<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
-----------
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number 0-23589
GlobalDigitalCommerce.com, Inc.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
Delaware 33-0775687
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10650 Scripps Ranch Blvd., Suite 210, San Diego, California 92131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 790-1212
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value
Redeemable Warrants
</TABLE>
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the 90 days. Yes X No__
--
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
The issuer's revenues for its most recent fiscal year were $462,673.
The aggregate market value of the voting and non-voting common equity held
by nonaffiliates of the registrant was approximately $1,159,000 as of March 2,
2000. Shares of common stock held by each officer and director and by each
person or group who owns 5% or more of the outstanding common stock have been
excluded, since such persons or groups may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 1, 2000, the Registrant had 3,840,925 shares of its $.001 par
value common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format: Yes___ No X
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1
<PAGE>
PART I
This Annual Report on Form 10-KSB contains certain forward-looking
statements, including statements relating to the Company's business strategy,
within the meaning of Section 21E of the Securities and Exchange Act of 1934, as
amended, and is subject to the Safe Harbor provisions created by that statute.
In this report, the words "anticipates," "believes," "expects," "future,"
"intends" and similar expressions identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, including, but not
limited to, those discussed herein, and, in particular, those contained in
"Item 6--Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the caption "Business Risks and Uncertainties," that could
cause actual results to differ materially from those projected.
Item 1. Description of Business
- ---------------------------------
The Company
GlobalDigitalCommerce.com, Inc. (the "Company" or "GDCC") was
incorporated in the State of Delaware on September 30, 1997 under the name of
C2i Solutions, Inc.
The Company was initially organized as a California limited liability
company under the name of Challenge 2000 International LLC on September 17, 1996
("Inception"). From Inception through September 30, 1997, the Company operated
under the name of Challenge 2000 International LLC. On September 30, 1997, the
Company reorganized as a Delaware corporation and changed its name to C2i
Solutions, Inc. From September 30, 1997 through December 1999, the Company
operated under the name of C2i Solutions, Inc. In December 1999, the Company
changed its name from C2i Solutions, Inc. to GlobalDigitalCommerce.com, Inc.
The Company's business strategy envisions a multi-phased roll-up
transaction, with each phase being comprised of a merger between the Company and
one or more privately-held companies who provide synergistic business to
business e-commerce and information technology services and solutions, as well
as a capital infusion from an external source. The Company's efforts are
currently focused on identifying and evaluating potential merger and acquisition
targets.
From Inception through the first quarter of 1999, the Company had
focused its efforts on Y2K business opportunities. At the end of the first
quarter of 1999, the Company reorganized, changing its primary business focus to
the Internet and business to business e-commerce. As a result of this strategic
realignment, the Company completed its Y2K related contracts, closed its four
regional offices, and eliminated approximately 14 positions. The Company
currently has no ongoing client engagements or sales and marketing activities.
Customers
During 1999, the Company expanded its customer base to include a small
project for a non-profit educational institution. During 1999, the Company also
completed projects for Nicholas Applegate Capital Management, a mutual-fund
management company and another major New York-based capital management firm.
However, as a result of the change in business focus discussed above, the
Company did not pursue additional Y2K related projects from these or other
customers. Substantially all of the Company's revenues to date have been derived
from Y2K projects. The Company currently has no ongoing projects or expectations
of future projects from any of its previous customers, including companies that
had been significant customers.
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2
<PAGE>
Sales and Marketing
Through the end of the first quarter of 1999, the Company used a sales
and marketing strategy designed to promote and enhance recognition of the
Company's products and services through referrals from parties who had entered
into VAR or other business relationships with the Company, including outside
sales agents. During the first quarter of 1999, the Company also used a direct
sales force to promote and enhance recognition of the Company's products and
services and to follow up with potential customers identified through the
aforementioned business relationships, referrals, and a telemarketing campaign.
Following it's strategic reorganization in March 1999, the Company terminated
its efforts to market or sell its products and services. The Company does not
have any marketing or sales activities currently in progress.
Competition
The market for services relating to IT in general is increasingly
competitive, highly fragmented, and subjected to intense technological
development. Global Digital Commerce's initial strategy to service Y2K-related
projects did not succeed due to lack of interest in the marketplace to outsource
such work as well as the otherwise fortuitous fact that the widely-proclaimed
problems of Y2K failed to materialize. The company has therefore restructured
its operations and personnel and has reformulated a strategy focusing on the
development of a service network for business-to-business e-commerce. Since very
few such entities with experience exist in this marketplace, the company is
unable to clearly define the competition. Furthermore, the market landscape is
changing constantly as 1. There are no substantial barriers to entry in the
internet market, 2. The industry is consolidating at a rapid pace, and 3. Many
of our potential competitors are forming cooperative alliances altering their
focus and direction.
While too numerous to list individually, potential competitors
generally offer some of the Internet professional services that we plan to offer
and include:
- traditional strategic consulting firms which are rapidly
developing and selling Internet-expertise,
- interactive advertising agencies and/or website developers,
- professional service groups of computer equipment companies,
- traditional systems integrators, and
- internet access providers.
Many of our existing or potential competitors have longer operating
histories, greater name recognition, larger established client bases, longer
client relationships and significantly greater financial, technical, personnel,
and marketing resources than we do. Such competitors may be able to undertake
more extensive marketing campaigns, adopt more aggressive pricing policies and
make more attractive offers to potential clients, employees, and strategic
partners. Further, our competitors may perform Internet services that are equal
or superior to our planned services or that achieve greater market acceptance
than our services. We have no patented or other planned proprietary technology
that would preclude or inhibit competitors from duplicating our planned
services.
Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share, any of which would have a material
adverse effect on our business, results of operations and financial condition.
We cannot assure you that we will be able to compete successfully against
existing or future competitors.
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3
<PAGE>
Employees
As of December 31, 1999, the Company had 6 full-time employees and 3
part-time employees.
Subsequent to December 31, 1999, three senior level employees left the
Company (1). The Company is currently recruiting replacement personnel to fill
the vacancies left by these former employees. Over the next twelve months, the
Company expects to maintain the approximate number of employees it had as of
year-end at the corporate level. As previously noted, the Company plans to
grow through mergers and acquisitions, the results of which cannot be quantified
herein. The actual number of employees to be hired is dependent on a number of
factors, including interest in the Company's merger and acquisition strategy.
Also, competition for qualified personnel is intense and there are a limited
number of professionals with the level of knowledge and experience required by
the Company. There can be no assurance that the Company will be successful in
attracting, integrating, training, and retaining such personnel to meet the
Company's future needs.
(1)
<TABLE>
<CAPTION>
Name Position Date Left Replaced By Date Hired
- ---- -------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Clyde Wooten Sr. Vice President & January 21, 2000 N/A N/A
Chief Technology Officer
Thomas M. Hartman Sr. Vice President, Sales, February 18, 2000 Jeff H. Primes March 7, 2000
Marketing, & Operations
Diane E. Hessler Sr. Vice President, March 3, 2000 Richard H. Middelberg March 15, 2000
Finance, Secretary &
Chief Financial Officer
</TABLE>
Item 2. Description of Property
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The Company leases approximately 1,700 square feet of office space in
San Diego, California pursuant to a one-year lease agreement, which expires
February 28, 2001. These facilities serve as the Company's principal offices.
