<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 September 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
------------------------------------------------------------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.)
1899 WYNKOOP, SUITE 600, DENVER, CO 80202
------------------------------------------------------------
(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 October 31, 2000 Registrant had 9,225,246 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 3
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2000 and 1999 5-6
Notes to Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-28
Part II. Other Information
Items 1 and 3 - 5. Not Applicable 29
Item 2. Changes in Securities 29
Item 6. Exhibits and Reports on Form 8-K 29-30
Signatures 31
</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
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,478,920 $ 4,164,371
Accounts receivable, net of allowance of doubtful accounts of $66,000 and
$4,000, respectively 1,542,525 76,806
Prepaid expenses 175,340 399,217
Note receivable from related party 100,000 -
Short-term deposits 438,140 444,545
-------------- --------------
Total current assets 10,734,925 5,084,939
Property and equipment, net of accumulated depreciation of $987,699 and
$1,091,763, respectively 2,842,431 1,668,599
Intangible assets, net of accumulated amortization of $8,757,287 and
$2,523,351, respectively 16,283,596 12,503,047
Net assets of discontinued operations 11,625 338,704
Investment in common stock 448,172 -
Deferred financing costs 121,122 2,649,517
Other assets 509,071 4,216
-------------- --------------
Total assets $ 30,950,942 $ 22,249,022
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases payable $ 206,643 $ 108,525
Accounts payable and accrued liabilities 1,119,773 771,417
Accrued salaries and payroll taxes payable 1,490,569 936,849
Accrued interest payable - 126,028
Other current liabilities 45,625 -
Customer deposits and deferred revenue 315,871 44,882
-------------- --------------
Total current liabilities 3,178,481 1,987,701
Capital leases payable 82,966 115,493
10% convertible note payable, net of discount of $342,189 and
$947,710, respectively 2,311,921 4,052,290
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value, 5,000,000 shares authorized:
Series B-2 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, 9,221,913 and
7,830,028 shares issued and outstanding, respectively 75,104,594 49,513,769
Warrants and options 13,319,873 8,612,322
Deferred compensation (263,382) (412,707)
Accumulated deficit (75,283,511) (42,640,141)
-------------- --------------
Total stockholders' equity 25,377,574 16,093,538
-------------- --------------
Total liabilities and stockholders' equity $ 30,950,942 $ 22,249,022
============== ==============
</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 Nine Months Ended
September 30, September 30,
----------------------------------- -------------------------------------
2000 1999 2000 1999
-------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net revenues $ 1,662,739 $ 452,385 $ 3,379,040 $ 780,044
Cost of revenues 781,425 467,563 2,133,346 966,128
------------ -------------- -------------- --------------
Gross margin 881,314 (15,178) 1,245,694 (186,084)
------------ -------------- -------------- --------------
Operating expenses:
Sales and marketing expenses 1,079,526 370,660 2,272,754 1,205,313
Product development expenses 1,452,491 771,345 4,009,606 1,924,976
General and administrative expenses 2,801,587 1,120,465 7,279,156 3,919,255
Customer acquisition costs - 868,316 - 941,684
Depreciation and amortization 2,296,856 1,384,147 6,899,823 1,561,051
------------ -------------- -------------- --------------
7,630,460 4,514,933 20,461,339 9,552,279
------------ -------------- -------------- --------------
Loss from operations (6,749,146) (4,530,111) (19,215,645) (9,738,363)
Interest income 70,761 82,583 508,096 173,331
Equity in loss of subsidiary - - - (127,083)
Loss on disposal of property and equipment (348,081) - (340,043) -
Interest expense (109,571) (713,493) (457,523) (721,324)
------------ -------------- -------------- --------------
Net loss from continuing operations (7,136,037) (5,161,021) (19,505,115) (10,413,439)
Loss from discontinued operations, net of taxes (203,272) (5,761) (265,129) (208,462)
------------ -------------- -------------- --------------
Net loss (7,339,309) (5,166,782) (19,770,244) (10,621,901)
Preferred stock dividends - (29,173) (373,126) (104,314)
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)
------------ -------------- -------------- --------------
Net loss applicable to common stockholders $(7,339,309) $(5,195,955) $(32,643,370) $(15,042,469)
============ ============== ============== ==============
Net loss applicable to common shareholders from
continuing operations per share, basic and diluted $ (0.78) $ (0.70) $ (3.60) $ (2.39)
============ ============== ============== ==============
Net loss applicable to common shareholders per share
from discontinued operations, basic and diluted $ (0.02) - $ (0.03) $ (0.03)
============ ============== ============== ==============
Net loss applicable to common shareholders per share,
basic and diluted $ (0.80) $ (0.70) $ (3.63) $ (2.42)
============ ============== ============== ==============
Weighted average shares outstanding, basic and
diluted 9,217,471 7,449,505 8,999,188 6,228,731
============ ============== ============== ==============
</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>
Nine Months Ended
September 30,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(19,770,244) $(10,621,901)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 7,358,886 1,779,127
Loss (gain) on sale of property and equipment 340,640 (2,225)
Stock and stock options issued for services and to customers 634,690 1,299,912
Bad debt expense 62,000 -
Write-off of NetIgnite intangible assets - 242,811
Accrued interest income on advances to DCI - (46,379)
Reduction in note receivable for services received from DCI - 368,643
Equity loss in subsidiary - 127,083
Accrued interest on 10% note payable - 49,383
