069) (1,308,667) (4,252,650) (16,317,386)
Other income (expense), net 139,806 (255,493) (1,473) (4) (117,160)
----------------- ---------------- ---------------- ----------------
Net loss (10,616,263) (1,564,160) (4,254,123) (16,434,546)
Preferred stock accretion
and dividends (5,146,109) - - (5,146,109)
----------------- ---------------- ---------------- ----------------
Net loss applicable to
common stockholders $ (15,762,372) $ (1,564,160) $ (4,254,123) $ (21,580,655)
================= ================ ================ ================
Net loss per share, basic and diluted $ (4.35) $ (4.09) - $ (4.73)
================= ================= ================= =================
Weighted average shares outstanding 3,621,585 382,418 944,763 (3) 4,566,348
================= ================= ================= =================
</TABLE>
The accompanying Notes to Unaudited Condensed Combined Pro Forma Financial
Statements are an integral part of these financial statements.
F-23
<PAGE>
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Historical WEBB
------------------------------------- Pro Forma Pro Forma
WEBB DCI Adjustments Combined
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net revenues $ 481,216 $ 537,790 $ (87,067) (4) $465,051
(466,888) (2)
Cost of revenues 541,318 269,559 (66,754) (4) 537,347
(206,776) (2)
----------------- ---------------- ---------------- ----------------
Gross margin (60,102) 268,231 (280,425) (72,296)
Operating expenses 5,350,850 573,158 (61,201) (4) 5,602,695
(260,112) (2)
Amortization of intangible assets - - 2,278,207 (1) 2,278,207
----------------- ---------------- ---------------- ----------------
Loss from operations (5,410,952) (304,927) (2,237,319) (7,953,198)
Other income (expense), net (44,166) 34,244 (109,749) (4) (119,671)
----------------- ---------------- ---------------- ----------------
Net loss $ (5,455,118) $ (270,683) $ (2,347,068) $ (8,072,869)
Preferred stock accretion
and dividends (4,391,295) - - (4,391,295)
Net loss applicable to
common stockholders $ (9,846,413) $ (270,683) $ (2,347,068) $ (12,464,164)
================= ================ ================ ===============
Net loss per share, basic and diluted $ (1.76) $ (0.71) - $ (1.90)
================= ================ ================ ===============
Weighted average shares outstanding 5,608,227 380,295 944,763 (3) 6,552,990
================= ================= ================= =================
</TABLE>
The accompanying Notes to Unaudited Condensed Combined Pro Forma Financial
Statements are an integral part of these financial statements.
F-24
<PAGE>
NOTES TO UNAUDITED CONDENSED PRO FORMA FINANCIAL
INFORMATION
NOTE 1 - BACKGROUND
On June 30, 1999, Durand Acquisition Corporation ("DAC"), a wholly
owned subsidiary of the Company, completed a merger with DCI by exchanging
944,763 of the Company's common stock for all of the common stock of DCI valued
at $9,211,439 and warrants and options to purchase 233,700 shares of common
stock valued at $1,440,446. The acquisition of the assets and liabilities was
recorded using the purchase method of accounting whereby the consideration paid
of $13,573,674 was allocated based on the relative fair values of the assets and
liabilities acquired with the excess consideration over the fair market value of
tangible assets of $13,669,270 recorded as intangible assets.
<TABLE>
<CAPTION>
Total consideration for the merger is as follows:
<S> <C>
Value of common stock issued $ 9,211,439 (a)
Value of warrants and options issued 1,440,446 (b)
Liabilities assumed 2,190,566 (c)
Acquisition expenses 911,223
----------------
Total purchase price $ 13,753,674
================
<CAPTION>
The purchase price was allocated to the assets acquired based on their fair
market values as follows:
Cash and cash equivalents $ 23,739
Other current assets 23,708
Property and equipment, net 36,984
---------------
Total tangible assets acquired 84,431
Developed technologies, goodwill and other intangibles 13,669,243
---------------
Total assets acquired $ 13,753,674
===============
</TABLE>
(a) 944,763 shares issued multiplied by $9.75, the average closing price of
the Webb stock the two days prior to and the two days subsequent to the
announcement of the DCI transaction (March 19, 1998).