The Company moved into these facilities in March 2000. The Company also leases
approximately 9,500 square feet of office space in San Diego, California
pursuant to a 13-month lease agreement, which expires September 30, 2000. The
Company moved into these facilities in September 1999 and has agreed to sublet
these premises commencing March 15, 2000, for the remainder of the lease term.
Management believes that its current facilities will be adequate for its current
needs and that additional suitable space will be available in the San Diego area
if the Company's facilities need to expand.
Item 3. Legal Proceedings
- ---------------------------
Legal Proceedings.
- -----------------
On January 10, 2000 the Securities and Exchange Commission entered a Formal
Order of Investigation in a matter entitled Trading in the Securities of C2i
Solutions, Inc. (LA-01970). This order enables the SEC to subpoena documents and
witnesses and to compel their compliance with an inquiry concerning possible
suspicious trading in the Company's Common Stock prior to a July 2, 1999
announcement of an execution of a letter of intent to merge with American
Digital Network, Inc. The Company has received a subpoena to produce documents
to the SEC and has complied with that request. The Company and its CEO have also
provided documents to the SEC in response to earlier informal document requests.
Pursuant to terms of its Indemnification Agreement with its CEO, the Company is
reimbursing the CEO for legal expenses incurred in this matter. This
investigation may result in substantial expenditures of available resources and
may divert management's attention from executing on the Company's acquisition
strategy. As a result, this investigation could have a material adverse effect
on the Company, its results of operations and its prospects.
The Company has been named as a defendant in a lawsuit filed by Allen & Caron,
Inc. in Superior Court located in Orange County, California. The compliant
alleges breach of contract, fraud and related claims associated with alleged
amounts unpaid to Allen & Caron for its consulting services in the areas of
investor relations. The compliant seeks recovery of approximately $21,500 in
unpaid services, plus interest, punitive damages and attorneys fees. Given the
inherent uncertainty involved with litigation, the Company is unable to
determine whether or when this matter will be resolved short of trial and the
extent of any payments the Company will be required to make.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
None.
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4
<PAGE>
PART II
Item 5. Market for the Common Equity and Related Stockholder Matters
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The Company effected an initial public offering ("IPO") on February
24, 1998 with its Common Stock and Redeemable Warrants traded on the Nasdaq
SmallCap Market under the symbols "CTWO" and "CTWOW," respectively. As a result
of the Company's failure to meet continued listing requirements, effective with
the close of business on November 8, 1999, the Company's securities were
delisted from the Nasdaq SmallCap Market and commenced trading on the OTC
Bulletin Board. The following table sets forth the high and low bid prices for
the Company's Common Stock, as reported on the Nasdaq SmallCap Market and the
OTC Bulletin Board for the periods indicated. These reported prices reflect
interdealer prices without adjustments for retail markups markdowns or
commissions.
High Low
---- ---
First Quarter 1998 14 1/2 6
(beginning February 24, 1998)
Second Quarter 1998 13 7 1/2
Third Quarter 1998 8 5/8 2 3/8
Fourth Quarter 1998 3 3/4 5/8
First Quarter 1999 2 5/8 7/8
Second Quarter 1999 2 1/8 3/4
Third Quarter 1999 5 1 1/4
Fourth Quarter 1999 1 9/16 3/8
As of March 2, 2000, there were 26 stockholders of record of the
Company's Common Stock. Because many of such shares are held by brokers and
other institutions on behalf of stockholders, the Company is unable to estimate
the total number of stockholders represented by these record holders.
The Company has not paid any cash dividends on its Common Stock. The
Company currently expects that it will retain its future earnings, if any, for
use in the operation and expansion of its business and does not anticipate
paying any cash dividends in the foreseeable future.
In the last fiscal year, the Company has sold and issued the following
unregistered securities:
In July 1999, a director exercised stock options equaling 12,760
shares at an exercise price of $1.375 per share, for aggregate consideration of
$17,545.
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5
<PAGE>
In October 1999, the Company issued an aggregate of 285,994 shares of
Common Stock to two directors of the Company at a price of $0.70 per share, for
aggregate consideration of $200,000 in connection with a private placement. No
underwriters were employed in connection with this transaction.
The issuances described above were exempt from registration under
Section 4 (2) of the Securities Act because they did not involve a public
offering.
The net proceeds to the Company from the sale of the 1,150,000 shares
of Common Stock and 1,150,000 Redeemable Warrants in the IPO (including $100 of
proceeds from the Underwriters Warrants) were $5,672,407 after deducting
underwriting discounts and commissions and the offering expenses payable by the
Company.
Proceeds of the initial public offering were used to repay the Bridge
Notes and accrued interest thereon, totaling $621,412, $17,920 of which was paid
to a former executive officer of the Company. The Company also used $132,915 to
purchase machinery, equipment and other capital additions, $17,147 to repay
capital leases and accrued interest, $2,176,317 to pay employees' and officers'
salaries and related payroll taxes, $452,731 for occupancy costs, $260,830 for
advertising and promotion, $155,100 for recruiting, $575,082 for other general
corporate purposes and realized and unrealized investment losses totaling
$453,028 net of related interest and dividend income. The remaining proceeds
from the initial public offering have been invested in cash equivalents pending
their use.
Item 6. Management's Discussion and Analysis of Financial Condition and
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Results of Operations.
---------------------
This discussion contains forward-looking statements, including those
relating to the Company's strategy, which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in such
forward-looking statements as a result of certain factors, including those set
forth under "Business Risks and Uncertainties'" and elsewhere in this Form
10-KSB. In this report, the words "anticipates," "believes," "expects,"
"future," "intends," and similar expressions identify forward-looking
statements. The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto contained in Item 7 of this
report.
Overview
GlobalDigitalCommerce.com, Inc. ("GDCC" or the "Company") is pursuing
business opportunities in the e-commerce and information technology services and
solutions arenas through mergers and acquisitions. The Company's business
strategy envisions a multi-phased roll-up transaction, with each phase being
comprised of a merger between the Company and one or more privately-held
companies who provide synergistic business to business e-commerce and
information technology services and solutions, as well as a capital infusion
from an external source. The Company's efforts are currently focused on
identifying and evaluating potential merger and acquisition targets.
The Company was founded in late 1996 and has a limited operating
history. From Inception (September 17, 1996) through mid-1997, the majority of
the Company's activities involved raising capital, research, developing the
business plan, establishing relationships and recruiting personnel. Sales and
marketing efforts during the subsequent 18 months were unsuccessful in
developing significant business. As a result, the Company's operations to-date
have not produced significant revenues and the Company is considered to be in
the development stage.
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6
<PAGE>
From Inception through the first quarter of 1999, the Company had
focused its efforts on Y2K related business opportunities. At the end of the
first quarter of 1999, the Company reorganized, changing its primary business
focus to the Internet and business to business e-commerce. As a result of this
strategic realignment, the Company completed its Y2K related contracts, closed
its four regional offices, and eliminated approximately 14 positions. The
Company currently has no ongoing client engagements or sales and marketing
activities.
There can be no assurance that the Company will be able to
successfully expand into the internet and business to business e-commerce areas.
The Company's failure to develop products and services through acquisitions
would materially adversely affect the Company's business, operating results and
financial condition. See "Risk Factors--Need to Develop New Products and
Technologies."