Notes payable issued for interest on 10% convertible note payable 154,110 -
Amortization of 10% convertible note payable discount 152,231 35,255
Amortization of 10% convertible note payable financing costs 56,473 12,948
Amortization of 10% convertible note payable beneficial conversion - 590,254
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,509,284) 42,841
Decrease in inventory - 55,126
Decrease (increase) in prepaid expenses 223,877 (141,594)
(Increase) decrease in short-term deposits and other assets (498,450) 93,824
Increase in accounts payable and accrued liabilities 126,521 38,079
Increase (decrease) in accrued salaries and payroll taxes payable 431,231 (19,509)
Decrease in accrued interest payable (126,028) -
Increase in customer deposits and deferred revenue 143,503 152,724
------------ ------------
Net cash used in operations (12,219,844) (5,943,598)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (2,111,800) (1,533,947)
Cash advances to related party (100,000) -
Proceeds from the sale of property and equipment 49,382 132,241
Cash acquired in business combinations - 32,484
Cash advances to DCI - (593,649)
Payment of acquisition costs - (27,470)
Investment in subsidiary - (240,564)
------------ ------------
Net cash used in investing activities (2,162,418) (2,230,905)
------------ ------------
Cash flows from financing activities:
Payments on capital leases (198,197) (33,760)
Payment on convertible notes payable - (35,000)
Proceeds from issuance of series B preferred stock and warrants 12,500,000 -
Proceeds from exercise of stock options and warrants 7,235,008 1,700,945
Proceeds from issuance of 10% convertible note payable - 5,000,000
Proceeds from issuance of common stock and warrants - 3,074,256
Proceeds from issuance of series C preferred stock - 5,000,000
10% convertible note payable financing costs - (383,184)
Stock offering costs (840,000) (401,887)
------------ ------------
Net cash provided by financing activities 18,696,811 13,921,370
------------ ------------
Net increase in cash and cash equivalents 4,314,549 5,746,867
Cash and cash equivalents, beginning of period 4,164,371 698,339
------------ ------------
Cash and cash equivalents, end of period $ 8,478,920 $ 6,445,206
============ ============
</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>
Nine Months Ended
September 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 220,555 $ 10,875
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Common stock and warrants issued in business combinations $ 9,995,417 $12,382,595
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 373,126 104,214
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 -
Convertible notes payable converted to common stock - 593,045
Proceeds from sale of discontinued operations received in stock 448,172 -
Beneficial conversion of 10% convertible note payable - 1,967,522
Discount of 10% convertible note payable - 1,072,325
Capital leases for equipment 263,788 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 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 has occurred, the fee is
fixed or determinable, and collectibility is probable.
Revenue from software license fees is recognized upon delivery. Under
certain circumstances, software license revenue is deferred until these criteria
are met. Certain arrangements contain provisions, which 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
on a month by month basis. 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 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 software arrangements
that include provisions for hosting. 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
7
<PAGE>
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 the results of its first three quarters of 2000 to reflect
this change in accounting principle as if SAB 101 had been implemented on
January 1, 2000. The Company has reviewed SAB 101 and believes that the adoption
of SAB 101 will not have a significant impact 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 from continuing operations are comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ------------------------------------
2000 1999 2000 1999
--------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Net revenues:
Licenses $ 874,877 $ 51,044 $ 2,043,611 $ 186,565
Services 787,862 401,341 1,335,429 475,940
Hardware and third party software - - - 117,539
--------------- --------------- ----------------- ---------------
Total net revenues $ 1,662,739 $ 452,385 $ 3,379,040 $ 780,044
=============== =============== ================= ===============
</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 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 historically has not entered into arrangements that would
fall under the scope of Statement No. 133.
8
<PAGE>
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 has been applied on a
prospective basis. There was no significant impact on the Company's financial
position or results of operations as a result of the application of FIN No. 44.
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 Internet business
solutions, 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:
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
==============
(a) 49,704 options issued, valued using the Black-Scholes option pricing
model using the following assumptions:
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%
The purchase price was allocated to the assets acquired based on their fair
market values as follows:
Acquired property and equipment $ 45,932
Developed technologies, goodwill and other intangibles 10,014,485
--------------
Total assets acquired $10,060,417
==============
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 uses an estimate of the
undiscounted cash flows over the remaining life of the goodwill in measuring
whether the goodwill is recoverable. The Company recorded amortization expense
of $2,103,891 and $6,233,936 for the three and nine months ended September 30,
2000, respectively, and $1,274,721 and $1,298,396 for the three and nine months
ended September 30, 1999, respectively. As of September 30, 2000, $5,931,344 of
the Company's intangible assets consisted of goodwill.
