<PAGE>
FORM 10-QSB - Quarterly
Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the period ended June 30, 2000.
--------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________________ to ____________________.
Commission File Number 0-28462.
------------
WEBB INTERACTIVE SERVICES, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1293864
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(State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.)
1899 WYNKOOP, SUITE 600, DENVER, CO 80202
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(Address of principal executive offices) (Zipcode)
(303) 296-9200
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [_] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 1, 2000 Registrant had 9,211,980 shares of common stock
outstanding.
________________________
<PAGE>
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
Index
-----
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Part I. Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the three and six months ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 5-6
Notes to Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-30
Part II. Other Information
Item 1 - 5. Not Applicable 31
Item 6. Exhibits and Reports on Form 8-K 31-32
Signatures 33
</TABLE>
_______________________
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section
27A of the Securities Act of 1933, as amended, and is subject to the safe
harbors created by those sections. These forward-looking statements are
subject to significant risks and uncertainties, including those identified
in the section of this Form 10-QSB entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors That
May Affect Future Operating Results," which may cause actual results to
differ materially from those discussed in such forward-looking statements.
The forward-looking statements within this Form 10-QSB are identified by
words such as "believes," "anticipates," "expects," "intends," "may,"
"will" and other similar expressions. However, these words are not the
exclusive means of identifying such statements. In addition, any statements
which refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. The Company
undertakes no obligation to publicly release the results of any revisions
to these forward-looking statements which may be made to reflect events or
circumstances occurring subsequent to the filing of this Form 10-QSB with
the Securities and Exchange Commission ("SEC"). Readers are urged to
carefully review and consider the various disclosures made by the Company
in this report and in the Company's other reports filed with the SEC that
attempt to advise interested parties of the risks and factors that may
affect the Company's business.
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,242,977 $ 4,164,371
Accounts receivable, net of allowance of doubtful accounts of $54,000 and $4,000,
respectively 689,508 107,132
Prepaid expenses 155,099 399,217
Note receivable and accrued interest from related party 100,686 -
Short-term deposits 398,804 444,545
------------ ------------
Total current assets 15,587,074 5,115,265
Property and equipment, net of accumulated depreciation of $2,070,638 and $1,402,158,
respectively 3,284,076 2,352,489
Intangible assets, net of accumulated amortization of $6,653,396 and
$2,523,351, respectively 18,387,487 12,503,047
Deferred financing costs 137,063 2,649,517
Other assets 509,071 4,216
------------ ------------
Total assets $ 37,904,771 $ 22,624,534
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases payable $ 107,494 $ 108,525
Accounts payable and accrued liabilities 1,668,730 841,440
Accrued salaries and payroll taxes payable 1,002,656 1,059,338
Accrued interest payable - 126,028
Customer deposits and deferred revenue 192,514 227,882
------------ ------------
Total current liabilities 2,971,394 2,363,213
Capital leases payable 55,254 115,493
10% convertible note payable, net of discount of $397,486 and
$947,710, respectively 2,164,843 4,052,290
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value, 5,000,000 shares authorized:
Series B convertible preferred stock, 12,500 and none shares issued and outstanding,
respectively 12,500,000 -
10% redeemable, convertible preferred stock, 10% cumulative return; none and 85,000
shares issued and outstanding, respectively, including dividends payable of none
and $170,295, respectively - 1,020,295
Common stock, no par value, 60,000,000 shares authorized, 9,211,980 and 7,830,028
shares issued and outstanding, respectively 74,763,353 49,513,769
Warrants and options 13,857,899 8,612,322
Deferred compensation (465,330) (412,707)
Accumulated deficit (67,942,642) (42,640,141)
------------ ------------
Total stockholders' equity 32,713,280 16,093,538
------------ ------------
Total liabilities and stockholders' equity $ 37,904,771 $ 22,624,534
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
3
<PAGE>
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- ---------------------------------------
2000 1999 2000 1999
----------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Net revenues $ 1,131,209 $ 192,934 $ 2,141,031 $ 481,216
Cost of revenues 804,914 340,084 1,567,839 541,318
----------------- ----------------- ------------------- ---------------
Gross margin 326,295 (147,150) 573,192 (60,102)
----------------- ----------------- ------------------- ---------------
Operating expenses:
Sales and marketing expenses 756,880 389,264 1,241,647 834,653
Product development expenses 1,495,543 655,257 2,640,123 1,254,097
General and administrative expenses 2,756,117 1,479,094 4,548,065 3,014,702
Depreciation and amortization 2,463,778 139,169 4,670,798 247,398
----------------- ----------------- ------------------- ---------------
7,472,318 2,662,784 13,100,633 5,350,850
----------------- ----------------- ------------------- ---------------
Loss from operations (7,146,023) (2,809,934) (12,527,441) (5,410,952)
Interest income 283,486 40,447 445,373 90,748
Equity in loss of subsidiary - (105,134) - (127,083)
Interest expense (172,961) (3,672) (347,951) (7,831)
----------------- ----------------- ------------------- ---------------
Net loss (7,035,498) (2,878,293) (12,430,019) (5,455,118)
Preferred stock dividends - (29,028) (373,126) (75,041)
Accretion of preferred stock to redemption value - (157,691) (12,500,000) (3,157,691)
Accretion of preferred stock for guaranteed
return in excess of redemption value - - - (1,158,563)
----------------- ----------------- ------------------- ---------------
Net loss applicable to common stockholders $ (7,035,498) $ (3,065,012) $ (25,303,145) $ (9,846,413)
================= ================= =================== ===============
Loss per share, basic and diluted $ (0.77) $ (0.52) $ (2.85) $ (1.76)
================= ================= =================== ===============
Weighted average shares outstanding, basic and
diluted 9,112,440 5,909,394 8,888,848 5,608,227
================= ================= =================== ===============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
<PAGE>
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (12,430,019) $ (5,455,118)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 4,798,526 535,574
Accrued interest income on advances to DCI - (46,379)
Reduction in note receivable for services received from DCI - 368,643
Stock and stock options issued for services 655,515 333,143
Equity loss in subsidiary - 127,083
Notes payable issued for interest on 10% convertible note payable 62,329 -
Amortization of 10% convertible note payable discount 96,934 -
Amortization of 10% convertible note payable financing costs 40,532 -
Bad debt expense 50,000 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (632,376) 90,197
Decrease in inventory - 55,126
Decrease (increase) in prepaid expenses 244,118 (61,358)
Increase in short-term deposits and other assets (459,114) (1,500)
Increase in accounts payable and accrued liabilities 762,251 192,936
(Decrease) increase in accrued salaries and payroll taxes payable (56,682) 18,251
Decrease in accrued interest payable (126,028) -
(Decrease) increase in customer deposits and deferred revenue (35,368) 284,310
--------------- -------------
Net cash used in operating activities (7,029,382) (3,559,092)
--------------- -------------
Cash flows from investing activities:
Cash acquired in business combinations - 32,484
Purchase of property and equipment (1,554,136) (1,353,223)
Cash advances to related party (100,000) -
Cash advances to DCI - (593,649)
Payment of acquisition costs - (27,468)
Investment in subsidiary - (240,564)
--------------- -------------
Net cash used in investing activities (1,654,136) (2,182,420)
--------------- -------------
Cash flows from financing activities:
Payments on capital leases (61,269) (16,435)
Proceeds from issuance of common stock and warrants - 3,074,256
Proceeds from exercise of stock options and warrants 7,163,393 1,322,000
Proceeds from issuance of series B preferred stock and warrants 12,500,000 -
Proceeds from issuance of series C preferred stock - 5,000,000
Stock offering costs (840,000) (401,887)
--------------- -------------
Net cash provided by financing activities 18,762,124 8,977,934
--------------- -------------
Net increase in cash and cash equivalents 10,078,606 3,236,422
Cash and cash equivalents, beginning of period 4,164,371 698,339
--------------- -------------
Cash and cash equivalents, end of period $ 14,242,977 $ 3,934,761
=============== =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
<PAGE>
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 137,742 $ 8,920
============== ============
Supplemental schedule of non-cash investing and financing activities:
Common stock and warrants issued in business combinations $ 9,995,417 $ 11,636,285
Accretion of preferred stock to redemption value 12,500,000 3,157,691
Accretion of preferred stock for guaranteed return in excess of
redemption value - 1,158,563
Preferred stock dividends paid or to be paid in common stock 373,126 75,041
Preferred stock and dividends converted to common stock 1,023,028 5,686,707
Common stock warrants issued for offering costs 2,311,475
10% note payable converted to common stock 1,886,263 -
Capital leases for equipment - 35,000
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include the accounts of Webb Interactive Services, Inc. and its wholly-owned
Subsidiaries (collectively "Webb" or the "Company"). All significant
intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared without audit pursuant
to rules and regulations of the Securities and Exchange Commission and reflect,
in the opinion of management, all adjustments, which are of a normal and
recurring nature, necessary for a fair presentation of the financial position
and results of operations for the periods presented. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions. Such estimates and
assumptions affect the reported amounts of assets and liabilities as well as
disclosure of contingent assets and liabilities at the date of the accompanying
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
results of operations for the interim periods are not necessarily indicative of
the results for the entire year. The interim financial statements should be
read in connection with the financial statements included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999 filed with the
Securities and Exchange Commission.
NOTE 2 - REVENUE RECOGNITION
The Company recognizes software license revenue in accordance with the
American Institute of Certified Public Accountants Statement of Position 97-2
"Software Revenue Recognition" ("SOP 97-2") and related interpretations, which
requires the Company to recognize revenue on software transactions only when
persuasive evidence of an agreement exists, delivery of the product has
occurred, no significant Company obligations remain, the fee is fixed or
determinable, and collectibility is probable.
Revenue from software license fees is recognized upon delivery, provided
that no future Company obligation exists. If obligations do exist, revenue is
deferred until the obligation is satisfied, which may require the Company to
recognize revenue from software licenses over the term of the contract. In
instances where the Company charges monthly license fees, revenue is recognized
in the month the license is provided. Guaranteed minimum revenue is recognized
on a straight-line basis over the period the minimum applies.