In view of the early stage of development and current absence of
revenue producing activities there can be no assurance that the Company will be
able to implement its strategy or achieve or maintain profitable operations. The
Company expects to continue to incur operating losses at least until it can
complete an acquisition.
Revenues associated with performance under contracts to provide Year
2000 consulting and reengineering services were recognized utilizing the
percentage-of-completion method, in the ratio that labor-hours incurred to-date
bear to estimated total labor-hours at completion, provided that collection of
the related receivable was probable. Adjustments to contract cost estimates were
made in the periods in which the facts requiring such revisions become known. If
the revised estimates indicated a loss, such loss was provided for currently in
its entirety. The costs of providing warranty and follow-on customer support are
currently non-existent. In the future such costs are not expected to be
significant and would be accrued if appropriate.
The Company recognized revenue from the sale of software and hardware
products upon delivery of the product to customers. Revenues on sales of
software products to customers, which required significant continued obligation
from the Company, were deferred until such obligations were no longer
significant. The Company currently does not have any revenue producing
activities in place.
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7
<PAGE>
Results of Operations
As a result of the Company's decision in early 1999 to focus on
acquisitions and to conclude its Y2K related activities, comparisons of
previous operating results are not meaningful.
The following table sets forth, for the periods indicated, certain items
from the Company's statements of operations as a percentage of total
revenues:
<TABLE>
<CAPTION>
Period from
Inception
(September 17,
Year Ended Year Ended 1996) through
December 31, 1998 December 31, 1999 December 31, 1999
------------------ ------------------- ------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 45.7% 55.1% 50.3%
------------------ ------------------- ------------------
Gross profit 54.3% 44.9% 49.7%
Selling, general and administrative expenses 442.4% 387.6% 543.2%
------------------ ------------------- ------------------
Operating loss (388.1%) (342.7%) (493.5%)
Other (income) expense, net 88.6% (7.1%) 47.3%
------------------ ------------------- ------------------
Loss before taxes (476.7%) (335.6%) (540.8%)
Provision for income taxes 0.8% 0.9% 1.1%
------------------ ------------------- ------------------
Net loss (477.5%) (336.5%) (541.8%)
================== =================== ==================
</TABLE>
Fiscal Year Ended December 31, 1999.
Revenues. Total revenues for the year ended December 31, 1999, were
$462,673, a decrease of 29% over the prior year, in which revenues totaled
$649,817. This decrease in revenues resulted from the restructuring
strategy and completion of existing Y2K contracts combined with an absence
of new contracts. For the year ended December 31, 1999 service revenues
accounted for 100% of total revenues. Total revenues for the year ended
December 31, 1998 consisted of service revenues of 88% and revenues from
product sales of 12%.
One customer accounted for 89% of the Company's revenues for the year
ended December 31, 1999. Two customers accounted for 92% of the Company's
revenues for the year ended December 31, 1998 (73% and 19%, respectively).
The Company does not expect that any of these customers will be the source
of any future revenues.
Cost of Revenues. Cost of revenues were 55% ($255,074) of total
revenues for the year ended December 31, 1999. These costs consisted of
personnel related costs of providing consulting services. Cost of revenues
was 46% ($296,685) of total revenues for the year ended December 31, 1998,
and consisted primarily of personnel related costs of providing consulting
services and the costs of products sold. For the year ended December 31,
1999 the gross margin percentage was 45% compared to the prior year gross
margin percentage of 54%, which reflects less favorable subcontract rates
negotiated during 1999, as well as less favorable terms on a contract with
its major customer.
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8
<PAGE>
Selling, general and administrative expenses. The Company incurred
selling, general and administrative expenses for year ended December 31, 1999
totaling $1,793,155, compared with $2,874,866, for the prior year. This decrease
in 1999 over 1998 resulted primarily from decreased personnel and related
expenses, decreased facilities expenses in connection with the closure of the
four regional offices, overall contraction of operations, and decreased travel
and marketing expenses incurred as a result of the restructuring and
reorganization the Company implemented in March 1999.
Other Income and Expenses. Interest and dividend income was $85,950
for the year ended December 31, 1999, compared with $220,728 for the year ended
December 31, 1998. This decrease in 1999 reflects a decrease in interest-earning
balances in 1999 compared with the 1998 balances, as the net proceeds from the
Company's initial public offering are being used to fund operations. Interest
expense totaled $2,600 and $21,827 for the years ended December 31, 1999 and
1998, respectively, and are related to capital lease obligations. Interest
expense for the year ended December 31, 1998 also included amounts related to
the debt financing completed in October 1997.
The Company originally invested a portion of the net proceeds from its
initial public offering in a mutual fund (the "Short-Term Investment"). During
the first quarter of 1999, the Company sold the entire balance of the Short-Term
Investment it held on December 31, 1998 and realized losses of $48,545. During
the year ended December 31, 1998, the Company realized losses of $161,098
related to the Short-Term Investment. In addition, the Company experienced
declines in fair value of $493,663 on the Short-Term Investment that were judged
to be other than temporary, which the Company included in its statements of
operations in 1998.
During the year ended December 31, 1999, the Company entered into an
agreement to merge with American Digital Network ("ADN"). In connection with
this planned merger transaction, the Company agreed to provide ADN with working
capital, in the form of an interest-bearing note receivable, prior to the
closing of the merger transaction. In October 1999, ADN and the Company, jointly
terminated the agreement to merge. As a result of this termination and the
uncertainty regarding the Company's ability to collect the amount advanced to
ADN under its loan agreement, the Company recorded an allowance to fully reserve
this note on September 30, 1999, in the amount of $402,936. In March of 2000,
the Company received payment in full from ADN of the note receivable in the
amount of $449,379 including $394,991 of principal, $32,181 of lease payments
made on behalf of ADN and $22,207 of accrued interest. Accordingly on December
31, 1999, the Company reversed the allowance for this note provided in the
financial statements and Form 10-QSB for the period ending September 30, 1999,
of $402,936. The Company recorded additional accrued interest of $10,435 and
lease payments made on behalf of ADN of $14,962 for the fourth quarter of 1999
for a total outstanding balance of $428,333.
Fiscal Year Ended December 31, 1998.
Revenues. Total revenues for the year ended December 31, 1998 were
$649,817 an increase of 720% over the prior year, in which revenues totaled
$79,283. This increase in revenues resulted from additional projects the Company
undertook for its customers. For the year ended December 31, 1998 service
revenues accounted for 88% of total revenues and product sales represented 12%.
Total revenues for the year ended December 31, 1997 consisted of service
revenues of 59% and revenues from product sales of 41%.
Two customers accounted for 92% of the Company's revenues for the year
ended December 31, 1998 (73% and 19%). Three customers accounted for 91% of the
Company's revenues for the year ended December 31, 1997 (62%, 19% and 10%).
Cost of Revenues. Cost of revenues were 46% ($296,685) of total
revenues for the year ended December 31, 1998. These costs consisted primarily
of personnel related costs of providing consulting services and the costs of
products sold. Cost of revenues were 59% ($46,894) of total revenues for the
year ended December 31, 1997 representing the costs of products and services
sold, including third party royalties relating to licensed technology.
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9
<PAGE>
For the year ended December 31, 1998 the gross margin percentage was
54% compared to the prior year gross margin percentage of 41% which reflects a
more favorable mix of service revenues relative to product revenues in 1998.