9
<PAGE>
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"). Under the provisions of SFAS 128, 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>
September 30,
-----------------------------
2000 1999
------------ -------------
<S> <C> <C>
Stock options 3,771,610 2,080,550
10% convertible note payable 263,362 -
Warrants and underwriter options 768,728 865,976
Series B-2 preferred stock 1,225,000 -
Convertible debt - 38,388
10% preferred stock - 109,753
------------ -------------
Total 6,028,700 3,094,667
============ =============
</TABLE>
The number of shares excluded from the earning per share calculation
because they are anti-dilutive, using the treasury stock method, were 463,430
and 381,778 for the three months ended September 30, 2000 and 1999,
respectively, and 2,976,934 and 849,473 for the nine months ended September 30,
2000 and 1999, respectively.
NOTE 7 - SERIES B AND SERIES B-2 PREFERRED STOCK
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 was convertible into shares of the Company's
common stock, initially at $20.00. The conversion rate for the series B
preferred stock was subject to a potential reset on November 12, 2000,
based on the then market price for the Company's common stock.
In order to facilitate the sale of the Company's series B preferred stock,
the terms of the10% convertible note payable agreement, issued on August 25,
1999, were amended on December 18, 1999. The Company issued the note holder a
five-year warrant to purchase 136,519 shares of the Company's common stock at an
initial exercise price of $18.506 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. The Company recorded $2,311,475 in series B preferred
stock offering costs as a result of the issuance of this warrant. In accordance
with the original terms of the warrant, the exercise price was reset on
September 29, 2000 to $10.264 per share, the average closing bid price of the
Company's common stock for the 20 trading days ended on September 29, 2000.
The Company also issued warrants to purchase 343,750 shares of common stock
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
10
<PAGE>
pricing model compared to the net proceeds received by the Company. The warrants
that entitle 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
August 16, 2000, the exercise price of the warrants was reset to $8.75 per
share.
On the issuance date, the warrants were valued utilizing the Black-Scholes
option pricing model using the following assumptions:
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%
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, 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>
Series B-2 Preferred Stock-
On September 27, 2000, the Company executed exchange agreements with the
holders of its series B preferred stock whereby the Company redeemed all of its
outstanding series B convertible preferred stock in exchange for 12,500 shares
of its series B-2 convertible preferred stock (the "series B-2 preferred stock")
which has a stated value of $1,000 per share.
The series B-2 preferred stock is convertible into shares of the Company's
common stock at $10.20408 per share (1,225,000 shares in the aggregate) by the
holders at any time, so long as the conversion would not result in the holder
being a beneficial owner of more than 4.99% of the Company's common stock. On
December 31, 2000, the series B-2 preferred stock, subject to the 4.99%
limitation, will be automatically converted into shares of the Company's common
stock. If the series B-2 preferred stock were subject to the automatic
conversion feature at September 30, 2000, the number of the Company's common
shares issuable upon conversion would be limited to approximately 1,000,000
shares.
The conversion price is also subject to anti-dilution protection in the
event of the issuance of the Company's common stock at prices less than the
conversion price for the series B-2 preferred stock or the then current price
for the Company's common stock and for stock splits, stock dividends and other
similar transactions. If the conversion price is reduced, the Company may be
required to record a charge against income and that charge may be significant.
11
<PAGE>
The Company's series B-2 preferred stock has preference if the Company were
to liquidate, dissolve or wind-up its business, whether voluntary or otherwise.
In these events, after the Company has paid its debts and other liabilities, the
holders of the series B-2 preferred stock would be entitled to receive $1,000
per share from the Company's remaining net assets, before any distribution to
the holders of its common stock.
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 provided and recorded expenses totalling $136,203 and $246,891 for the
three and nine months ended September 30, 2000, respectively, determined based
on the fair market value of the stock on the day the services were provided.
During the third quarter of 2000, the Company issued 912,500 common shares
of common stock of Jabber.com. Inc., a majority-owned subsidiary, to employees
of the subsidiary, an officer of the Company and members of the Jabber.com
advisory boards. The shares vest over periods ranging from grant date to two
years. The Company recorded deferred compensation totalling $45,625 and
compensation expense totalling $13,349 in the third quarter based upon the
estimated fair value of the Jabber.com Inc. common stock. The shares issued in
connection with these transactions represent approximately 9.4% of the ownership
and 1% voting interest in the subsidiary.