Revenue from professional services billed on a time and materials basis is
recognized as performed. Revenue from fixed price long-term contracts is
recognized on the percentage of completion method for individual contracts,
commencing when progress reaches a point where experience is sufficient to
estimate final results with reasonable accuracy. Revenues are recognized in the
ratio that costs incurred bear to total estimated contract costs. The Company's
use of the percentage of completion method of revenue recognition requires
estimates of percentage of project completion. Changes in job performance,
estimated profitability and final contract settlements may result in revisions
to costs and income in the period in which the revisions are determined.
Provisions for any estimated losses on uncompleted contracts are made in the
period in which such losses are determinable. In instances when the work
performed on fixed price agreements is of relatively short duration, the Company
uses the completed contract method of accounting whereby revenue is recognized
when the work is completed. Customer advances and billed amounts due from
customers in excess of revenue recognized are recorded as deferred revenue.
Revenue from service bureau fees is recognized in the month the service is
provided.
Revenue from maintenance and support agreements is recognized on a
straight-line basis over the life of the related agreement.
The Company follows the provisions of EITF 00-3, "Application of AICPA SOP
97-2, "Software Revenue Recognition," to Arrangements That Include the Right to
Use Software Stored on Another Entity's Hardware," for
7
<PAGE>
hosting arrangements. Under the EITF consensus, if the customer has the
contractual right to take possession of the software at anytime during the
hosting period without significant penalty and it is feasible for the customer
to either run the software on its own hardware or contract with another party
unrelated to the vendor to host the software, then the software portion of the
arrangement is accounted for under SOP 97-2. If the customer does not have this
right, then the fee for the entire arrangement is recognized on a straight-line
basis over the life of the related arrangement.
In multiple element arrangements when vendor specific objective evidence
does not exist for the individual elements, all revenue from the arrangement is
deferred until the earlier of the point at which (a) such sufficient vendor-
specific objective evidence does exist or (b) all elements of the arrangement
have been delivered. In some instances, the Company recognizes all the revenue
from the arrangement on a straight-line basis over the life of the related
agreement.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101
provides interpretive guidance on the recognition, presentation and disclosure
of revenue in financial statements. The accounting impact of SAB 101 is
required to be determined no later than the Company's fourth fiscal quarter of
2000. If the Company determines that its revenue recognition policies must
change to be in compliance with SAB 101, the implementation of SAB 101 will
require the Company to restate its first three quarters of 2000 results to
reflect a cumulative effect of a change in accounting principle as if SAB 101
had been implemented on January 1, 2000. The Company is currently reviewing SAB
101 to determine what impact, if any, the adoption of SAB 101 will have on its
financial position and results of operations.
The Company believes its current revenue recognition policies and practices
are consistent with the provisions of SOP 97-2, as amended by SOP 98-4 and SOP
98-9, which were issued by the American Institute of Certified Public
Accountants as well as other authoritative literature. Implementation
guidelines for these standards, including SAB 101 as well as potential new
standards, could lead to unanticipated changes in the Company's current revenue
recognition policies. Such changes could affect the timing of the Company's
future revenue and results of operations.
Estimates of returns and allowances are recorded in the period of the sale
based on the Company's historical experience and the terms of individual
transactions.
Net revenues are comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
2000 1999 2000 1999
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net revenues:
Licenses $ 487,008 $ 62,984 $ 1,168,734 $ 101,400
Service bureau application
provider service fees 87,899 66,409 169,968 124,718
Services 556,302 63,541 802,329 137,589
Hardware and third party software - - - 117,509
--------------- ------------- -------------- ---------------
Total net revenues $ 1,131,209 $ 192,934 $ 2,141,031 $ 481,216
=============== ============== ============== ===============
</TABLE>
NOTE 3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. It requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measures those
instruments at fair value. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - An
amendment of
8
<PAGE>
FASB Statement No. 133" (SFAS 137). SFAS 137 delays the effective date of SFAS
133 to financial quarters and financial years beginning after June 15, 2000. The
Company does not typically enter into arrangements that would fall under the
scope of Statement No. 133 and thus, management believes that SFAS 133 will not
significantly affect the Company's financial condition and results of
operations.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN No. 44"). The
Interpretation clarifies the application of APB No. 25 for certain issues
related to equity based instruments issued to employees. FIN No. 44 is
effective on July 1, 2000, except for certain transactions, and will be applied
on a prospective basis. Management believes that FIN No. 44 will not have a
significant impact on the Company's financial statements.
NOTE 4 - BUSINESS ACQUISITION
On January 7, 2000, the Company acquired the assets of Update Systems, Inc.
("Update"), a developer and provider of e-communication solutions for businesses
in the highly competitive world of Internet relationships, by issuing 278,411
shares of the Company's common stock. In addition, outstanding Update options
to purchase common stock were exchanged into 49,704 options to purchase the
Company's common stock. The acquisition of the assets was recorded using the
purchase method of accounting whereby the consideration paid of $10,060,417 was
allocated based on the fair values of the assets acquired with the excess
consideration over the fair market value of tangible assets of $10,014,485
recorded as intangible assets.
Total consideration for the merger is as follows:
<TABLE>
<S> <C>
Value of common stock issued $ 8,630,741
Value of options issued 1,364,676 (a)
Acquisition expenses 65,000
-----------
Total purchase price $10,060,417
===========
</TABLE>
(a) 49,704 options issued, valued using the Black-Scholes option pricing model
using the following assumptions:
<TABLE>
<S> <C>
Exercise prices $ 4.33
Fair market value of common stock on measurement date $ 29.50
Option lives 5 years
Volatility rate 104%
Risk-free rate of return 5.0%
Dividend rate 0%
</TABLE>
The purchase price was allocated to the assets acquired based on their fair
market values as follows:
<TABLE>
<S> <C>
Acquired property and equipment $ 45,932
Developed technologies, goodwill and other intangibles 10,014,485
-----------
Total assets acquired $10,060,417
===========
</TABLE>
The transaction with Update resulted in $10,014,485 of intangible assets
(primarily developed technologies, workforce and goodwill). These intangible
assets will be amortized over their estimated economic lives of three years.
The purchase price allocation is subject to adjustment based on the final
determination of the fair value of the assets acquired, which could take as long
as one year from January 7, 2000.
NOTE 5 - GOODWILL
Goodwill is being amortized on a straight-line basis over three years.
Subsequent to acquisitions which result in goodwill, the Company continually
evaluates whether later events and circumstances have occurred that indicate the
remaining useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company
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<PAGE>
uses an estimate of the undiscounted net income or cash flows, as appropriate,
over the remaining life of the goodwill in measuring whether the goodwill is
recoverable. The Company recorded amortization expense of $2,092,790 and
$4,130,045 for the three and six months ended June 30, 2000, respectively, and
$23,675 for the three and six months ended June 30, 1999. As of June 30, 2000,
$6,650,895 of the Company's intangible assets consisted of goodwill.
None of the businesses acquired by the Company were profitable prior to
their acquisition. Accordingly, and due to other risks and uncertainties
discussed herein, it is possible that an analysis of these long-lived assets in
future periods could result in a conclusion they are impaired, and the amount of
impairment could be substantial.
NOTE 6 - NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128, "Earnings
Per Share" ("SFAS 128"), and Securities and Exchange Commission Staff Accounting
Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS 128 and SAB 98, basic
net loss per share is computed by dividing net loss applicable to common
shareholders for the period by the weighted average number of common shares
outstanding for the period. Diluted net loss per share is computed by dividing
the net loss applicable to common shareholders for the period by the weighted
average number of common and potential common shares outstanding during the
period if the effect of the potential common shares is dilutive. As a result of
the Company's net losses, all potentially dilutive securities, as indicated in
the table below, would be anti-dilutive and are excluded from the computation of
diluted loss per share.
<TABLE>
<CAPTION>
June 30,
-----------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Stock options 3,461,215 1,948,569
10% convertible note payable 248,262 -
Warrants and underwriter options 777,085 362,929
Series B preferred stock 625,000 -
Convertible debt - 32,147
10% preferred stock - 97,715
Series C preferred stock - 225,763
-------------- --------------
Total 5,111,562 2,667,123
============== ==============
</TABLE>
The number of shares excluded from the earning per share calculation
because they are anti-dilutive, using the treasury stock method, were 2,554,633
and 1,123,013 for the three months ended June 30, 2000 and 1999, respectively,
and 3,872,394 and 1,190,764 for the six months ended June 30, 2000 and 1999,
respectively.
NOTE 7 - SERIES B PREFERRED STOCK
On February 18, 2000, the Company completed a private placement which
resulted in gross proceeds of $12,500,000. The placement was made pursuant to a
securities purchase agreement entered into on December 31, 1999. The Company
sold 12,500 shares of its series B convertible preferred stock (the "series B
preferred stock"), including warrants to purchase 343,750 shares of the
Company's common stock. Net proceeds to the Company were approximately
$11,660,000 after deducting approximately $840,000 in offering costs.
The series B preferred stock is convertible into shares of the Company's
common stock, initially at $20.00. The conversion rate for the series B
preferred stock is subject to a potential reset. The conversion price will be
reset on November 14, 2000 at which time the conversion price is fixed at the
lower of $20.00 or the average closing bid price of the Company's common stock
for 10 days ending on November 13, 2000 or the closing bid price of the
Company's common stock on November 13, 2000.
The terms of the 10% convertible note payable agreement, issued on August
25, 1999, were amended on December 18, 1999 whereby the Company issued the note
holder a five-year warrant to purchase 136,519 shares of the Company's common
stock at an exercise price of $18.51 per share in consideration for the note
holder's agreement to exchange the note for an amended note with terms more
favorable for the Company. As this
10
<PAGE>
transaction was consummated to facilitate the sale of the Company's series B
preferred stock, the Company recorded the fair value of the warrant totalling
$2,311,475 as offering costs related to the series B preferred stock.