Selling, general and administrative expenses. The Company incurred
selling, general and administrative expenses for year ended December 31, 1998
totaling $2,874,866, compared with $1,810,623, for the prior year. This increase
in 1998 over 1997 resulted primarily from increased personnel and related
expenses due to a greater number of employees, increased facilities expenses in
connection with the relocation to larger offices, the establishment of regional
offices, expansion of operations, increased travel and marketing expenses
incurred in connection with the overall scale-up of Company's operations and
business development efforts, and higher legal, accounting and other general and
administrative expenses associated with becoming a public company.
Other Income and Expenses. Interest and dividend income was $220,728
for the year ended December 31, 1998, compared with $0 for the year ended
December 31, 1997. This increase in 1998 reflects interest and dividends earned
from the short-term investment of the net proceeds from the Company's initial
public offering, which closed on February 27, 1998. Interest expense totaling
$21,827 and $24,804 for the years ended December 31, 1998 and 1997,
respectively, was related to capital lease obligations and the debt financing
completed in October 1997.
The Company invested the net proceeds from its initial public
offering, net of anticipated near-term working capital requirements, in a mutual
fund (the "Short-Term Investment"). The proceeds that the Company anticipated
would be used to satisfy near-term working capital requirements were invested in
money market accounts. The Short-Term Investment is a publicly held mutual fund
traded on the New York Stock Exchange, which invests in interesting-bearing,
debt instruments. During the year ended December 31, 1998, the Short-Term
Investment was impacted by unusual financial market events, which caused its
fair market value to decline. During the year ended December 31, 1998, the
Company realized losses of $161,098 and experienced declines in fair value of
$493,663 on the Short-Term Investment that were judged to be other than
temporary.
During the year ended December 31, 1998, the Company recognized a
charge of approximately $111,950, related to repayment of the Bridge Financing,
which is included in other expense in the statements of operations. This charge
represents the write-off of the unamortized balances of the debt discount and
deferred finance charges remaining upon repayment of the Bridge Notes.
Liquidity and Capital Resources
From Inception (September 17, 1996) through February 1998, the Company
financed its operations primarily through the proceeds from the issuance of
Common Stock and a bridge financing, completed in October 1997, resulting in an
aggregate of $958,000 from the sale and issuance of debt and equity securities,
including warrants. In February 1998, the Company completed an initial public
offering of its Common Stock. This offering provided the Company with the net
proceeds of $5,672,407, including proceeds from the exercise of the
underwriter's overallotment option received in March 1998. The Company received
$2,083 and $17,545 in March 1998 and July 1999, respectively, related to the
exercise of stock options. In August 1999 the Company received $200,000 for
issuance of its Common Stock in a private placement to two directors. Funds from
these sources have been and are expected to continue to be used as working
capital to fund the Company's operations.
The Company's operating activities used net cash of $1,306,785 and
$2,427,294 during the years ended December 31, 1999 and 1998, respectively. This
decrease in cash used for operating activities in 1999 compared to 1998 results
primarily from the restructuring and reorganization the Company implemented in
March 1999. This restructuring decreased operating expenses by lowering the
number of employees, closing four regional offices and decreasing travel and
marketing expenses.
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10
<PAGE>
The Company's investing activities provided cash of $1,786,693 during
the year ended December 31, 1999 compared with cash of $3,064,650 used in
investing activities during the year ended December 31, 1998. This increase in
cash provided by investing activities in 1999 compared to 1998 results primarily
from proceeds from sales of short-term investments of $2,180,702 in 1999
compared with net cash used of $2,884,008 for the purchase of short-term
investments. During the year ended December 31, 1998, the Company used $129,038
to purchase property and equipment, compared with $3,819 of proceeds from the
sale of property and equipment during the same period in 1999. During the year
ended December 31, 1999, the Company used $397,828 as an advance to ADN under
the loan agreement.
The Company's financing activities provided net cash of $208,845 and
$5,329,075 during the years ended December 31, 1999 and 1998, respectively. This
decrease in cash provided by financing activities in 1999 compared to 1998
results from a decrease in net proceeds from the sale of common stock and
redeemable warrants totaling $5,716,851 during 1998 (of which $5,932,313 related
to the Company's initial public offering). During the year ended December 31,
1999, the Company used $8,700 to repay capital lease obligations, compared with
$5,321 in 1998 used for this same purpose. During the year ended December 31,
1998, the Company also used $600,000 to repay the bridge notes.
As of December 31, 1999, the Company had cash and cash equivalents of
$824,707 and working capital of $757,725 compared with cash and cash equivalents
of $2,365,201 and working capital of $2,344,639 at December 31, 1998. Based on
management's current business plan, the Company believes that its existing
resources will be sufficient to fund operations through approximately September
30, 2000. However, the Company expects to continue to experience operating
losses and to use cash in operations at least until it can complete an
acquisition.
The Company's ability to achieve profitability will be dependent upon
a number of factors, including interest in and support for the Company's merger
and acquisition strategy, as well as management's ability to execute its
strategy and to obtain financing. There can be no assurance that the Company
will be able to successfully execute its strategy, that any such current or
future strategy will provide the Company with expected benefits, or that the
Company will ever be able to generate revenues sufficient to cover its expenses.
There is also no assurance that the Company will be able to obtain future
financing.
If the Company cannot generate sufficient revenues, of which there can
be no assurance, the Company will be required to raise capital from the sale of
equity securities or the issuance of debt. There is no assurance that such sales
or issuances can be effected at favorable terms, if at all.
The timing and amount of the Company's capital requirements will
depend on a number of factors, including interest in and support for the
Company's merger and acquisition strategy, as well as management's ability to
execute its strategy, competitive pressures, and the availability of
complementary businesses or technologies that the Company may wish to acquire.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of the Company's stockholders will be diluted and such
equity securities may have rights, preferences or privileges senior to those of
the holders of the Company's Common Stock. There can be no assurance that
additional financing will be available when needed or, that if available, such
financing will include terms favorable to the Company or its stockholders. If
adequate funds are not available on acceptable terms, the Company may be unable
to implement its strategy, develop or enhance its products and services, take
advantage of opportunities or respond to competition, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
- -------------------------------------------------------------------------------
11
<PAGE>
Interest Rate Risk
The Company is exposed to changes in interest rates primarily from its
short-term investments in certain available for sale securities. Under its
current policies, the Company does not use interest rate derivative instruments
to manage exposure to interest rate changes. During the year ended December 31,
1999, the Company realized losses on its short-term investments totaling
$48,545. The Company has invested its cash resources in fully-insured money
market accounts, short-term U.S. Government treasury bills and investment grade
commercial paper. The Company believes a hypothetical 100 basis point adverse
move in interest rates along the entire interest rate yield curve would not
materially effect the fair value of interest-sensitive financial instruments it
holds.
Business Risks and Uncertainties
GDCC has a Limited Operating History; Limited Experience in Information
Technology and E-Commerce Solutions and Lack of Current Contracts
GDCC was founded in September 1996, has a limited operating history
and is in the development stage. GDCC has limited experience in providing
information technology or E-commerce solutions. GDCC's operations to date have
not produced significant revenues and its decision to refocus on acquisitions
means that it will not produce any revenues at least until it is able to
complete an acquisition. GDCC may not generate any future revenues from the sale
of its services or products through acquisition. Since GDCC does not currently
have any ongoing client relationships, it will not generate any revenues at
least until such relationships are developed.