During the second quarter of 2000, the Company issued a common stock
purchase warrant to an employment agency in connection with a placement fee and
stock options to an advisory board member for services to purchase in the
aggregate 8,334 shares of its common stock at exercise prices ranging from
$15.88 to $38.44. The agreements specify option lives ranging from one to seven
years with vesting terms of approximately one year. The Company valued these
securities in the aggregate at $192,849 utilizing the Black-Scholes option
pricing model using the following assumptions:
Exercise prices $15.88 to $38.44
Fair market value of common stock on date of issuances $15.88 to $38.44
Option lives 1 to 7 years
Volatility rate 119% to 123%
Risk-free rate of return 6.06%
Dividend rate 0%
The Company recorded deferred compensation totalling $192,849 and
compensation expense totalling $279,659 during the nine months ended September
30, 2000, related to the issuance of these securities. In addition, an aggregate
of 2,500 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 nine months ended September 30, 2000, holders of warrants
exercised their right to purchase 503,874 shares of the Company's common stock,
resulting in net proceeds to the Company totalling $5,443,315, after deducting
$93,707 in commissions, as summarized in the following table:
12
<PAGE>
<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 120,185 6.61 to 10.16 118,523 1,012,948
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
------------- ------------- --------------
503,874 499,403 $ 5,443,315
============= ============= ==============
</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
In January and February 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:
<TABLE>
<CAPTION>
Number of Shares Common Stock
-----------------------------------------
10% Preferred Conversion
Conversion Date Stock Common 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 $100,000 to an officer of the Company
pursuant to a demand note bearing interest at 8% per annum. Interest is payable
monthly commencing July 1, 2000.
NOTE 13 - DISCONTINUED OPERATIONS
On September 12, 2000, the Company sold its e-banking segment to a
privately-held company for consideration valued at $487,873, which is
approximately the same as the net book value of the net assets of this segment.
The Company received $39,700 in cash and 181,176 shares of the purchaser's
common stock recorded at a value of approximately $2.47 per share. The Company
continually reviews the value of the common stock to determine its current fair
value. It is possible that an analysis of this investment in future periods
could result in a conclusion that the fair value of the investment is less that
the Company's recorded value which would require the Company to record a charge
to earnings for the difference between the recorded value and the current fair
value and this charge could be substantial.
The Company's consolidated financial statements reflect the sale of this
segment as a sale of discontinued operations. Accordingly, the assets and
liabilities; and revenues, costs and expenses of these discontinued operations
have been excluded from the respective captions in the Consolidated Balance
Sheet and Consolidated Statement of Operations have been reported as "Net
13
<PAGE>
assets of discontinued operations," and as "Loss from discontinued operations,
net of taxes," for all periods presented.
Net assets of discontinued operations consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
Accounts receivable $ 11,891 $ 30,326
Property and equipment, net - 683,890
Accounts payable and accrued liabilities (266) (192,512)
Deferred revenue and customer deposits - (183,000)
---------------- ----------------
Total net assets of discontinued operations $ 11,625 $ 338,704
================ ================
</TABLE>
Summarized financial information for the discontinued operations is as
follows (Note: 2000 amounts include activity through September 12, 2000 only):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------------
2000 1999 2000 1999
--------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net revenues $ 73,092 $ 193,308 $ 497,821 $ 346,864
Loss from operations (203,272) (5,761) (265,129) (208,462)
</TABLE>
NOTE 14 - 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's subsidiary, 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 The Company has two reportable business segments: AccelX and
Jabber.com.
AccelX consists of XML-based online commerce and communication solutions
for small business, with a particular emphasis on local commerce interaction.
14
<PAGE>
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.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------ ------------------
<S> <C> <C>
Assets
------
AccelX $ 30,610,925 $ 21,910,318
Jabber.com 4,322,494 -
Net assets of discontinued operations 11,625 338,704
Eliminations (3,994,102) -
----------------- ------------------
Total assets $ 30,950,942 $ 22,249,022
================= ==================
Property and equipment, net
---------------------------
AccelX $ 2,718,757 $ 1,668,599
Jabber.com 123,674 -
------------------ --------------------
Total $ 2,842,431 $ 1,668,599
================== ====================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
2000 1999 2000 1999
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Net revenues from continuing operations
---------------------------------------
AccelX $ 1,415,094 $ 452,385 $ 3,112,845 $ 780,044
Jabber.com 247,645 - 266,195 -
-------------- ------------- --------------- -------------
Total net revenues from continuing
operations $ 1,662,739 $ 452,385 $ 3,379,040 $ 780,044
============== ============= =============== =============
Net loss from continuing operations
-----------------------------------
AccelX (4,599,190) $ (5,161,021) $ (15,744,417) $ (10,413,439)
Jabber.com (2,990,911) - (4,214,762) -
Eliminations 454,064 - 454,064 -
-------------- ------------- --------------- -------------
Total net loss from continuing operations $ (7,136,037) $ (5,161,021) $ (19,505,115) $ (10,413,439)
============== ============= =============== =============
Depreciation and amortization
-----------------------------
AccelX $ 2,285,787 $ 1,384,147 $ 6,884,582 $ 1,561,051
Jabber.com 465,133 - 469,305
Eliminations (454,064) - (454,064) -
-------------- ------------- --------------- -------------
Total depreciation and amortization
expense $ 2,296,856 $ 1,384,147 $ 6,899,823 $ 1,561,051
============== ============= =============== =============
Property and equipment additions
--------------------------------
AccelX $ 1,958,829 $ 1,294,482
Jabber.com 138,915 -
Discontinued operations 14,056 239,465
--------------- -------------
Total $ 2,111,800 $ 1,533,947
=============== =============
</TABLE>
15
<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 and instant messaging applications and services for businesses. 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 AccelX products may be either licensed or delivered on an
application service provider business model whereby we would host the software
on our servers and expect to 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. On September 12, 2000, we completed the
sale of our e-banking business to a privately-held venture capital-backed
company. In January 2000, we formed a new subsidiary in order to commercialize
separately the Jabber.org instant messaging system from our AccelX business. We
intend to seek significant participation from external partners to help us
maximize the value of the 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.