The Company also issued 343,750 common stock purchase warrants with the
series B preferred stock, valued at $6,913,568 based on the relative fair value
of the warrants using the Black-Scholes option pricing model compared to the net
proceeds received by the Company, that entitles the holder to purchase one share
of the Company's common stock for a purchase price initially set at $20.20,
equal to 101% of the initial conversion price of the preferred stock at any time
during the five-year period commencing on February 18, 2000. The exercise price
for the warrants is subject to being reset based upon future market prices for
the Company's common stock every 90 days commencing May 17, 2000 until January
20, 2003. If the current exercise price is higher than the current market price
(the lower of the average closing bid prices for the 10-day period ending on
such date or the closing bid price on such date), the exercise price will be
reset to the market price. On May 17, 2000, the exercise price of the warrants
was reset to $13.00 per share.
On their issuance date, the warrants were valued utilizing the Black-
Scholes option pricing model using the following assumptions:
<TABLE>
<S> <C>
Exercise price $20.20
Fair market value of common stock on grant date $66.88
Option life 5 years
Volatility rate 120%
Risk-free rate of return 6.7%
Dividend rate 0%
</TABLE>
Due to the conversion feature associated with the series B preferred stock,
the Company accounted for a beneficial conversion feature (a "Guaranteed
Return") as an additional preferred stock dividend. The computed value of the
Guaranteed Return of $2,434,957 is limited to the relative fair value of the
series B preferred stock, which totalled $2,434,957, and was initially recorded
as a reduction of the series B preferred stock and an increase to additional
paid-in capital. The Guaranteed Return reduction to the series B preferred
stock was accreted on the date of issuance, as additional dividends, by
recording a charge to income applicable to common stockholders from the date of
issuance to the earliest date of conversion.
The difference between the stated redemption value of $1,000 per share and
the recorded value on February 18, 2000, totalling $12,500,000, was accreted as
a charge to income applicable to common stockholders on the date of issuance
(the date on which the series B preferred stock was first convertible) and was
comprised of the following:
<TABLE>
<S> <C>
Guaranteed return $ 2,434,957
Value of common stock warrants 6,913,568
Value of common stock warrant issued to holder of 10% note payable 2,311,475
Series B preferred stock offering costs 840,000
-----------
Total accretion recorded $12,500,000
===========
</TABLE>
NOTE 8. - CONVERSION OF 10% CONVERTIBLE NOTE PAYABLE
On February 18, 2000, the holder converted $2,500,000 of the $5,000,000
outstanding Note Payable into 248,262 shares of the Company's common stock at a
conversion price of $10.07 per share.
NOTE 9. - ISSUANCE OF COMMON STOCK AND WARRANTS/OPTIONS FOR SERVICES
On March 16, 2000, the Company executed a two-month consulting agreement
with a financial consulting firm to enhance Company activities in corporate
finance, mergers and acquisitions and investor relations. In connection with the
agreement, the Company issued 15,000 restricted shares of its common stock for
services
11
<PAGE>
provided and recorded expenses totalling $136,203 and $246,891 for the three and
six months ended June 30, 2000, respectively, determined based on the fair
market value of the stock on the day the services were provided.
During the second quarter of 2000, the Company issued a common stock
purchase warrant to an employment placement agency and stock options to
consultants for services to purchase in the aggregate 48,338 shares of its
common stock at exercise prices ranging from $11.88 to $38.44. The agreements
specify option lives ranging from one to seven years with vesting terms ranging
from upon issuance to three years. The Company valued these securities in the
aggregate at $461,247 utilizing the Black-Scholes option pricing model using the
following assumptions:
<TABLE>
<S> <C>
Exercise prices $11.88 to $38.44
Fair market value of common stock on date of issuances $12.81 to $38.44
Option lives 1 to 7 years
Volatility rate 119% to 123%
Risk-free rate of return 6.06%
Dividend rate 0%
</TABLE>
The Company recorded deferred compensation expense totalling $461,247 and
compensation expense totalling $279,659 in the second quarter related to the
issuance of these securities. In addition, an aggregate of 42,504 shares are
being valued under variable plan accounting whereby the fair value of the option
is recomputed at the end of each quarter. As a result, the Company may incur
significant charges in future periods if its stock price increases.
NOTE 10 - EXERCISE OF COMMON STOCK WARRANTS
During the six months ended June 30, 2000, holders of warrants exercised
their right to purchase 495,517 shares of the Company's common stock, resulting
in net proceeds to the Company totalling $5,374,416, after deducting $93,707 in
commissions, as summarized in the following table:
<TABLE>
<CAPTION>
Common
Stock Exercise Common Proceeds
Warrant Price Stock to the
Warrant Exercised Exercised Per Share Issued Company
----------------------------- ------------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
10% preferred stock warrants 35,000 $15.00 35,000 $ 525,000
IPO representative warrants 105,170 8.10 102,361 736,047
Warrants issued in connection
with the DCI merger 111,828 6.61 to 10.16 110,166 944,049
Warrant issued in connection
with 5% Preferred Stock 100,000 16.33 100,000 1,633,000
Warrant issued to customer 7,000 9.75 7,000 68,250
Warrant issued to 10%
convertible note holder 136,519 11.44 136,519 1,468,070
----------- --------- -----------
495,517 491,046 $ 5,374,416
=========== ========= ===========
</TABLE>
Included in the common stock issued in connection with the exercise of the
IPO representative warrants and the warrants issued in connection with the DCI
merger are 11,491 and 6,865 shares, respectively, issued to the holders as a
result of utilizing the cashless exercise provision of the agreements for the
exercise of 14,300 and 8,527 warrants, respectively.
NOTE 11 - CONVERSION OF 10% PREFERRED STOCK
During the six months ended June 30, 2000, 85,000 shares of the 10%
preferred stock, including accrued dividends payable of $173,028, were converted
into 102,302 shares of the Company's common stock at a conversion price of
$10.00 as summarized in the following table:
12
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Common Stock
------------------------------------------
10% Preferred Common Conversion
Conversion Date Stock Stock Price per Share
---------------------- -------------------- ------------------- ---------------------
<S> <C> <C> <C>
January 11, 2000 80,000 96,240 $10.00
February 14, 2000 5,000 6,062 10.00
-------------------- -------------------
85,000 102,302
==================== ===================
</TABLE>
NOTE 12 - DUE FROM RELATED PARTIES
On April 17, 2000, the Company loaned one of its officers $100,000 pursuant
to a demand note bearing interest at 8% per annum. Interest is payable monthly
commencing July 1, 2000.
NOTE 13 - BUSINESS SEGMENT INFORMATION
The Company develops and supports products and services for local markets
by providing an interactive framework of local commerce and community-based
services comprised of publishing, content management, community-building and
communications. In addition, the Company develops and supports products and
services for electronic banking applications, targeting credit unions, community
banks, and savings and loan institutions with a full line of e-banking
transaction processing and account management services. The Company has three
reportable business segments: Local Commerce, e-Banking and Jabber.com.
Local Commerce consists of XML-based online commerce and communication
solutions for small business, with a particular emphasis on local commerce
interaction.
e-Banking consists of an online banking solution, marketed generally to
financial institutions having less than $500 million in assets, using a service
bureau approach to e-banking, which enables institutions to provide many of the
capabilities and services available to the larger financial institutions without
the cost associated with the development of institution-specific systems.
Jabber.com consists of XML-based open-source Internet application products
which incorporates instant messaging as a key application for commerce-oriented
dialogs between businesses and consumers.
Corporate Activities consists of general corporate expenses, including
capitalized costs that are not allocated to specific business segments. Assets
of corporate activities include unallocated cash, receivables, prepaid expenses,
note receivable, deferred acquisition costs, deposits, intangible assets
acquired in mergers, and corporate use of property and equipment.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------- -------------------
<S> <C> <C>
Assets
------
Local commerce $ 2,153,190 $ 1,651,481
e-Banking 728,134 714,216
Jabber.com 105,115 -
Corporate activities 34,918,332 20,258,837
------------- -------------
Total $ 37,904,771 $ 22,624,534
============= =============
Property and Equipment, net
---------------------------
Local commerce $ 1,528,890 $ 1,378,408
e-Banking 588,525 683,890
Jabber.com 80,066 -
Corporate activities 1,086,595 290,191
------------- -------------
Total $ 3,284,076 $ 2,352,489
============= =============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- ---------------------------------------
2000 1999 2000 1999
----------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Net Revenues
------------
Local commerce $ 885,199 $ 111,825 $ 1,697,752 $ 327,660
e-Banking 227,460 81,109 424,729 153,556
Jabber.com 18,550 - 18,550 -
------------- ------------- ------------- ------------
Total net revenue $ 1,131,209 $ 192,934 $ 2,141,031 $ 481,216
============= ============= ============= ============
Net Loss
--------
Local commerce $ (2,103,796) $ (1,470,460) $ (3,704,520) $ (2,746,031)
e-banking (27,065) (20,282) (61,801) (127,927)
Jabber.com (1,160,602) (1,387,551) (1,225,928) (2,581,160)
Corporate activities (3,744,035) - (7,437,771) -
------------- ------------- ------------- ------------
Total net loss $ (7,035,498) $ (2,878,293) $ (12,430,020) $ (5,455,118)
============= ============= ============= ============
Depreciation and Amortization
-----------------------------
Local commerce $ 191,199 $ 49,780 $ 261,418 $ 94,371
e-banking 34,800 35,247 67,831 70,494
Jabber.com 3,896 - 4,172 82,533
Corporate activities 2,233,883 54,142 4,337,377 -
------------- ------------- ------------- ------------
Total depreciation and amortization expense $ 2,463,778 $ 139,169 $ 4,670,798 $ 247,398
============= ============= ============= ============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------------
2000 1999
------------------- -----------------
<S> <C> <C>
Property and Equipment Additions
--------------------------------
Local commerce $ 460,397 $ 1,020,257
e-Banking 3,094 297,281
Jabber.com 84,238 -
Corporate activities 1,006,407 35,685
---------------- ---------------
Total $ 1,554,136 $ 1,353,223
================ ===============
</TABLE>
NOTE 14 - SUBSEQUENT EVENTS
On July 5, the Company's board of directors approved a non-binding letter
of intent to sell its e-banking business to a venture capital-backed private
company. The letter of intent, which is subject to negotiations and completion
of a definitive purchase agreement, of which there can be no assurance,
contemplates that the purchase price for the e-banking business will be paid
primarily in shares of the buyer's stock. The transaction, if completed, is
expected to result in neither a significant gain or loss for book purposes. If
the Company does not complete the proposed transaction, it will continue to
operate its e-banking business.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Webb provides innovative advanced online commerce and communication
solutions for small businesses, with a particular emphasis on local commerce
interaction. Our AccelX product line of XML-based commerce and buyer-seller
interaction products and services, provides businesses with powerful web-site
development and communication tools to attract customers, generate leads,
increase buyer-seller interaction and strengthen customer relationship
management. The AccelX services are divided into two categories: Customer
Relationship Management Services and Marketplace Services.