History of Operating Losses; Need for Additional Financing
GDCC has experienced significant operating losses since its inception
in September 1996. As of December 31, 1999, GDCC's accumulated deficit was
$6,510,653. Losses have principally been the result of the various costs
associated with GDCC's selling, general and administrative expenses as GDCC
commenced operations, and began marketing activities and losses on investments.
GDCC expects that it will continue to incur operating losses if no acquisitions
are completed. GDCC believes that its existing capital resources will enable it
to fund its operations until approximately September 30, 2000. GDCC will be
required to seek additional capital to continue its operations beyond that time.
GDCC has no commitments for any future funding, and GDCC may not be able to
obtain additional capital in the future. If GDCC is unable to obtain the
necessary capital, it will be required to significantly curtail its activities
or cease operations.
Due to its continuing losses, and inability to raise sufficient
additional equity, GDCC failed to meet the requirements for continued listing of
its shares on the Nasdaq SmallCap market. As a result, GDCC's securities were
delisted from the Nasdaq SmallCap Market, effective with the close of business
on November 8, 1999. GDCC's securities are currently traded on the OTC Bulletin
Board and may become subject to the regulations applicable to penny stocks.
Investors may find it more difficult to obtain timely and accurate quotes and
execute trades in the Company's securities and the liquidity of GDCC's
securities may be impaired. Before GDCC's securities can be listed on the Nasdaq
SmallCap Market, it will need to satisfy the more stringent initial listing
requirements (which require, among other things, net tangible assets of $4
million and a minimum bid price of $4.00 per share). GDCC may not be able to
meet these requirements.
- -------------------------------------------------------------------------------
12
<PAGE>
Need to Develop New Products and Services; Risks Associated with Potential
Unspecified Acquisitions
To date, GDCC has generated substantially all of its revenues from its
Y2K related activities. As a result of its changed focus, GDCC plans to actively
pursue business opportunities in the Internet and business to business
e-commerce market through mergers and acquisitions, although no specific
acquisitions are ready to be completed. Any such future acquisitions would be
accompanied by the risks commonly encountered in acquisitions of companies. Such
risks include, among other things:
. The assumption of unforeseen liabilities;
. The difficulty of assimilating the operations and personnel of
the acquired companies;
. The potential disruption of GDCC's business;
. The inability of GDCC's management to maximize the financial and
strategic position of GDCC by the incorporation of acquired
technology or business into GDCC;
. The difficulty of maintaining uniform standards, controls,
procedures and policies;
. The potential loss of key employees of the acquiring or acquired
companies; and
. The impairment of relationships with employees, consultants,
customers, and suppliers as a result of changes in management.
No assurance can be given that GDCC will undertake acquisition
activities, will complete any acquisitions, or that if an acquisition does occur
it will not materially and adversely affect GDCC or will be successful in
enhancing GDCC's business. If GDCC proceeds with one or more significant
acquisitions, a substantial portion of GDCC's available cash could be used to
consummate those transactions. Alternatively, GDCC might issue equity securities
as consideration for an acquisition which might result in significant dilution
of the stockholders' ownership interest in GDCC, or GDCC could issue debt
securities to finance an acquisition, which might reduce the book value and
earnings per share of GDCC common stock. The accounting for business
acquisitions by GDCC is likely to involve the recognition of significant
goodwill and intangible assets in connection with the acquisition and, as a
result, would typically result in substantial charges against GDCC's reported
future operating results.
No Follow-On Business
As a result of GDCC's decision not to pursue additional Y2K projects,
GDCC currently has no ongoing projects or expectations of future projects from
its previous customers, including significant customers. The absence of any
current revenue generating client relationships is expected to have a material
adverse effect on GDCC's business, financial condition and results of
operations. GDCC will not have any revenues at least until it completes an
acquisition.
Dependence on Key Personnel
GDCC's success will, to a large extent, depend upon the continued
services of its executive officers who have limited experience at managing a
business like GDCC's or in evaluating potential strategic alternatives. The loss
of services of any of these executive officers may materially and adversely
affect GDCC. GDCC's employment agreements with its key personnel may be
terminated by either party, with or without cause, with the exception of its
agreement with Mr. Whalen. Mr. Whalen's employment agreement has a term of five
years, expiring in May 2002, and limits GDCC's ability to terminate him, except
for cause, and provides for six months severance pay, unless Mr. Whalen
voluntarily resigns his position.
Three of the executive officers of GDCC have left the Company since
December 31, 1999. While the Company has recruited two replacements, these
transitions have affected, for at least the short term, the Company's ability to
implement its strategic plan.
- -------------------------------------------------------------------------------
13
<PAGE>
Concentration of Share Ownership and Voting Power Among Directors and Officers
The directors and officers of GDCC control approximately 45.6% of the
voting power and therefore have close to a majority of the votes required to
elect all of GDCC's directors and, hence, will be able to significantly
influence the affairs of the Company. In addition, the directors and officers of
GDCC will have a substantial portion of all the votes required to amend GDCC's
Certificate of Incorporation and By-laws and significantly effect fundamental
corporate transactions involving GDCC, including the acceptance or rejection of
any proposals relating to a merger of GDCC or an acquisition of GDCC by another
entity.
Risk of Shares Being Characterized as Penny Stocks; Impaired Liquidity of the
Shares
The SEC has adopted regulations which define a "penny stock" to be any
equity security that has a market price (as therein defined) less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the SEC relating to the penny stock market.
Disclosure is also required to be made about current quotations for the
securities and about commissions payable to both the broker-dealer and the
registered representative. Finally, broker-dealers must send monthly statements
to purchasers of penny stocks disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
The foregoing penny stock restrictions will not apply to shares if:
. They are listed on the Nasdaq SmallCap Market;
. Certain price and volume information is publicly available on a
current and continuing basis; and,
. The issuer meets certain minimum net tangible assets or average
revenue criteria.
There can be no assurance that GDCC's securities will qualify for
exemption from the penny stock restrictions. If GDCC's shares were subject to
the rules on penny stocks, the market liquidity for these shares would be
adversely affected.
Item 7. Financial Statements.
- ------------------------------
The financial statements and related notes thereto required by this
item are listed and set forth in a separate section of this report following the
index to exhibits.
Item 8. Changes in and Disagreements With Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure.
--------------------
None.
- --------------------------------------------------------------------------------
14
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act.
- -------------------------------------------------
The directors and executive officers of the Company and their ages are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John Anthony Whalen, Jr. 57 Chairman of the Board of Directors;
President and Chief Executive Officer
Richard H. Middelberg 35 Vice President, Finance, Chief Financial
Officer and Secretary
Jeff H. Primes 45 Vice President, Mergers and Acquisitions
William J. Kaffer (1) (2) 70 Director
James A. Lonergan (1) (2) 60 Director
</TABLE>
________________
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Mr. Whalen founded the Company in 1996. Prior to joining the Company
he served from February 1994 through October 1994 as President and Chief
Operating Officer of NETCOM On-line Communication Services, Inc., an Internet
service provider and software developer, and from October 1986 through May 1990
as Executive Vice President of Optimum Care Corporation, a company operating
behavioral medicine programs in healthcare facilities. From May 1990 to February
1994 and from October 1994 to February 1996, Mr. Whalen was a private investor.