On February 18, 2000, we completed a private placement of 12,500 shares
of our series B convertible preferred stock and warrants to acquire 343,750
shares of our common for an aggregate cash investment of $12,500,000. The
conversion price for the series B convertible preferred stock, initially $20.00,
was subject to being reset on November 12, 2000, based on the then market value
for our common stock. On September 14, 2000, we agreed to exchange all of the
series B convertible preferred stock for 12,500 shares of series B-2 convertible
preferred stock, which has a fixed conversion price of $10.24028.
On September 12, 2000, we sold our e-banking business to a privately-
held company for gross proceeds equal to the net book value of the assets sold
totalling $487,873. We received $39,700 in cash and 181,176 shares of the
purchaser's common stock recorded at a value of approximately $2.47 per share.
We continually review the value of the common stock to determine its current
fair value. It is possible that an analysis of this investment in future periods
could result in a conclusion that the fair value of the investment is less than
the recorded value which
16
<PAGE>
would require us to record a charge to earnings for the difference between the
recorded value and the current fair value and this charge could be substantial.
We have incurred losses from operations since inception. At September
30, 2000, we had an accumulated deficit of approximately $75.3 million. The
accumulated deficit at September 30, 2000, included approximately $40 million of
non-cash expenses related to the following:
. 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 paid by the issuance of
similar notestes; and
. Amortization of assets acquired in consideration for the
issuance of our securities.
Based on applicable current accounting standards, we may be required to
record additional undeterminable non-cash operating expenses related to the
exercise reset provisions of warrants we issued in connection with our series B
preferred stock as well as non-cash compensation expense related to the issuance
of common stock and options to purchase common stock of our subsidiary,
Jabber.com.
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 have reviewed SAB 101 and believe that the adoption of SAB 101 will not
have a significant impact on our financial position and results of operations.
RESULTS OF OPERATIONS
Revenues:
Components of net revenues and cost of revenues are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- --------------------------------------
2000 1999 2000 1999
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net revenues:
Licenses $ 874,877 $ 51,044 $2,043,612 $ 186,565
Services 787,862 401,341 1,335,428 475,940
Hardware and third party software sales -- -- -- 117,539
---------- ---------- ---------- ----------
Total net revenues 1,662,739 452,385 3,379,040 780,044
---------- ---------- ---------- ----------
Cost of revenues:
Cost of licenses 157,888 59,999 629,706 211,343
Cost of services 623,537 407,564 1,503,640 660,630
Cost of hardware and third party software -- -- -- 94,155
---------- ---------- ---------- ----------
Total cost of revenues 781,425 467,563 2,133,346 966,128
---------- ---------- ---------- ----------
Gross margin $ 881,314 $ (15,178) $1,245,694 $ (186,084)
========== ========== ========== ==========
</TABLE>
License revenues represent fees earned for granting customers licenses
to use our software products and services which we began to sell in the second
half of 1999. During the three months ended September 30, 2000, we recognized
$813,154 from the sale of initial software licenses and $61,723 from recurring
license fees. During the nine months ended September 30, 2000, we recognized
$1,409,154 from the sale of initial software licenses and
17
<PAGE>
$634,458 from recurring license fees. The software license revenues in the 2000
three-month period were primarily from a sale to VNU Publitec, an European
yellow page publisher, and for the 2000 nine-month period were primarily from
the VNU Publitec sale as well as 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. In addition, during 2000 we began to
license our AccelX 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 AccelX services to develop a significant base of small businesses using
these services for the recurring revenues to become significant. Recurring
license revenues for the 2000 nine-month period 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 and
support. Our net revenues from services were $787,862 for the three months ended
September 30, 2000, which represents an increase of 96.3% when compared with the
similar 1999 period. Our revenues from services were $1,335,428 for the nine
months ended September 30, 2000, which represents an increase of 180.6% 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 our customers; increases in revenue recognized from
support and maintenance agreements for our AccelX software and; service revenues
during the third quarter of $232,645 for our Jabber.com subsidiary.