We distribute our AccelX products and services on a private-label basis to
high-volume distribution partners such as yellow page directory publishers,
newspapers, city guides, vertical market portals and other aggregators of local
businesses. Our products may be either purchased or delivered on an application
service provider business model whereby we host the software on our servers and
deliver and manage the service on behalf of our distribution partners.
Generally, these services are provided on a revenue-share basis providing us
with recurring revenues as our distribution partners sell these services to
their small business customers. This distribution model is designed to provide
us with a growing base of businesses using one or more of our services who are
ideal customers for additional AccelX services.
Prior to January 2000, we were organized around our primary market focus on
local commerce services, with an additional business unit dedicated to e-banking
services. In the local commerce segment, we target small and medium sized
businesses with our AccelX products and services supporting XML-based commerce
and buyer-seller interaction. The electronic banking unit targets credit unions,
community banks, and savings and loan institutions with a full line of e-banking
transaction processing and account management services. In January 2000, we
formed a new subsidiary in order to commercialize separately from our AccelX
business, the Jabber.org instant messaging system. We intend to seek significant
participation from external partners to help us maximize the value of the e-
banking and instant messaging businesses.
During July 2000, working with Diamond Technology Partners, Inc., we
completed a business plan for our Jabber.com subsidiary. The plan focuses
Jabber.com's business development efforts on three areas.
. Providing professional services to help companies implement, customize and
host instant messaging applications;
. Developing outsourced solutions for instant messaging services for
businesses, utilizing an application service provider business model; and
. Developing open gateway services through strategic relationships with
companies in the areas of Internet protocol telephony, mobile services,
customer services and exchange services.
Jabber.com is engaged in the early stages of several projects that are
implementing the Jabber.org XML-based open-source instant messaging platform for
portal services, enterprise messaging, financial services applications and
enhanced mobile and telephony integration. Jabber.com is continuing to work with
Diamond Technology Partners, Inc. to develop enterprise level services based on
Jabber's version 1.0 server and to establish strategic partnerships with
investors and businesses that share a common vision of the opportunity for next
generation instant communications.
On July 5, 2000, we signed a non-binding letter of intent for the sale of
our e-banking business to a venture capital-backed private company.
15
<PAGE>
We have incurred losses from operations since inception. At June 30, 2000,
we had an accumulated deficit of approximately $67.9 million. The accumulated
deficit at June 30, 2000, included approximately $37.8 million of non-cash
expenses related to the issuance of preferred stock and warrants in financing
transactions, stock and stock options issued for services, warrants issued to
four customers, interest expense on the 10% convertible note payable and
amortization of assets acquired in consideration for the issuance of our
securities. Based on applicable current accounting standards, we estimate that
we will be required to record a non-operating expense of approximately $126,000
in the remainder of 2000, $251,000 in 2001 and $158,000 in 2002 in connection
with the issuance of our 10% convertible note, unless it is converted to common
stock prior to its maturity date. We also recorded additional non-cash charges
of $12.5 million in the first quarter of 2000 in connection with the issuance of
series B convertible preferred stock. While these charges do not affect our
operating losses or working capital, they do result in a decrease in our net
income applicable to common stockholders. Additionally, during 2000, we
recorded a non-cash charge for preferred stock dividends of approximately
$373,000 and non-cash interest expense of approximately $198,000 in connection
with the sale of our 10% convertible note payable.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101
provides interpretive guidance on the recognition, presentation and disclosure
of revenue in financial statements. The accounting impact of SAB 101 is
required to be determined no later than the fourth fiscal quarter of 2000. If
we determine that our revenue recognition policies must change to be in
compliance with SAB 101, the implementation of SAB 101 may require us to restate
our previously reported 2000 quarterly results to reflect a cumulative effect of
a change in accounting principle as if SAB 101 had been implemented on January
1, 2000. We are currently reviewing SAB 101 to determine what impact, if any,
the adoption of SAB 101 will have on our financial position and results of
operations.
16
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the percentage of
net revenues by items contained in the Statements of Operations. All
percentages are calculated as a percentage of total net revenues, with the
exception of cost of revenues which are calculated based on the respective net
revenue amounts.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ -----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net revenues:
Licenses 43.1% 39.2% 54.6% 25.7%
Service bureau fees 7.8% 34.4% 7.9% 25.9%
Services 49.1% 26.3% 37.5% 24.0%
Hardware and software sales - - - 24.4%
--------------- --------------- --------------- --------------
Total net revenues 100.0% 100.0% 100.0% 100.0%
--------------- --------------- --------------- --------------
Cost of revenues:
Cost of licenses 56.0% 148.4% 40.4% 122.3%
Cost of service bureau revenues 53.9% 12.3% 57.1% 13.3%
Cost of services 87.2% 431.8% 124.5% 242.3%
Cost of hardware and software - - - 80.1%
--------------- --------------- --------------- --------------
Total cost of revenues 71.2% 176.3% 73.2% 112.5%
--------------- --------------- --------------- --------------
Gross margin 28.8% (76.3)% 26.8% (12.5)%
--------------- --------------- --------------- --------------
Operating expenses:
Sales and marketing expenses 66.9% 201.8% 58.0% 173.4%
Product development expenses 132.2% 339.6% 123.3% 260.6%
General and administrative expenses 243.6% 766.6% 212.5% 626.5%
Depreciation and amortization expenses 217.8% 72.1% 218.1% 51.4%
--------------- --------------- --------------- --------------
Total operating expenses 660.5% 1380.1% 611.9% 1111.9%
--------------- --------------- --------------- --------------
Loss from operations (631.7)% (1456.4)% (585.1)% (1124.4)%
Net loss (621.9)% (1491.9)% (580.6)% (1133.6)%
Preferred stock dividends - (15.0)% (17.4)% (15.6)%
Accretion of preferred stock to redemption
value - (81.7)% (583.8)% (656.2)%
Accretion of preferred stock for guaranteed
return in excess of redemption value - - - (240.8)%
--------------- --------------- --------------- --------------
Net loss applicable to common stockholders (621.9)% (1588.6)% (1181.8)% (2046.2)%
=============== =============== =============== ==============
</TABLE>
17
<PAGE>
REVENUES:
Local Commerce:
Components of net revenues and cost of revenues from Local Commerce are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ -----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net revenues:
Licenses $487,008 $ 62,984 $1,168,734 $ 101,400
Services 398,191 48,841 529,018 108,751
Hardware and third party software - - - 117,509
--------------- --------------- --------------- --------------
Total net revenues 885,199 111,825 1,697,752 327,660
--------------- --------------- --------------- --------------
Cost of revenues:
Cost of licenses 272,593 112,355 471,819 151,344
Cost of services 420,559 205,846 867,145 253,066
Cost of hardware and third party
software - - - 94,155
--------------- --------------- --------------- --------------
Total cost of revenues 693,152 318,201 1,338,964 498,565
--------------- --------------- --------------- --------------
Gross margin $192,047 $(206,376) $ 358,788 $(170,905)
=============== =============== =============== ==============
</TABLE>
License revenues represent fees earned for granting customers licenses to
use our AccelX software products and services which we began to sell in the
second half of 1999. During the three months ended June 30, 2000 we recognized
$217,500 from the initial software license fees and $269,508 from recurring
license fees. During the six months ended June 30, 2000 we recognized $656,400
from the initial sale of software licenses and $512,334 from recurring license
fees. The software license revenues in the 2000 six-month period were primarily
from a sale to Vetconnect, Inc., a vertical portal that provides Internet
services for veterinarians. While our basic distribution model is to provide
services to aggregators of small business on a recurring revenue basis, thereby
providing us with future revenues as our distribution partners sell our services
to their small business customers, late in 1999 we began offering perpetual
software licenses to those businesses that desire to acquire our software for
integration into the services they provide to their customers. In addition,
during 2000 we began to license our software products under a hybrid model
whereby our customers purchase a fixed number of licenses under a perpetual
license arrangement and purchase additional licenses on a recurring revenue
basis. Software license fees may continue to represent a significant portion of
license revenue for at least the next several quarters as these fees are
generally significantly larger than are the initial fees paid by those
distribution partners who agree to pay us a portion of their future revenues. We
estimate that it will take those distribution partners up to one year or more
after they commence distribution of our services to develop a significant enough
base of small businesses using our services for these recurring revenues to
become significant. Recurring license revenues for the first quarter of 2000 are
primarily a result of fees earned from Switchboard, Inc. in the form of
quarterly guaranteed minimum payments required to maintain limited exclusivity
for our Site Builder services in a segment of the United States market.
Switchboard's exclusivity rights terminated on June 30, 2000 and Switchboard
will not, therefore, pay quarterly guaranteed minimum payments in the future.
Services revenues consist principally of revenue derived from professional
services for the customization of our software to customer specifications,
assisting our customers in configuring and integrating our software
applications, hosting fees and fees for ongoing maintenance, which consists of
unspecified product upgrades and enhancements on a when-and-if-available basis.
Our net revenues from services were $398,191 for the three months ended June 30,
2000, which represents an increase of 715.3% when compared with the similar 1999
period. Our revenues from services were $529,018 for the six months ended June
30, 2000, which represents an increase of 386.4% when compared with the similar
1999 period. The increases are primarily due to professional service revenue we
earned in connection with the integration of our software products with those of
our customers.
18
<PAGE>
Revenues from hardware and software include the resale of computer hardware
and third party software to customers generally in connection with implementing
our local directory products and services. During the three and six months ended
June 30, 1999, we sold equipment totalling $117,509 to customers with whom we
had existing contracts to provide equipment. We do not anticipate significant
revenues from hardware and equipment sales in future periods.
As of July 31, 2000, we have revenue backlog from closed contracts
totalling approximately $1.6 million which we expect to recognize as revenue
during 2000.