Mr. Whalen holds a B.A. in English literature and American History from St.
Mary's College of California and an M.B.A. from California State University.
Mr. Whalen was licensed as a Certified Public Accountant by the State of
California.
Mr. Middelberg joined the Company in March of 2000 as Vice President,
Finance, Chief Financial Officer and Secretary. Mr. Middelberg has eleven years
of financial management and consulting experience in the U.S. and Europe. Prior
to joining GDCC, he successfully completed the placement of private venture
capital in the medical services industry as General Partner of Diagnostic
Imaging Associates, L.P., from June 1996 to March 2000. While consulting at Bain
& Company, between September 1993 and June 1996, Mr. Middelberg gained
experience in diverse industries including consumer goods and industrial
manufacturing. His public accounting background focused principally on due
diligence and mergers & acquisitions both in the U.S. and abroad. Mr. Middelberg
holds a B.A. from Dartmouth College and a M.B.A. from University of
Pennsylvania's Wharton School and is licensed as a Certified Public Accountant
by the State of New York.
- -------------------------------------------------------------------------------
15
<PAGE>
Mr. Primes has over 20 years of business management experience at the
executive level. Mr. Primes has devoted most of his career to sales and
marketing of consumer goods. Prior to joining GlobalDigitalCommerce he has
served from 1995 to 1999 as Director of Sales & Marketing at Stik-ees a consumer
goods manufacturer; and, as Director of Sales for Tash Inc., a distributor of
consumer goods, from 1991 to 1995. Mr. Primes has also served as Senior Vice
President of Marketing for Merchandising Unlimited, a wholesale distributor, and
National Sales Manager for Puritan Quartz Pharmaceuticals, a manufacturer of
nutritional products and OTC pharmaceuticals. During his career, he has been
involved in the acquisition and sale of multiple companies. Mr. Primes holds a
B.A. from U.C.L.A. and a J.D. from the University of San Diego. Mr. Primes is a
member of the California State Bar.
Mr. Kaffer was elected to the Board in 1998. He has served with
Theodore Barry & Associates for 25 years, most recently as Managing Director. He
was employed by IBM from 1956 to 1974 in a variety of sales, marketing, planning
and general management positions. From 1947 to 1952 he was employed as a sales
engineer by Johnson Service Company (now Johnson Controls) and as a field
engineer for the architects, Voorhees, Walker, Foley & Smith. He received his
B.M.E. from Marquette University.
Dr. Lonergan was elected to the Board in 1998. Dr. Lonergan has over
30 years experience in senior management, project management, technical and
financial management, and marketing of contract research and consulting
engineering services. From 1969 to 1998 he was Division Manager, Group Manager,
Deputy Sector Manager and Senior Vice President at SAIC, where he organized
corporate marketing activities in a number of business areas, including nuclear
power and waste management, environmental and permitting, marine science, and
geotechnology. Dr. Lonergan holds a B.S. from Santa Clara University and a M.S.
and Ph.D. from the University of Arizona.
The Company's Certificate of Incorporation provides that the Board of
Directors is divided into three classes. Each class of directors consists of one
or two directors, who will serve for a one, two or three year period or until
their successors are elected and qualified. Thereafter, directors will serve
staggered three year terms.
Officers are elected by and serve at the discretion of the Board of
Directors. There are no family relationships among the directors or officers of
the Company.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a)
of the Securities Exchange Act of 1934 (the "Exchange Act") requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities to file with
the Securities and Exchange Commission (the "SEC") initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of the Company. Officers, directors and greater than ten percent shareholders
are required by SEC regulation to furnish the Company with copies of all
Section 16(a) reports they file.
To the Company's knowledge, based solely upon review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were timely met.
- -------------------------------------------------------------------------------
16
<PAGE>
Item 10. Executive Compensation.
- --------------------------------
The following table sets forth the compensation paid by the Company
during the fiscal years ended December 31, 1999, 1998 and 1997 to the Company's
Chief Executive Officer and the other executive officers of the Company (the
"Named Officers") who received total salary and bonus in excess of $100,000
during the year ended December 31, 1999.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Securities
------------------- Underlying All other
Name and Principal Position Year Salary Bonus Options Compensation
- --------------------------- ---- ------ ----- ------- ------------
<S> <C> <C> <C> <C> <C>
John Anthony Whalen, Jr. 1999 $150,000 $0 30,200 $0
President and CEO 1998 $150,000 $0 100,000 $0
1997 $ 12,500 $0 62,000 $0
Clyde Wooten (1) 1999 $121,000 $0 0 $0
Senior Vice President 1998 $120,000 $0 91,800 $0
and CTO 1997 (2)
Thomas M. Hartman (1) 1999 $112,000 $0 100,000 $0
Senior Vice President, Sales 1998 (3)
Marketing and Operations 1997 (3)
Diane E. Hessler (1) 1999 $104,000 $0 20,000 $0
Senior Vice President and 1998 (2)
CFO 1997 (2)
</TABLE>
(1) Ms. Hessler and Messrs. Wooten and Hartman left the Company after December
31, 1999.
(2) Information is not required to be reported.
(3) Mr. Hartman joined the Company on January 25, 1999.
- --------------------------------------------------------------------------------
17
<PAGE>
The following table sets forth, as to the Company's Chief Executive
Officer and the Named Officers information concerning stock options granted
during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
---------------------------------
Individual Grants
------------------------------------------------------------
Potential Realization Value
Percent of at Assumed Annual Rates
Number of Total of Stock Purchase
Securities Options Appreciation for
Underlying Granted to Exercise Option
Options Employees in Price Per Expiration Term/1/
Name Granted Fiscal Year Share Date 5% 10%
- --------------------------- -------------- -------------- ------------- ---------- -- --
<S> <C> <C> <C> <C> <C> <C>
John Anthony Whalen, Jr. 30,200 15% $1.31 1/1/09 $24,809 $62,871
Thomas M. Hartman/(2)/ 60,000 29% $1.38 1/25/09 $51,884 $131,484
Thomas M. Hartman/(2)/ 40,000 19% $1.75 3/23/09 $44,023 $111,562
Diane E. Hessler/(2)/ 20,000 10% $1.06 11/3/09 $13,364 $ 33,867
</TABLE>
______________________________
/1/ The 5% and 10% assumed compounded annual rates of stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can be no
assurance that the actual stock price appreciation over the ten-year option term
will be at the assumed 5% and 10% levels or at any other defined level. Unless
the market price of the Common Stock appreciates over the option term, no value
will be realized from the option grants.
/2/ Options will terminate prior to end of the ten-year option term due to
resignation of officer.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
- --------------------------------------------------------------------------
Values.
- ------
The following table sets forth, as to the Company's Chief Executive
Officer and the Named Officers certain stock option information concerning the
number of shares subject to both exercisable and unexercisable stock options and
the value of unexercised options as of December 31, 1999. No options were
exercised by the named individuals during the fiscal year ended December 31,
1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End ($)/1/
--------------------------------------- --------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
------------------------------ --------------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
John Anthony Whalen, Jr. 95,067 97,133 $ ____ $ _____
Clyde Wooten 75,600 70,200 $ ____ $ _____
Thomas M. Hartman 28,333 71,667 $ ____ $ _____
Diane E. Hessler 62,722 88,778 $ ____ $ _____
</TABLE>
________________________________
/1/ Based on the difference between the closing price of the Company's
Common Stock on the OTC Bulletin Board on the last trading day of fiscal
1999, which was $0.4375 per share and the exercise price.