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
nine months ended September 30, 1999, we sold equipment totalling $117,539 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.
Cost of Revenues:
Cost of revenues as a percentage of net revenues was 47.0% for the
three months ended September 30, 2000, compared to 103.4% for the similar 1999
period and 63.1% for the nine months ended September 30, 2000, compared to
123.9% 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 $157,888 for the three months ended September 30,
2000, or 18.0% of net license revenues, compared with $59,999, or
117.5% of net license revenues for the similar 1999 period. Cost of
license revenues were $629,706 for the nine months ended September 30,
2000, or 30.8% of net license revenues, compared with $211,343, or
113.3% 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
AccelX 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. In addition,
during the 2000 three-month period we incurred costs associated with
the establishment of a client services infrastructure to assist in the
sell-through of our products and services to small business.
18
<PAGE>
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 $623,537 for the three months ended September 30,
2000, or 79.1% of net service revenues, compared with $407,564, or
101.6% of net service revenues for the similar 1999 period. Cost of
service revenues were $1,505,640 for the nine months ended September
30, 2000, or 112.5% of net service revenues, compared with $660,630 or
138.8% of net service revenue for the similar 1999 period. The absolute
dollar increases in the 2000 periods were attributable to providing a
higher volume of professional services to our customers. In addition,
we incurred more costs during the 2000 periods associated with 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 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. We also anticipate that cost of service
revenues will increase in absolute dollars as well as a percentage of
service revenues for at least the next several quarters as we build the
support infrastructure for our Jabber.com subsidiary ahead of
anticipated revenues for those services.
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.
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 $1,079,526 for the three months
ended September 30, 2000, or 64.9% of net revenues compared with $370,660, or
81.9% of net revenues for the similar 1999 period. For the nine months ended
September 30, 2000, sales and marketing expenses were $2,272,754, or 67.3% of
net revenues as compared to $1,205,313, or 154.5% of net revenues for the
similar 1999 period. These expenses included $149,183 and $178,935 for the 2000
three- and nine-month periods, respectively, for our Jabber.com subsidiary. The
increases in absolute dollars in the 2000 periods were primarily attributable to
(i) higher employee compensation costs including commissions; and (ii) an
increase in employee recruiting fees. The increase during the 2000 three-month
period was also partially due to an increase in travel related expenses
primarily from international travel. The increase during the 2000 nine-month
period was also attributable to (i) an increase in fees paid to consultants for
market research; (ii) an increase in marketing collateral materials; and (iii)
and increase in costs related to the outsourcing of public relations and
redesign of our web site. 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. During the 2000 and
1999 three-and-nine-month periods, all product development costs have been
expensed as incurred. Product development expenses were $1,452,491 for the three
months ended September 30, 2000, or 87.4% of net revenues compared with $771,345
or 170.5% of net revenues for the similar 1999 period. For the nine months ended
September 30, 2000, product development expenses were $4,009,606, or 118.7% of
net revenues as compared to $1,924,976, or 246.8% of net revenues for the
similar 1999 period. Product development expenses in the 2000 periods include
the development of our AccelX software products and our Jabber.com instant
messaging products, which we began developing in the second quarter of 2000.
During the 2000 three-and nine-month periods we incurred $944,556 and
$3,222,524, respectively, of expenses developing our AccelX products and
$507,935 and $787,082, respectively, developing out Jabber products. In addition
to the costs we incurred developing our Jabber.com products, the increases in
absolute dollars in the 2000 periods were due primarily from (i) higher employee
compensation costs; (ii) an increase in contract labor to augment our
development team; and (iii) an increase in employee recruiting fees. We believe
that significant investments in product development
19
<PAGE>
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
administrative expenses were $2,801,587 for the three months ended September 30,
2000, or 168.5% of net revenues compared with $1,120,465, or 247.7% of net
revenues for the similar 1999 period. For the nine months ended September 30,
2000, general and administrative expenses were $7,279,156, or 215.4% of net
revenues as compared to $3,919,255, or 502.4% of net revenues for the similar
1999 period. These expenses include $1,363,115 and $2,279,488 for the 2000
three- and- nine-month periods, respectively, for our Jabber.com subsidiary. The
increases in absolute dollars during the 2000 periods were primarily
attributable to (i) consulting fees incurred with Diamond Technology Partners
Inc. totalling $1.8 million; (ii) an increase in office rent expense as we moved
to a new office location during the second quarter; and (iii) increases in
travel expenses. In addition, the increase in absolute dollars during the 2000
nine-month period we primarily due to (i) an increase in non-cash expenses
associated with the issuance of stock and options for advisory board services,
recruiting activities and investor relation services; (ii) an increase in
investor relation expenses; and (iii) and increase in stock market listing fees
associated with our move to the Nasdaq National Market. We expect to incur at
least an additional $500,000 in consulting fees during the forth quarter of 2000
for the continued engagement of Diamond Technology Partners. Approximately
$680,000 of the fees to be paid Diamond Technology Partners will be paid in
securities of Jabber.com, Inc. We expect general and administrative expenses to
decrease as a percentage of revenues as our revenues increase.