E-Banking:
Components of net revenues and cost of revenues from e-banking are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ -----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net revenues:
Service bureau and hosting fees $ 87,899 $66,409 $169,968 $124,718
Services 139,561 14,700 254,761 28,838
--------------- --------------- --------------- --------------
Total net revenues 227,460 81,109 424,729 153,556
--------------- --------------- --------------- --------------
Cost of revenues:
Cost of service bureau and hosting fees
47,358 8,200 97,125 16,530
Cost of services 51,447 13,683 118,793 26,223
--------------- --------------- --------------- --------------
Total cost of revenues 98,805 21,883 215,918 42,753
--------------- --------------- --------------- --------------
Gross margin $128,655 $59,226 $208,811 $110,803
=============== =============== =============== ==============
</TABLE>
Service bureau and hosting revenues represent fees earned for providing
online banking application services to our e-banking customers. Revenues
increased 32.4% and 36.3% in the 2000 three-and-six-months periods compared to
the similar 1999 periods, respectively, due to revenue from a new credit union
customer that went online during the fourth quarter of 1999.
Services revenues consist of revenue derived from professional services for
the customization of our software to customer specifications. Revenues
increased 849.4% and 783.4% in the 2000 three-and-six-month periods compared to
the similar 1999 periods, respectively, due to fees we earned from a customer
recognized on a percentage of completion basis.
We have signed a non-binding letter of intent for the sale of our e-banking
business. In the event that this sale is completed, we will be required to
exclude the revenues from this business in our future reports and to restate
information for prior periods to treat this income as income from discontinued
operations.
Jabber.com:
Components of net revenues and cost of revenues from Jabber.com are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ -----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net service revenues $18,550 $ - $18,550 $ -
Cost of service revenues 12,957 - 12,957 -
--------------- --------------- --------------- --------------
Gross margin $ 5,593 $ - $ 5,593 $ -
=============== =============== =============== ==============
</TABLE>
19
<PAGE>
Services revenues consist of revenue derived from professional services for
the customization of our Jabber.org instant messaging software to customer
specifications and assisting our customers in configuring and integrating
software applications. For at least the remainder of 2000, we expect to derive
the majority of our revenue from Jabber.com from professional service contracts.
COST OF REVENUES:
Local Commerce:
Cost of revenues as a percentage of net revenues was 78.3% for the three
months ended June 30, 2000, compared to 284.6% for the similar 1999 period and
78.9% for the six months ended June 30, 2000, compared to 152.2% for the similar
1999 period.
Cost of license revenues - Cost of license revenues consists of
compensation costs associated with personnel who assist our customers in
delivering services to end users, third party content software license
fees, and third party transaction fees. Cost of license revenues were
$272,593 for the three months ended June 30, 2000, or 56.0% of net license
revenues, compared with $112,355, or 178.4% of net license revenues for the
similar 1999 period. Cost of license revenues were $471,819 for the six
months ended June 30, 2000, or 40.4% of net license revenues, compared with
$151,344, or 149.3% of net license revenues for the similar 1999 period.
The absolute dollar increases in the 2000 periods were primarily
attributable to the amortization of a one-year third party software license
we purchased to integrate directory functionality into our products as well
as third party license fees we purchased for map publishing and costs
associated with delivering software enhancements for which we earn monthly
license fees.
Cost of service revenues - Cost of service revenues consists of
compensation costs and consulting fees associated with performing custom
programming, installation and integration services for our customers and
support services as well as costs for hosting services which consist of
costs to operate our network operating center. Cost of service revenues
was $420,559 for the three months ended June 30, 2000, or 105.6% of net
service revenues, compared with $205,846, or 421.5% of net service revenues
for the similar 1999 period. Cost of service revenues were $867,145 for
the six months ended June 30, 2000, or 163.9% of net service revenues,
compared with $253,066 or 232.6% of net service revenue for the similar
1999 period. Approximately 77% and 81% of our cost of service revenues for
the three-and-six-month periods, respectively, are attributable to fixed
costs associated with operating our network operating center, which we
placed into service during the second quarter of 1999. Our network
operating center has been built to accommodate our current customer base
and our contract backlog as well as significant additional projected
growth. Consequently, the current cost to operate the network operating
center is high compared to current revenues and will remain relatively high
for at least the next several quarters as we continue to build this
business.
Cost of hardware and third party software revenues - Cost of hardware
and software revenues consists of computer and third party software
purchased for resale to cable operators. Due to the change in our business
model, equipment sales are not expected to be significant in future
periods.
E-Banking:
Cost of revenues as a percentage of net revenues was 43.4% for the three
months ended June 30, 2000, compared to 27.0% for the similar 1999 period and
50.8% for the six months ended June 30, 2000, compared to 27.8% for the similar
1999 period.
Cost of service bureau and hosting fees - Cost of service bureau and
hosting fees consists of compensation costs for customer service, help desk
fees, third party software support
20
<PAGE>
agreements and Internet connectivity costs. Cost of service bureau fees was
$47,358 for the three months ended June 30, 2000, or 53.9% of net service
bureau fees, compared with $8,200 or 12.3% of net service bureau fees for
the similar 1999 period. Cost of service bureau and hosting fees for the
six months ended June 30, 2000 was $97,125, or 57.1% of net service bureau
fees, compared with $16,530 or 13.3% of net service bureau fees for the
similar 1999 period. The absolute dollar increase was primarily
attributable to an increase in the number of credit union members using the
services, including costs associated with a second credit union which began
using our services during the fourth quarter of 1999.
Cost of service revenues - Cost of service revenues consists of
compensation costs associated with performing custom programming and design
and integration services for our customers. Cost of service revenues was
$51,447 for the three months ended June 30, 2000, or 36.9% of net service
revenues, compared with $13,683 or 93.1% of net service revenues for the
similar 1999 period. Cost of service revenues was $118,793 for the six
months ended June 30, 2000, or 46.6% of net service revenues, compared with
$26,223 or 90.9% of net service revenues for the similar 1999 period. The
increase in costs were primarily due to continued implementation of our e-
banking solution for the CU Cooperative Systems, Inc. for which we earned
slightly higher margins than for our professional services to customers
already online.
Jabber.com:
Cost of service revenues consists of compensation costs and consulting
fees associated with performing custom programming, installation and
integration services for our customers and was $12,957 for the three and
six months ended June 30, 2000, or 69.9% of net service revenues.
OPERATING EXPENSES:
Sales and marketing expenses consist primarily of employee compensation,
advertising, trade show expenses, and costs of marketing materials. Sales and
marketing expenses were $756,880 for the three months ended June 30, 2000, or
66.9% of net revenues compared with $389,264, or 201.8% of net revenues for the
similar 1999 period. For the six months ended June 30, 2000, sales and
marketing expenses were $1,241,647, or 58.0% of net revenues as compared to
$834,653, or 173.4% of net revenues for the similar 1999 period. The increases
in absolute dollars in the 2000 periods were primarily attributable to (i)
higher employee compensation costs in the 2000 three-month period related to
commissions and bonuses; (ii) increases in fees paid for market research; (iii)
increase in employee placement fees; and (iv) increased travel expenses in the
2000 three-month period related to international travel. We expect sales and
marketing expenses to increase on an absolute dollar basis in future periods but
decrease as a percentage of net revenues as our revenues increase from current
levels as we continue to market our products and services.
Product development expenses consist primarily of employee compensation and
programming fees relating to the development and enhancement of the features and
functionality of our software products and services. Product development
expenses were $1,495,543 for the three months ended June 30, 2000, or 132.2% of
net revenues compared with $655,257, or 339.6% of net revenues for the similar
1999 period. For the six months ended June 30, 2000, product development
expenses were $2,640,123, or 123.3% of net revenues as compared to $1,254,097,
or 260.6% of net revenues for the similar 1999 period. During the 2000 and 1999
three-month periods, all product development costs have been expensed as
incurred. The increases in absolute dollars in the 2000 periods were due
primarily from our continued investment in our AccelX and Jabber.com software
products. During 2000, employee compensation costs and related hiring expenses
increased more than 132% as we added 26 employees to our development team during
the 2000 six-month period. We also utilized more contract labor in the 2000
periods to augment our development team resulting in an 122% increase in those
costs when compared with the 1999 periods. We believe that significant
investments in product development are critical to attaining our strategic
objectives and, as a result, we expect product development expenses to increase
in future periods.
General and administrative expenses consist primarily of employee
compensation, consulting expenses, fees for professional services, and the non-
cash expense of stock and warrants issued for services. General and
21
<PAGE>
administrative expenses were $2,756,117 for the three months ended June 30,
2000, or 243.6% of net revenues compared with $1,479,094, or 766.6% of net
revenues for the similar 1999 period. For the six months ended June 30, 2000,
general and administrative expenses were $4,548,065, or 212.5% of net revenues
as compared to $3,014,702, or 626.5% of net revenues for the similar 1999
period. The increases in absolute dollars were primarily attributable to (i) an
increase in fees paid to consultants which included $660,000 paid to Diamond
Technology Partners Inc.; (ii) an increase in employee compensation costs; (ii)
increase in non-cash expense for stock and warrants issued for investor relation
and consulting services; (iii) increases in regulatory filing fees and other
costs associated with securities filings; and (iv) increases in investor
relation expenses. We expect to incur at least an additional $1.5 million in
consulting fees during the remainder of 2000 for the continued engagement of
Diamond Technology Partners. Approximately $550,000 of the fees to be paid
Diamond Technology Partners will be paid in securities of Jabber.com, Inc. In
addition, we issued options to consultants which are valued using the variable
plan accounting method for options whereby the fair value of the option is
recomputed at the end of each quarter. As a result, we may incur significant
charges in future periods if our stock price increases. We expect general and
administrative expenses to decrease as a percentage of revenues as our revenues
increase.