(b) 233,700 warrants and options issued valued using the Black-Scholes
option pricing model using the following assumptions:
<TABLE>
<CAPTION>
Exercise prices $4.30 to $20.33
<S> <C>
Fair market value of common stock on
measurement date $9.75
Option lives 1 to 9 years
Volatility rate 104%
Risk free rate of return 5.0%
Dividend rate 0%
</TABLE>
(c) The liabilities assumed by the Company included a $1,168,173 note
payable and accrued interest from DCI to WEBB which was forgiven at the
consummation of the transaction. The note receivable is considered as
additional purchase price consideration.
In connection with the merger, the Company issued a warrant to a
placement agent to purchase 31,421 shares of the Company's common stock at an
exercise price of $14.13. The warrant is exercisable for a period of five years.
The Company recorded $348,058 in acquisition costs for the warrant, which was
valued using the Black-Scholes option pricing model utilizing the following
assumptions:
F-25
<PAGE>
<TABLE>
<S> <C>
Exercise price $14.13
Fair market value of common stock on grant date $14.13
Option life 5 Years
Volatility rate 104%
Risk free rate of return 5.0%
Dividend rate 0%
</TABLE>
The following table indicates the preliminary allocation of excess
purchase price and expected amortization periods:
<TABLE>
<CAPTION>
Intangible Asset Assigned Value Amortization Period
-------------------------------------------------------------------------------------
<S> <C> <C>
Developed technologies $ 11,089,847 3 Years
Goodwill 2,579,396 3 Years
--------------
Total intangible assets and goodwill $ 13,669,243
==============
</TABLE>
NOTE 2 - HISTORICAL
The condensed pro forma combined statements of operations for the year
ended December 31,1998 include the historical results of both WEBB and DCI for
the full year. The condensed pro forma combined statements of operations for the
six months ended June 30, 1999 include the results of WEBB and DCI for the
six-month period ended June 30, 1999.
NOTE 3 - PRO FORMA ADJUSTMENTS
The condensed pro forma combined statements of operations have been
adjusted to reflect the following pro forma adjustments:
1. To record one year amortization of intangible assets and goodwill as
follows:
For the year ended December 31, 1998-
<TABLE>
<CAPTION>
Statement of Operations Item Amount Explanation
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amortization of intangible assets $4,556,414 Increase amortization expense for one year of
amortization.
</TABLE>
For the six months ended June 30, 1999-
<TABLE>
<CAPTION>
Statement of Operations Item Amount Explanation
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amortization of intangible assets $2,278,207 Increase amortization expense for six months of
amortization.
2. Elimination of revenue, cost of sales and operating expenses for services between WEBB and DCI as follows:
For the year ended December 31, 1998-
Statement of Operations Item Amount Explanation
- -----------------------------------------------------------------------------------------------------------------
Net revenues $ 552,952 Decrease net revenues for services billed to WEBB by
DCI.
Cost of revenues $ 271,152 Reclassify costs of product development services
provided to WEBB to product development.
Operating expenses $ 281,800 Net effect of decreasing net revenues and elimination
of costs for product development services incurred
by WEBB.
</TABLE>
For the six months ended June 30, 1999-
<TABLE>
<CAPTION>
Statement of Operations Item Amount Explanation
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $ 466,888 Decrease net revenues for services billed to WEBB by
DCI.
Cost of revenues $ 206,776 Reclassify costs of product development services
provided to WEBB to product development.
Operating expenses $ 260,112 Net effect of decreasing net revenues and elimination
of costs for product development services incurred
by WEBB.
</TABLE>
3. 944,763 shares of Webb common stock issued in accordance with the
Merger Agreement (See Note 1).
4. Elimination of revenues, cost of revenues, operating expenses, and
other income from CompuLearning Systems ("CLS"), a wholly owned
subsidiary of DCI, as follows:
F-26
<PAGE>
For the year ended December 31, 1998-
<TABLE>
<CAPTION>
Statement of Operations Item Amount Explanation
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $ 243,054 Decrease net revenues for elimination of CLS.
Cost of revenues $ 186,349 Decrease cost of revenues for elimination of CLS.
Operating expenses $ 360,469 Decrease operating expenses for elimination of CLS.
Other income $ 1,473 Decrease other income for elimination of CLS.
For the six months ended June 30, 1999-
Statement of Operations Item Amount Explanation
- -----------------------------------------------------------------------------------------------------------------
Net revenues $ 87,067 Decrease net revenues for elimination of CLS.
Cost of revenues $ 66,754 Decrease cost of revenues for elimination of CLS.
Operating expenses $ 61,201 Decrease operating expenses for elimination of CLS.
Other income $ 109,749 Decrease other income for elimination of CLS.
</TABLE>
F-27