Customer acquisition costs consist of the value of warrants to purchase
our common stock we issued to customers in connection with customer contracts
for our products and services. We expense the value of warrants on the date of
issuance unless the related contract specifies minimum guaranteed revenues.
Customer acquisition costs were $868,316 and $941,684 for the
three-and-nine-months ended September 30, 1999, respectively, or 191.9% and
120.7% of net revenues, respectively. During the 1999 three-month period, we
issued a warrant to a customer to purchase 150,000 shares of our common stock
and recorded $868,316 of expense on the date of issuance. During the 1999
nine-month period, we issued warrants to three customers to purchase an
aggregate of 161,667 shares of our common stock and recorded $941,864 of
expenses.
Depreciation and amortization was $2,296,856 for the three months ended
September 30, 2000, compared to $1,384,147 for the similar 1999 period and
$6,899,823 for the nine months ended September 30, 2000, compared to $1,561,051
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 our
AccelX services 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
$2,103,891 and $6,233,936 of amortization expense in the 2000
three-and-nine-month periods, respectively. As a result of these acquisitions,
we expect to record approximately $2.1 million of such expenses in the forth
quarter of 2000 and approximately $8.4 million and $5.8 million of such expenses
in 2001 and 2002, 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. If we determine that these long-lived assets are impaired, we would
record a charge to earning, which could be as much as the remaining net book
value of the assets.
Other Income and Expense:
Interest income was $70,761 for the three months ended September 30,
2000, compared to $82,583 for the similar 1999 period and $508,096 for the nine
months ended September 30, 2000, compared to $173,331 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 $109,571 for the three months ended September 30,
2000, compared to $713,493 for the similar 1999 period and $457,523 for the nine
months ended September 30, 2000, compared to $721,324 for the similar 1999
period. We recorded the following interest expense related to the 10%
convertible note payable:
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<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Amortization of discount $ 55,297 $ 35,255 $ 152,231 $ 35,255
Amortization of financing costs 15,941 12,984 56,473 12,984
Principal-in-kind notes 91,781 - 154,110 -
Beneficial conversion - 590,256 - 590,256
----------- ----------- ----------- -----------
Total non cash interest expense 163,019 638,495 362,814 638,495
Cash interest expense - 49,383 67,123 49,383
----------- ----------- ----------- -----------
Total interest expense $ 163,019 $ 687,878 $ 429,937 $ 687,878
=========== =========== =========== ===========
</TABLE>
Net Losses Applicable to Common Stockholders:
Net loss allocable to common stockholders was $7,339,309 for the three
months ended September 30, 2000, compared to $5,195,955 for the similar 1999
period and $32,643,370 for the nine months ended September 30, 2000, compared to
$15,042,469 for the similar 1999 period. We recorded non-cash expenses for the
following items:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Amortization of intangible assets and
goodwill $ 2,103,891 $ 1,274,471 $ 6,233,936 $ 1,298,396
Amortization of discount and placement fees
to interest expense and non-cash
interest related to the 10%
convertible note payable 163,019 638,495 362,814 638,495
Stock and warrants issued for services (20,825) 98,453 634,690 358,228
Customer acquisition costs - 868,316 941,684
Preferred stock dividends - 29,173 373,126 104,214
Accretion of preferred stock - - 12,500,000 4,316,254
----------- ----------- ----------- -----------
Total $ 2,246,085 $ 2,908,908 $20,104,566 $ 7,657,271
=========== =========== =========== ===========
</TABLE>
The increase in losses reflect losses from Jabber.com totalling $1,885,510
and $3,112,361 for the three and nine months ended September 30, 2000,
respectively, and 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, from Jabber.com and 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 September 30, 2000, we had cash and cash equivalents of $8,478,920
and working capital of $7,556,441. We financed our operations and capital
expenditures and other investing activities during 2000 primarily through the
sale of securities (See Notes 7 and 10 of Notes to Consolidated Financial
Statements for information regarding these sales of securities).
We used $12,219,844 in cash to fund our operations for the nine months
ended September 30, 2000, compared to $5,943,598 for the similar 1999 period.
The increase in net cash used resulted primarily from (i) cash invested in
Jabber.com which totalled $3,604,609; (ii) an increase in costs paid for
continued development of our
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products and services; (iii) increased direct costs and support costs associated
with increased head count; and (iv) payment of 1999 performance bonuses in the
first quarter of 2000.
We used an additional $2,162,418 in cash for investing activities, during
the nine months ended September 30, 2000, compared to $2,230,905 during the
similar 1999 period. We also purchased $2,111,800 of property and equipment in
the first nine months of 2000 and plan to purchase an additional $700,000 during
the forth quarter of 2000.