Depreciation and amortization was $2,463,778 for the three months
ended June 30, 2000, compared to $139,169 for the similar 1999 period and
$4,670,798 for the six months ended June 30, 2000, compared to $247,398 for the
similar 1999 period. We recorded more depreciation expense in 2000 as a result
of an increase in fixed assets primarily from construction of our network
operating center and computer hardware and third party software to support the
launch of our AccelX services; two new e-banking customers; and computer
equipment to support our product development team. We also amortized the
intangible assets and goodwill we acquired in the Durand Communications,
NetIgnite, and Update Systems acquisitions and recorded $2,092,790 and
$4,130,045 of amortization expense in the 2000 three-and-six-month periods,
respectively. As a result of these acquisitions, we expect to record
approximately $4.1 million of such expenses in the remainder of 2000 and
approximately $8.4 million and $5.8 million of such expenses in 2001 and 2000,
respectively. Because our business has never been profitable, and due to the
other risks and uncertainties discussed herein, it is possible that an analysis
of these long-lived assets in future periods could result in a conclusion that
they are impaired, and the amount of the impairment could be substantial.
OTHER INCOME AND EXPENSE:
Interest income was $283,486 for the three months ended June30, 2000,
compared to $40,477 for the similar 1999 period and $445,373 for the six months
ended June 30, 2000, compared to $90,748 for the similar 1999 period. We earn
interest by investing surplus cash in highly liquid investment funds or AAA or
similarly rated commercial paper.
Interest expense was $172,961 for the three months ended June 30,
2000, compared to $3,672 for the similar 1999 period and $347,951 of the six
months ended June 30, 2000, compared to $7,831 for the similar 1999 period.
During the 2000 three-and-six-month periods, we recorded $154,353 and $325,104
of interest expense related to the 10% convertible note payable we issued in
August 1999, including $95,890 and of cash interest expense and $62,329 of non-
cash interest expense issued in principal-in-kind notes payable in the second
quarter. We also recorded non-cash charges related to the amortization of the
discount recorded for the issuance of a common stock purchase warrant and the
amortization of financing fees totalling $92,024 and $166,885 for the 2000
three-and-six-month periods, respectively.
NET LOSSES APPLICATBLE TO COMMON STOCKHOLDERS:
Net loss allocable to common stockholders was $7,035,498 for the three
months ended June 30, 2000, compared to $3,065,012 for the similar 1999 period
and $25,303,145 for the six months ended June 30, 2000, compared to $9,846,413
for the similar 1999 period. We recorded non-cash expenses for the following
items:
22
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------- -----------------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Amortization of intangible assets and
goodwill $2,092,790 $ 23,675 $ 4,130,045 $ 23,675
Amortization of discount and placement
fees to interest expense and non-cash
interest related to the 10% convertible
note payable 154,353 - 229,214 -
Stock and warrants issued for services 480,347 157,973 655,517 333,143
Preferred stock dividends - 29,028 373,126 75,041
Accretion of preferred stock - 157,691 12,500,000 4,316,254
----------------- ----------------- ----------------- -----------------
Total $2,727,490 $368,367 $17,887,902 $4,748,113
================= ================= ================= =================
</TABLE>
The increase in losses reflect expenses in the sales and marketing, product
development, and general and administrative areas that have increased at a
faster rate than revenues. This is due to the time lag associated with product
development and market introduction as well as the long sales cycle for most of
our products and services. We expect to continue to experience increased
operating expenses during 2000, as we continue to develop new product offerings
and the infrastructure required to support our anticipated growth. We expect to
report operating and net losses for 2000 and for one or more years thereafter.
LIQUIDITY AND CAPITAL RESOURCES:
As of June 30, 2000, we had cash and cash equivalents of $14,242,977 and
working capital of $12,615,680. We financed our operations and capital
expenditures and other investing activities during 2000 primarily through the
sale of securities (See Notes 7 and 9 of Notes to Consolidated Financial
Statements for information regarding these sales of securities).
We used $7,029,382 in cash to fund our operations for the six months ended
June 30, 2000, compared to $3,559,092 for the similar 1999 period. The increase
in net cash used resulted primarily from the following: (i) an increase in costs
paid for continued development of our XML-based AccelX and Jabber.com products
and services and e-banking applications; (ii) increased direct costs and support
costs associated with increased head count; and (iii) payment of 1999
performance bonuses in the first quarter of 2000.
We used an additional $1,654,136 in cash for investing activities,
including $100,000 for a demand loan to an officer, during the six months ended
June 30, 2000, compared to $2,182,420 during the similar 1999 period. We
purchased $1,554,136 of property and equipment in the first six months of 2000
and plan to purchase an additional $1.2 million during the balance of 2000,
including computer equipment and software.
We received $18,762,124 in operating capital from financing activities for
the six months ended June 30, 2000, compared to $8,977,934 for the similar 1999
period. During the first and second quarters of 2000, we received funds from
the following financing transactions:
. On February 18, 2000, we sold 12,500 shares of our series B preferred
stock with stated value of $1,000 per share, which resulted in net
proceeds of $11,660,000; and
. We received $7,163,393 in cash from the issuance of our common stock as
a result of the exercise of common stock options and warrants.
We believe that based on our cash and cash equivalents and working capital
at June 30, 2000 and anticipated revenues and expenses, we have sufficient
working capital to fund operations for our local commerce business throughout
fiscal 2001.
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<PAGE>
We plan to fund the future development of our Jabber.com business
separately from our local commerce business. There can be no assurances that we
will be able to raise the required funds, currently estimated to be at least $15
million by January 1, 2002, or that if such funds are available, that they will
be available on acceptable terms. In the event that we do not fund Jabber.com
separately from our local commerce business, we will be required to either
curtail the development of the Jabber.com business or to fund it from our
current operating funds. In the event that we choose to fund these expenses from
our current operating funds, we would be required to obtain additional funds to
fund our local commerce and Jabber.com businesses before January 1, 2002.
Factors That May Affect Future Results
Factors that may affect our future results include, but are not limited to,
the following items as well as the information in "Item 1 - Financial
Statements - Notes to the Consolidated Financial Statements" and "Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our limited operating history could affect our business. We were founded in
March 1994 and commenced sales in February 1995. Accordingly, we have a limited
operating history upon which you may evaluate us. Our business is subject to the
risks, expenses and difficulties frequently encountered by companies with a
limited operating history including:
. Limited ability to respond to competitive developments;
. Exaggerated effect of unfavorable changes in general economic and
market conditions;
. Ability to attract qualified personnel;
. Ability to develop and introduce new product and service offerings;
and
. Ability to adjust the business plan to address marketplace and
technological changes.
There is no assurance we will be successful in addressing these risks. If we are
unable to successfully address these risks our business could be significantly
affected.
We have accumulated losses since inception and we anticipate that we will
continue to accumulate losses for the foreseeable future. We have incurred net
losses since inception totalling approximately $67.9 million through June 30,
2000. In addition, we expect to incur additional substantial operating and net
losses in 2000 and for one or more years thereafter. We expect to incur these
additional losses because:
. We currently intend to increase our capital expenditures and operating
expenses to expand the functionality and performance of our products
and services; and
. We recorded goodwill and other intangible assets totalling
approximately $24 million in connection with the acquisitions of three
businesses which will be amortized over their estimated useful lives
of approximately three years.
The accumulated deficit at June 30, 2000, included approximately $37.8
million of non-cash expenses related to the issuance of preferred stock and
warrants in financing transactions, stock and stock options issued for services,
warrants issued to four customers, interest expense on a 10% convertible note
payable and amortization of assets acquired through the issuance of our
securities. The current competitive business environment may result in our
issuance of similar securities in future financing transactions or to other
companies as an inducement for them to enter into a business relationship with
us. While these transactions represent non-cash charges, they will increase our
expenses and net loss and our net loss applicable to common shareholders.
If we are unable to raise additional working capital funds, we may not be
able to sustain our operations. We believe that our present cash and cash
equivalents, working capital and commitments for additional equity investments
will be adequate to sustain our current level of operations for our AccelX
business throughout fiscal 2001; assuming that we do not use a significant
portion of our current funds to pursue the business opportunities for our
Jabber.com subsidiary. We currently intend to fund Jabber.com's activities
independently of our AccelX business. However, we may discover that we have
underestimated our working capital needs for our local commerce business or that
we are unable to obtain capital independently for Jabber.com. We may, therefore,
need to obtain additional funds for our AccelX business prior to 2002. There is
no assurance that we will be able to raise additional funds if required in
amounts required or
24
<PAGE>
upon acceptable terms. If we cannot raise additional funds when needed, we may
be required to curtail or scale back our operations. These actions could have a
material adverse effect on our business, financial condition or results of
operations.
We may never become or remain profitable. Our ability to become profitable
depends on the ability of our products and services to generate revenues. The
success of our revenue model will depend upon many factors including:
. The success of our distribution partners in marketing their products
and services; and
. The extent to which consumers and businesses use our services and
conduct e-commerce transactions and advertising utilizing our
services.
Because of the new and evolving nature of the Internet, we cannot predict
whether our revenue model will prove to be viable, whether demand for our
products and services will materialize at the prices we expect to charge, or
whether current or future pricing levels will be sustainable. Additionally, our
customer contracts may result in significant development revenue in one quarter,
which will not recur in the next quarter for that customer. As a result, it is
likely that components of our revenue will be volatile, which may cause our
stock price to be volatile as well.
Our business depends on the growth of the Internet. Our business plan
assumes that the Internet will develop into a significant source of
communication and communication interactivity. However, the Internet market is
new and rapidly evolving and there is no assurance that the Internet will
develop in this manner. If the Internet does not develop in this manner, our
business, operating results and financial condition would be materially
adversely affected. Numerous factors could prevent or inhibit the development of
the Internet in this manner, including:
. The failure of the Internet's infrastructure to support Internet usage
or electronic commerce;
. The failure of businesses developing and promoting Internet commerce
to adequately secure the confidential information, such as credit card
numbers, needed to carry out Internet commerce; and
. Regulation of Internet activity.
Use of many of our products and services will be dependent on distribution
partners. Because we have elected to partner with other companies for the
distribution of many of our products and services, many users of our products
and services are expected to utilize our services through our distribution
partners. As a result, our distribution partners, and not us, will
substantially control the customer relationship with these users. If the
business of the companies with whom we partner is adversely affected in any
manner, our business, operating results and financial condition could be
materially adversely affected.