- --------------------------------------------------------------------------------
18
<PAGE>
Stock Plans
1997 Stock Option Plan. In January 1998, the Company's Board of
Directors and stockholders approved the 1997 Stock Option Plan which had an
initial share reserve of 82,500 shares of Common Stock (the "Option Plan").
Under the Option Plan, options may be granted to employees, including officers,
consultants, advisors and directors, although only employees and directors and
officers who are also employees may receive "incentive stock options" intended
to qualify for certain tax treatment. The exercise price of all nonqualified
stock options must equal at least 85% of the fair market value of the Common
Stock on the date of grant, and the exercise price of incentive stock options
must be no less than the fair market value on the date of grant. Options granted
under the Option Plan are generally immediately exercisable, vest over periods
ranging from one to four years and must be exercised within ten years.
In June 1998, the Company's stockholders approved an amendment to the
Option Plan to (a) increase by 2,650,000 the maximum number of shares of the
Company's Common Stock reserved for issuance under the Option Plan, (b) increase
the limit on the number of share issuable on exercise of outstanding options
under the Option Plan to no more than 90% of the outstanding shares of the
Company's Common Stock, and (c) to limit to 100,000 the maximum number of shares
for which options may be granted to any employee in any fiscal year.
Prior to the adoption of the Option Plan, during the period from June
1997 through December 1997, the Company granted nonqualified options to purchase
an aggregate of 625,000 shares of the Company's Common Stock, at exercise prices
ranging from $2.50 to $5.40 per share, to employees, consultants and directors
of the Company. These options vest over periods ranging from one to four years,
are exercisable at various dates and expire five to ten years from the date of
grant, or earlier in the event of termination of employment, directorship or
consulting engagement.
At December 31, 1999, the Company had outstanding options to purchase an
aggregate of 855,845 shares of the Company's common stock with an average
exercise price of $1.89 per share.
Compensation of Directors
Directors of the Company who are not employees of the Company do not
receive any compensation for attending meetings of the Board of Directors,
although directors are reimbursed for their expenses in attending such meetings.
From time to time, directors have received grants of options to purchase the
Company's Common Stock. The Company does not pay additional amounts for
committee participation or special assignments of the Board of Directors. The
Company has agreed to pay to Messrs. Kaffer and Lonergan, certain referral fees
based on sales by the Company to customers introduced to the Company by such
director. See "Certain Transactions."
Limitation of Liability and Indemnification
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which provide
that directors of the Company shall not be personally liable for monetary
damages to the Company or its stockholders for a breach of fiduciary duty as a
director, except for liability as a result of (i) a breach of the director's
duty of loyalty to the Company or its stockholders; (ii) acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law; (iii) an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of Delaware General Corporation Law; and (iv)
transactions from which the director derived an improper personal benefit. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission.
- --------------------------------------------------------------------------------
19
<PAGE>
The Company's Certificate of Incorporation also authorizes the Company
to indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. The Company has
entered into separate indemnification agreements with its directors and
officers, which may, in some cases, be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements require the Company, among other things, to indemnify
such officers and directors against certain liabilities that may arise by reason
of their status or service as directors or officers (other than liabilities
arising from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance if available on
reasonable terms.
With the exceptions of the SEC investigation and the Allen & Caron,
Inc. claim, which is addressed in Item 3, the Company is not aware of any other
threatened litigation or proceeding which may result in a claim for such
indemnification.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
The following table sets forth certain information regarding the
beneficial ownership of the Company's capital stock as of March 1, 2000, (i) by
each person who is known by the Company to own beneficially more than 5% of the
Company's capital stock, (ii) by each of the executive officers named in the
tables under "Executive Compensation" and by each of the Company's directors,
and (iii) by all officers and directors as a group.
Number of Percentage
Shares Beneficially Beneficially
Beneficial Owner Owned (1) Owned(2)
------------------------------- ------------------- -----------
John Anthony Whalen, Jr. (3) 1,594,372 40.0%
Clyde Wooten (4) 439,533 11.1%
Frank Vukmanic 293,333 7.6%
Konrad Witt 267,750 7.0%
James A. Lonergan (5) 174,164 4.5%
William J. Kaffer (6) 172,164 4.5%
Diane E. Hessler (7) 121,500 3.1%
Thomas M. Hartman (8) 31,111 *
All directors and executive
officers as a group (6 persons) 2,532,843 59.0%
- ------------------------------------
* Represents less than one percent.
(1) Except pursuant to applicable community property laws or as otherwise
noted, all shares are beneficially owned and sole voting and investment
power is held by the persons named.
(2) Based on 3,840,925 shares of Common Stock outstanding as of March 1,
2000.
(3) Includes 145,356 shares subject to options exercisable within 60 days
of March 1, 2000. Includes 266,666 held indirectly by Mr. Whalen as
Trustee for the benefit of certain family members.
(4) Includes 106,200 shares subject to options exercisable within 60 days
of March 1, 2000. As a result of Mr. Wooten's resignation, these
options will terminate prior to their normal expiration date.
(5) Includes 29,167 shares subject to options exercisable within 60 days of
March 1, 2000.
(6) Includes 16,407 shares subject to options exercisable within 60 days of
March 1, 2000.
(7) Includes 121,500 shares subject to options exercisable within 60 days
of March 1, 2000. As a result of Ms. Hessler's resignation, these
options will terminate prior to their normal expiration date.
- --------------------------------------------------------------------------------
20
<PAGE>
(8) Includes 31,111 shares subject to options exercisable within 60 days of
March 1, 2000. As a result of Mr. Hartman's resignation, these options
will terminate prior to their normal expiration date.
Item 12. Certain Relationships and Related Transactions.
- --------------------------------------------------------
In December 1998, the Company entered into agreements with each of
James A. Lonergan and William J. Kaffer to pay referral fees of four and
one-half percent for sales by the Company that are consummated without the
Company participating in a "Request for Proposal" process (an "RFP") with a
customer, provided the engagement of the Company by the customer resulted from
an introduction by the director, and two percent of sales by the Company that
are consummated following the participation in an RFP with a customer, if the
entrance of the Company in the RFP resulted from an introduction by the
director. These referral fees are payable by the Company on all revenue
generated from such customers during the period that the director serves as a
director. Such fees are payable within 30 days after receipt of payment from the
customer.
In December 1998, the Company issued to each of Messrs. Lonergan and
Kaffer options to purchase 87,500 shares of Common Stock of the Company at an
exercise price of $1.38 per share. Such options vest in equal monthly amounts
over a four-year period, for as long as they remain directors.
In July 1999, Mr. Kaffer exercised options to purchase 12,760 shares of
Common Stock of the Company. The Company received total cash consideration of
$17,545 related to the exercise of these options.
In October 1999, the Company issued an aggregate of 285,994 shares of
Common Stock of the Company to Messrs. Lonergan and Kaffer in connection with a
private placement for cash consideration of $0.70 per share or aggregate
consideration of $200,000.