We received $18,696,811 in operating capital from financing activities for
the nine months ended September 30, 2000, compared to $13,921,370 for the
similar 1999 period. During the nine months ended September 30, 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 $7,235,008 in cash from the issuance of our common stock as
a result of the exercise of common stock options and warrants.
In order to maintain operations and business and product development
efforts at planned levels for both our AccelX and Jabber.com businesses, we
will need to raise additional capital by the middle of fiscal 2001. The timing
of the need for this capital has been accelerated due to our continuing to fund
internally the development of our Jabber.com business.
We estimate, based on projected revenues and expenses, that we need to
raise approximately $15 million of additional capital to fund consolidated
operations and business and product development efforts at planned levels until
we are able to achieve positive cash flow from operations. We are in active
discussions with several institutional and strategic investors regarding
potential investments in our Jabber.com subsidiary. However, there can be no
assurance that we will be successful in obtaining additional capital or that if
such capital is available, that it will be available on acceptable terms. In the
event that we are not able to raise additional capital, we will be required to
significantly reduce our operations and business and product development efforts
in order to sustain operations. Any such reduction in either our operations or
business and development efforts could have a material adverse affect on our
operating results and financial condition.
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. Subsequently, our business
model has changed periodically to reflect changes in technology and markets.
Accordingly, we have a limited operating history for our current business model
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
adversely affected.
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 and working capital
22
<PAGE>
will be adequate to sustain our current level of operations and product
development efforts only to the middle of fiscal 2001. 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 estimate that we will need to
raise through equity, debt or other external financing approximately $15 million
to sustain operations until we achieve positive cash flows. There is no
assurance that we will be able to raise additional funds in amounts required or
upon acceptable terms. In addition, we may discover that we have underestimated
our working capital needs, and we may need to obtain additional funds to sustain
our operations. See "Item 2 -Management's Discussion of Financial Condition and
Results of Operations -Liquidity and Capital Resources."
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 $75.3 million through September
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
$25 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 September 30, 2000, included approximately $40
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.
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.
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<PAGE>
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. A suitable market for our
products and services may not develop. 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 and our ability to address sustainable markets:
. 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
24
<PAGE>
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 one customer representing 66% of revenues for the three months
ended September 30, 2000, and three customers representing 86% of revenues for
the similar 1999 period. We had three customers representing 57% of revenues for
the nine months ended September 30, 2000, and four customers representing 74% 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 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.
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<PAGE>
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 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.
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<PAGE>
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 $5.31 per share between January 1, 2000
and October 31, 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 October 31, 2000, we had issued warrants and options to
acquire 4,639,240 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 $13.49 per share. In addition to these warrants and options, we
have reserved 1,624,474 shares of common stock for issuance upon conversion of
our 10% convertible note and series B-2 convertible preferred stock. During the
terms of these derivative securities, the holders will have the opportunity to
profit from an increase 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-2 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-2 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-2 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.
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 October 31,
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 1,624,474 shares issuable upon conversion of the 10%
convertible note and series B-2 preferred stock; and
. Approximately 4,639,240 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.
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<PAGE>
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, 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 and
series B-2 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 $71,000 as additional interest expense for the three months ended
September 30, 2000, and approximately $209,000 as additional interest expense
and $12.5 million of accretion expense for the nine months ended September 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 $71,000 during the forth quarter 2000 and
$251,000 during 2001 and $158,000 during 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 therefore, 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 and 3-5. Not Applicable
Item 2. Changes in Securities. See Form 8-K report filed on September 19, 2000,
as amended on September 27, 2000.
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 (14)
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 (14)
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
(14)
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10.18 Articles of Amendment setting forth the terms of the series B-2
convertible preferred stock (15)
10.19 Exchange Agreement dated as of September 14, 2000, between Webb
and Castle Creek (15)
10.20 Registration Agreement between Webb and Castle Creek (15)
10.21 Letter Agreement dated as of September 14, 2000 between Webb and
Marshall (14)
10.22 Exchange Agreement dated as of September 14, 2000, between Webb
and Marshall (15)
10.23 Registration Agreement dated as of September 14, 2000, between
Webb and Castle Creek (15)
10.24 Asset Purchase Agreement dated September 12, 2000, between Webb
and BNKR, Inc. (14)
21 Subsidiaries of Webb Interactive Services, Inc. (12)
27 Financial Data Schedule *
____________
* 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
(14) File with Form 10-QSB Quarterly Report for the period ended June 30,
2000, Commission File No. 0-28462
(15) Filed with the current report on Form 8-K, filed September 19, 2000,
Commission File No. 000-28462.
(16) Filed with the current report on Form 8-K, filed September 27, 2000,
Commission File No. 000-28462.
(b) Reports on Form 8-K. The Company filed a report on Form 8-K, Item
5, on September 19, 2000, which was amended on September 27,
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: November 14, 2000. By /s/ William R. Cullen
--------------------------
Chief Financial Officer
/s/ Stuart Lucko
--------------------------
Controller
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