We may be unable to develop desirable products. Our products are subject to
rapid obsolescence and our future success will depend upon our ability to
develop new products and services that meet changing customer and marketplace
requirements. There is no assurance that we will be able to successfully:
. Identify new product and service opportunities; or
. Develop and introduce new products and services to market in a timely
manner.
If we are unable to accomplish these items, our business, operating results
and financial condition could be materially adversely affected.
Our products and services may not be successful. Even if we are able to
successfully identify, develop, and introduce new products and services there is
no assurance that a market for these products and services will materialize to
the size and extent that we anticipate. If a market does not materialize as we
anticipate, our business, operating results, and financial condition could be
materially adversely affected. The following factors could affect the success
of our products and services:
25
<PAGE>
. The failure of our business plan to accurately predict the rate at
which the market for Internet products and services will grow;
. The failure of our business plan to accurately predict the types of
products and services the future Internet marketplace will demand;
. Our limited experience in marketing our products and services;
. The failure of our business plan to accurately predict our future
participation in the Internet marketplace;
. The failure of our business plan to accurately predict the estimated
sales cycle, price and acceptance of our products and services;
. The development by others of products and services that renders our
products and services noncompetitive or obsolete; or
. Our failure to keep pace with the rapidly changing technology,
evolving industry standards and frequent new product and service
introductions that characterize the Internet marketplace.
The intense competition that is prevalent in the Internet market could have
a material adverse effect on our business. Our current and prospective
competitors include many companies whose financial, technical, marketing and
other resources are substantially greater than ours. There is no assurance that
we will have the financial resources, technical expertise or marketing, sales
and support capabilities to compete successfully. The presence of these
competitors in the Internet marketplace could have a material adverse effect on
our business, operating results or financial condition by causing us to:
. Reduce the average selling price of our products and services; or
. Increase our spending on marketing, sales and product development.
There is no assurance that we would be able to offset the effects of any
such price reductions or increases in spending through an increase in the number
of our customers, higher sales from premium services, cost reductions or
otherwise. Further, our financial condition may put us at a competitive
disadvantage relative to our competitors. If we fail to, or cannot, meet
competitive challenges, our business, operating results and financial condition
could be materially adversely affected.
A limited number of our customers generate a significant portion of our
revenues. We had three customers representing 44% of revenues for the three
months ended June 30, 2000, and four customers representing 77% of revenues for
the similar 1999 period. We had two customers representing 47% of revenues for
the six months ended June 30, 2000, and four customers representing 83% of
revenues for the similar 1999 period. There is no assurance that we will be able
to attract or retain major customers. The loss of, or reduction in demand for
products or services from major customers could have a material adverse effect
on our business, operating results, cashflow and financial condition.
The sales cycle for our products and services is lengthy and unpredictable.
While our sales cycle varies from customer to customer, it typically has ranged
from two to six months. Our pursuit of sales leads typically involves an
analysis of our prospective customer's needs, preparation of a written proposal,
one or more presentations and contract negotiations. We often provide
significant education to prospective customers regarding the use and benefits of
our Internet technologies and services. Our sales cycle may also be affected by
a prospective customer's budgetary constraints and internal acceptance reviews,
over which we have little or no control. In order to quickly respond to, or
anticipate, customer requirements, we may begin development work prior to having
a signed contract, which exposes us to the risk that the development work will
not be recovered from revenue from that customer.
We may be unable to adjust our spending to account for potential
fluctuations in our quarterly results. As a result of our limited operating
history, we do not have historical financial data for a sufficient number of
periods on which to base planned operating expenses. Therefore, our expense
levels are based in part on our expectations as to future sales and to a large
extent are fixed. We typically operate with little backlog and the sales cycles
for our products and services may vary significantly. As a result, our quarterly
sales and operating results generally depend on the volume and timing of and the
ability to close customer contracts within the quarter, which
26
<PAGE>
are difficult to forecast. We may be unable to adjust spending in a timely
manner to compensate for any unexpected sales shortfalls. If we were unable to
so adjust, any significant shortfall of demand for our products and services in
relation to our expectations would have an immediate adverse effect on our
business, operating results and financial condition. Further, we currently
intend to increase our capital expenditures and operating expenses to fund
product development and increase sales and marketing efforts. To the extent that
such expenses precede or are not subsequently followed by increased sales, our
business, operating results and financial condition will be materially adversely
affected.
We may be unable to retain our key executives and research and development
personnel. Our future success also depends in part on our ability to identify,
hire and retain additional personnel, including key product development, sales,
marketing, financial and executive personnel. Competition for such personnel is
intense and there is no assurance that we can identify or hire additional
qualified personnel.
Executives and research and development personnel who leave us may compete
against us in the future. We generally enter into written nondisclosure and
nonsolicitation agreements with our officers and employees which restrict the
use and disclosure of proprietary information and the solicitation of customers
for the purpose of selling competing products or services. However, we generally
do not require our employees to enter into non-competition agreements. Thus, if
any of these officers or key employees left, they could compete with us, so long
as they did not solicit our customers. Any such competition could have a
material adverse effect on our business.
We may be unable to manage our expected growth. If we are able to implement
our growth strategy, we will experience significant growth in the number of our
employees, the scope of our operating and financial systems and the geographic
area of our operations. There is no assurance that we will be able to implement
in whole or in part our growth strategy or that our management or other
resources will be able to successfully manage any future growth in our business.
Any failure to do so could have a material adverse effect on our operating
results and financial condition.
We may be unable to protect our intellectual property rights. Intellectual
property rights are important to our success and our competitive position. There
is no assurance that the steps we take to protect our intellectual property
rights will be adequate to prevent the imitation or unauthorized use of our
intellectual property rights. Policing unauthorized use of proprietary systems
and products is difficult and, while we are unable to determine the extent to
which piracy of our software exists, we expect software piracy to be a
persistent problem. In addition, the laws of some foreign countries do not
protect software to the same extent as do the laws of the United States. Even if
the steps we take to protect our proprietary rights prove to be adequate, our
competitors may develop services or technologies that are both non-infringing
and substantially equivalent or superior to our services or technologies.
Computer viruses and similar disruptive problems could have a material
adverse effect on our business. Our software and equipment may be vulnerable to
computer viruses or similar disruptive problems caused by our customers or other
Internet users. Our business, financial condition or operating results could be
materially adversely affected by:
. Losses caused by the presence of a computer virus that causes us or
third parties with whom we do business to interrupt, delay or cease
service to our customers;
. Losses caused by the misappropriation of secured or confidential
information by a third party who, in spite of our security measures,
obtains illegal access to this information;
. Costs associated with efforts to protect against and remedy security
breaches; or
. Lost potential revenue caused by the refusal of consumers to use our
products and services due to concerns about the security of
transactions and commerce that they conduct on the Internet.
Future government regulation could materially adversely affect our
business. There are currently few laws or regulations directly applicable to
access to, communications on, or commerce on the Internet. Therefore, we are not
currently subject to direct regulation of our business operations by any
government agency, other than regulations applicable to businesses generally.
Due to the increasing popularity and use of the Internet, however, federal,
state, local, and foreign governmental organizations are currently considering a
number of legislative and
27
<PAGE>
regulatory proposals related to the Internet. The adoption of any of these laws
or regulations may decrease the growth in the use of the Internet, which could,
in turn:
. Decrease the demand for our products and services;
. Increase our cost of doing business; or
. Otherwise have a material adverse effect on our business, results of
operations and financial condition.
Moreover, the applicability to the Internet of existing laws governing
issues such as property ownership, copyright, trademark, trade secret,
obscenity, libel and personal privacy is uncertain and developing. Our business,
results of operations and financial condition could be materially adversely
affected by the application or interpretation of these existing laws to the
Internet.
Our articles of incorporation and bylaws may discourage lawsuits and other
claims against our directors. Our articles of incorporation provide, to the
fullest extent permitted by Colorado law, that our directors shall have no
personal liability for breaches of their fiduciary duties to us. In addition,
our bylaws provide for mandatory indemnification of directors and officers to
the fullest extent permitted by Colorado law. These provisions may reduce the
likelihood of derivative litigation against directors and may discourage
shareholders from bringing a lawsuit against directors for a breach of their
duty.
The price of our common stock has been highly volatile due to factors that
will continue to affect the price of our stock. Our common stock closed as high
as $67.75 per share and as low as $9.19 per share between January 1, 2000 and
August 1, 2000. Historically, the over-the-counter markets for securities such
as our common stock have experienced extreme price and volume fluctuations. Some
of the factors leading to this volatility include:
. Price and volume fluctuations in the stock market at large that do not
relate to our operating performance;
. Fluctuations in our quarterly revenue and operating results;
. Announcements of product releases by us or our competitors;
. Announcements of acquisitions and/or partnerships by us or our
competitors; and
. Increases in outstanding shares of common stock upon exercise or
conversion of derivative securities.
These factors may continue to affect the price of our common stock in the
future.
We have issued numerous options, warrants, and convertible securities to
acquire our common stock that could have a dilutive effect on our shareholders.
As of August 1, 2000, we had issued warrants and options to acquire 4,238,300
shares of our common stock, exercisable at prices ranging from $1.63 to $58.75
per share, with a weighted average exercise price of approximately $14.30 per
share. In addition to these warrants and options, we have reserved 1,875,000
shares of common stock for issuance upon conversion of our 10% convertible note
and series B convertible preferred stock. During the terms of these derivative
securities, the holders will have the opportunity to profit from either an
increase or, in the case of the preferred stock and note, decrease in the market
price of our common stock with resulting dilution to the holders of shares who
purchased shares for a price higher than the respective exercise or conversion
price. In addition, the increase in the outstanding shares of our common stock
as a result of the exercise or conversion of these derivative securities could
result in a significant decrease in the percentage ownership of our common stock
by the purchasers of our common stock.
The potentially significant number of shares issuable upon conversion of
our 10% convertible note and series B convertible preferred stock could make it
difficult to obtain additional financing. Due to the significant number of
shares of our common stock which could result from a conversion of our 10%
convertible note and series B convertible preferred stock, new investors may
either decline to make an investment in Webb due to the potential negative
effect this additional dilution could have on their investment or require that
their investment be on terms at least as favorable as the terms of the 10%
convertible note or series B convertible preferred stock. If we are required to
provide similar terms to obtain required financing in the future, the potential
adverse effect of these existing financings could be perpetuated and
significantly increased.
28
<PAGE>
Future sales of our common stock in the public market could adversely
affect the price of our common stock. Sales of substantial amounts of common
stock in the public market that is not currently freely tradable, or even the
potential for such sales, could have an adverse affect on the market price for
shares of our common stock and could impair the ability of purchasers of our
common stock to recoup their investment or make a profit. As of August 1, 2000,
these shares consist of:
. Approximately 310,000 shares owned by our executive officers and
directors of our outstanding common stock ("Affiliate Shares");
. Up to 1,875,000 shares issuable upon conversion of the 10% convertible
note and series B preferred stock; and
. Approximately 4,238,300 shares issuable to warrant and option holders.
Unless the Affiliate Shares are further registered under the securities
laws, they may not be resold except in compliance with Rule 144 promulgated by
the SEC, or some other exemption from registration. Rule 144 does not prohibit
the sale of these shares but does place conditions on their resale which must be
complied with before they can be resold.
The common stock issuable upon conversion of our convertible note and
preferred stock may increase as the price of our common stock decreases, which
may adversely affect the price of our common stock. On August 1, 2000, we had
issued and outstanding $2,500,000 principal amount of a 10% convertible note and
12,500 shares of series B convertible preferred stock. The number of shares of
common stock that may ultimately be issued upon conversion of these securities
is presently indeterminable and could fluctuate significantly. Purchasers of
common stock could therefore experience substantial dilution upon conversion of
the convertible note and preferred stock. In addition, the significant downward
pressure on the market price of our common stock could develop as the holders
convert and sell material amounts of common stock which could encourage short
sales by the holders or others, placing further downward pressure on the market
price of our common stock.
At August 1, 2000, the convertible note and preferred stock were
convertible into 248,262 shares and 625,000 shares, respectively, of our common
stock. To illustrate the potential dilution that may occur upon conversion of
the convertible note and preferred stock, the following table sets forth the
number of shares of common stock that would be issued upon conversion of the
principal of the convertible note and the shares of preferred stock if the
market price for our common stock on the dates that the conversion prices of
these securities are subject to adjustment (September 29, 2000 for the
convertible note and November 14, 2000 for the preferred stock) is $9.75, the
closing sale price for our common stock on August 1, 2000, and at assumed market
prices of 75% and 50% of the market price on August 1, 2000.
<TABLE>
<CAPTION>
Shares Issued Upon Conversion
---------------------------------------------------------------- Total
Assumed 10% Notes (Conversion Series B Preferred Stock (Percentage of
Market Price Price) (Conversion Price) Outstanding)
---------------------------------- -------------------------- -------------------------------- ---------------------
<S> <C> <C> <C>
$9.75 (actual price at 08/01/00) 248,262 ($9.75) 1,282,051 ($9.75) 1,538,461 (16.7%)
$7.31 (75% of 08/01/00 price) 312,500 ($8.00) 1,562,500 ($8.00) 1,875,000 (20.4%)
$4.88 (50% of 08/01/00 price) 312,500 ($8.00) 1,562,500 ($8.00) 1,875,000 (20.4%)
</TABLE>
Future sales of our common stock in the public market could limit our
ability to raise capital. Sales of substantial amounts of our common stock in
the public market pursuant to Rule 144, upon exercise or conversion of
derivative securities or otherwise, or even the potential for such sales, could
affect our ability to raise capital through the sale of equity securities.
Provisions in our articles of incorporation allow us to issue shares of
stock that could make a third party acquisition of us difficult. Our Articles of
Incorporation authorize our Board of Directors to issue up to 60,000,000 shares
of common stock and 5,000,000 shares of preferred stock in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors, without further action by our shareholders. Preferred stock
authorized by the Board of Directors may include voting rights, preferences as
to dividends and liquidation,
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conversion and redemptive rights and sinking fund provisions. If the Board of
Directors authorizes the issuance of preferred stock in the future, this
authorization could affect the rights of the holders of common stock, thereby
reducing the value of the common stock, and could make it more difficult for a
third party to acquire us, even if a majority of the holders of our common stock
approved of an acquisition.
The issuance of our 10% convertible note payable and series B convertible
preferred stock required us to record non-cash expenses which will, in turn,
increase our net loss applicable to common shareholders. Based on current
accounting standards, we recorded a non-cash expense of approximately $154,353
and as additional interest expense for the three months ended June 30, 2000, and
approximately $229,214 as additional interest expense and $12.5 million of
accretion expense for the six months ended June 30, 2000, as a result of the
issuance of our 10% convertible note and the issuance of our series B preferred
stock, respectively. We will record additional non-cash expenses of
approximately $340,000 during the remainder of 2000 and $409,000 during the two
years ending December 31, 2002, related to the issuance of the note unless it is
converted to common stock prior to its maturity date, in which case it will be
less.
We do not anticipate paying dividends on our common stock for the
foreseeable future. We have never paid dividends on our common stock and do not
intend to pay any dividends on our common stock in the foreseeable future. Any
decision by us to pay dividends on our common stock will depend upon our
profitability at the time, cash available therefor, and other factors. We
anticipate that we will devote profits, if any, to our future operations.
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PART II
OTHER INFORMATION
Items 1-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
2.1 Asset Purchase Agreement, including exhibits thereto, dated
December 27, 1999, between Webb Interactive Services, Inc.,
Update Systems, Inc. and Kevin Schaff. (1)
3.1 Articles of Incorporation, as amended, of Webb (2)
3.2 Bylaws of Webb (3)
4.1 Specimen form of Webb's Common Stock certificate (4)
4.2 Stock Option Plan of 1995 (3)
4.3 Form of Incentive Stock Option Agreement for Stock Option Plan of
1995 (3)
4.4 Form of Nonstatutory Stock Option Agreement for Stock Option Plan
of 1995 (3)
4.5 Form of Warrant issued in 1996 to private investors (3)
4.6 Form of Warrant Agreement issued in 1997 and 1998 to private
investors (5)
10.1 Form of Nondisclosure and Nonsolicitation Agreement between Webb
and its employees (2)
10.2 Office Lease for Webb's principal offices commencing May 2000
(12)
10.3 Form of Change of Control Agreement between Webb and certain
employees (6)
10.4 Amended Employment Agreement dated as of June 30, 2000, between
Webb and Perry Evans *
10.5 Securities Purchase Agreement dated August 25, 1999 between Webb
and Castle Creek (7)
10.6 Promissory Note dated August 25, 1999 issued by Webb to Castle
Creek (7)
10.7 Amendment dated December 18, 1999 to Securities Purchase
Agreement dated August 25, 1999 between Webb and Castle Creek (8)
10.8 First Amendment dated December 18, 1999 to Promissory Note dated
August 25, 1999 issued by Webb to Castle Creek (8)
10.9 Stock Purchase Warrant dated December 18, 1999 issued by Webb to
Castle Creek (8)
10.10 Securities Purchase Agreement dated December 31, 1999, between
Webb, Marshall Capital Management and Castle Creek. Included as
exhibits to the Securities Purchase Agreement are the proposed
form of Warrant and the Registration Rights Agreement (9)
10.11 Articles of Amendment setting forth the terms of the Series B
Convertible Preferred Stock (10)
10.12 Development, Access and License Agreement, as amended, effective
June 30, 1999 between Webb and Switchboard, Inc. (11)
10.13 Engineering Services Agreement, effective June 30, 1999, between
Webb and Switchboard, Inc. (11)
10.14 Master Software License Agreement, Web Site Hosting Agreement,
Maintenance and Support Agreement and Professional Services
Agreement, effective March 31, 2000, between Webb and Vetconnect,
Inc. (13)
10.15 Consulting Agreement, effective April 24, 2000, between Webb and
Diamond Technology Partners, Inc. (13)
10.16 Master Software License Agreement, Web Site Hosting Agreement,
Maintenance and Support Agreement and Professional Services
Agreement, effective June 30, 2000, between Webb and British
Telecommunications PLC Trading as Yellow Pages. *
10.17 Master Software License Agreement, Web Site Hosting Agreement,
Maintenance and Support Agreement and Professional Services
Agreement, effective July 17, 2000, between Webb and Promedia
GCV. *
21 Subsidiaries of Webb Interactive Services, Inc. (12)
27 Financial Data Schedule *
-----------------------------
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* Filed herewith.
(1) Filed with the Form 8-K Current Report, filed January 14, 2000,
Commission File No. 0-28642.
(2) Filed with the Registration Statement on Form S-3, filed January
29, 1999, Commission File No. 333-71503.
(3) Filed with the initial Registration Statement on Form SB-2, filed
April 5, 1996, Commission File No. 333-3282-D.
(4) Filed with the Registration Statement on Form S-3, filed September
24, 1999, Commission File No. 333-86465.
(5) Filed with the Form 10-KSB Annual Report for the year ended
December 31, 1997, Commission File No. 0-28462.
(6) Filed with the Form 10-KSB Annual Report for the year ended
December 31, 1998, Commission File No. 0-28462.
(7) Filed with the Form 8-K Current Report, filed September 2, 1999,
Commission File No. 0-28642.
(8) Filed with Amendment No. 2 to Webb's Registration Statement on
Form S-3, filed January 3, 2000, Commission File No. 333-87887
(9) Filed with the Form 8-K Current Report, filed January 5, 2000,
Commission File No. 0-28642.
(10) Filed with the Form 8-K Current Report, filed February 25, 2000,
Commission File No. 0-28642.
(11) Filed with the Registration Statement on Form S-3, filed September
2, 1999, Commission File No. 333-86465.
(12) File with the Form 10-KSB Annual Report for the year ended
December 31, 1999, Commission File No. 0-28462.
(13) File with Form 10-QSB Quarterly Report for the period ended March
31, 2000, Commission File No. 0-28462
(b) Reports on Form 8-K. The Company was not required to file any
reports on Form 8-K during the quarter ended June 30, 2000.
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Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WEBB INTERACTIVE SERVICES, INC.
Date: August 14, 2000 By /s/ William R. Cullen
---------------------
Chief Financial Officer
/s/ Stuart Lucko
----------------
Controller
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