The Company believes that all transactions with affiliates described
above were made on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties. The Company intends to submit all
future transactions, including loans, between the Company and affiliates of the
Company, to the Company's Board of Directors for approval by its disinterested
members to ensure that such future transactions are for a bona fide business
purpose and on terms no less favorable to the Company than could be obtained
from independent parties. The Company intends to maintain at least two
independent directors on its Board of Directors.
Item 13. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits.
Exhibit
Number Description of Document
------- -----------------------
3.1* Certificate of Incorporation (previously filed as an exhibit to
GDCC's Quarterly Report on Form 10-QSB filed on May 15, 1998).
3.2* Bylaws
3.3 Certificate of Ownership and Merger Merging
GlobalDigitalCommerce.com, Inc. Into C2i Solutions, Inc.
4.1* Form of Warrant Agreement between GDCC and the Warrant Agent,
including the form of Warrants
4.2* Form of Representative Warrant
10.1* Form of Indemnity Agreement for officers and directors
10.2* Form of Stock Option Plan and Agreements thereunder
10.3* Amendment to the GDCC Solutions, Inc. 1997 Stock Option Plan
10.4* Form of Bridge Note and accompanying Bridge Warrant
10.5* Employment Agreement dated June 1, 1997 between GDCC and John
Anthony Whalen, Jr.
- --------------------------------------------------------------------------------
21
<PAGE>
Exhibit
Number Description of Document
------- -----------------------
10.6* Sublease Agreement dated December 16, 1997 between GDCC and Road
Runner Sports, Inc. (previously filed as an exhibit to GDCC's
Annual Report on Form 10-KSB for the year ended December 31,
1997.)
10.7* Letter Agreement dated December, 1998 by and between GDCC and
James A. Lonergan
10.8* Letter Agreement dated December, 1998 by and between GDCC and
William J. Kaffer
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
_______________________
*Previously filed. Unless otherwise indicated, all previously filed exhibits
were filed as exhibits to the Company's Registration Statement on Form SB-2, as
amended, initially filed on November 4, 1997.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of the year ended
December 31, 1999.
- --------------------------------------------------------------------------------
22
<PAGE>
GlobalDigitalCommerce.com, Inc.
(a development stage company)
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................................ 24
Balance Sheets as of December 31, 1998 and 1999.............................................. 25
Statements of Operations for the years ending December 31, 1998 and 1999 and for the period
from Inception (September 17, 1996) through December 31, 1999................................ 26
Statements of Stockholders' Equity (Deficit) for the periods ended December 31, 1996, 1997,
1998 and 1999................................................................................ 27
Statements of Cash Flows for the years ended December 31, 1998 and 1999 and for the period
from Inception (September 17, 1996) through December 31, 1999................................ 28
Notes to Financial Statements................................................................ 29
</TABLE>
- --------------------------------------------------------------------------------
23
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
GlobalDigitalCommerce.com, Inc.
We have audited the accompanying balance sheets of GlobalDigitalCommerce.com,
Inc., formerly known as C2i Solutions, Inc. (a development stage company) as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years ended December 31,
1998 and 1999 and for the period from Inception (September 17, 1996) through
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GlobalDigitalCommerce.com, Inc.
at December 31, 1998 and 1999, and the results of its operations and its cash
flows for the years ended December 31, 1998 and 1999 and for the period from
Inception (September 17, 1996) through December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As more fully described in Note 1, the Company
has incurred recurring operating losses and has limited working capital. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
San Diego, California
March 24, 2000
- --------------------------------------------------------------------------------
24
<PAGE>
GlobalDigitalCommerce.com, Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
-------------- --------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 135,954 $ 824,707
Short-term investment 2,229,247 ----
Accounts receivable 116,805 ----
Prepaid expenses and other 69,475 60,954
-------------- --------------
Total current assets 2,551,481 885,661
Property and equipment, net 117,534 51,253
Note receivable ---- 428,333
Other assets, net 54,379 4,066
-------------- --------------
Total assets $ 2,723,394 $ 1,369,313
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of capital lease obligations $ 6,110 $ 3,556
Accounts payable 136,401 96,878
Accrued payroll and related 35,455 22,396
Other current liabilities 28,876 5,106
-------------- --------------
Total current liabilities 206,842 127,936
-------------- --------------
Capital lease obligations, net of current portion 6,146 ----
Stockholders' equity:
Preferred Stock - $.001 par value; 1,000,000 shares
authorized; no shares issued and outstanding ---- ----
Common Stock - $.001 par value; 10,000,000 shares
authorized; 3,542,171 and 3,840,925 shares issued
and outstanding in 1998 and 1999, respectively 3,542 3,841
Additional paid-in capital 7,466,970 7,549,989
Warrants to acquire common stock 223,100 223,100
Deficit accumulated during the development stage (4,953,906) (6,510,653)
Deferred compensation (229,300) (24,900)
-------------- --------------
Total stockholders' equity 2,510,406 1,241,377
-------------- --------------
Total liabilities and stockholders' equity $ 2,723,394 $ 1,369,313
============== ==============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
25
<PAGE>
GlobalDigitalCommerce.com, Inc.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
Period from
Inception
(September 17,
Year Ended Year Ended 1996) through
December 31, December 31, December 31,
1998 1999 1999
-------------- ------------ -------------
<S> <C> <C> <C>
Revenues:
Products $ 76,800 $ --- $ 118,848
Services 573,017 462,673 1,082,723
-------------- ------------ -------------
Total revenues 649,817 462,673 1,201,571
-------------- ------------ -------------
Cost of revenues:
Products:
Customers 54,239 ---- 64,852
Former stockholder ---- ---- 17,652
Services 242,446 255,074 522,449
-------------- ------------ -------------
Total cost of revenues 296,685 255,074 604,953
-------------- ------------ -------------
Gross profit 353,132 207,599 596,618
Selling, general and administrative expenses 2,874,866 1,793,155 6,526,480
-------------- ------------ -------------
Operating loss (2,521,734) (1,585,556) (5,929,862)
Interest and dividend income (220,728) (85,950) (306,678)
Interest expense 21,827 2,600 46,126
Interest expense to employees ---- ---- 3,105
Other expense 120,196 1,849 122,045
Loss realized on sale of short-term investments 654,761 48,545 703,306
-------------- ------------ -------------
Loss before income taxes (3,097,790) (1,552,600) (6,497,766)
Provision for income taxes 5,340 4,147 12,887
-------------- ------------ -------------
Net loss $ (3,103,130) $ (1,556,747) $ (6,510,653)
============== ============ =============
Loss per share (basic and diluted) $ (0.92) $ (0.43)
============== ============
Shares used in computing loss per share 3,360,493 3,605,383
============== ============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
26
<PAGE>
GlobalDigitalCommerce.com, Inc.
(a development stage company)
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
--------------------------- Warrants During the
Additional to Acquire Development
Shares Amount Paid-In Capital Common Stock Stage
--------- ---------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at Inception, September 17, 1996 ---- $ ---- $ ---- $ ---- $ ----
Issuance of common stock for cash and
capital subscriptions receivable 1,050,000 1,050 156,450 ---- ----
Net loss and comprehensive loss ---- ---- ---- ---- (44,338)
--------- ---------- ----------- ---------- ------------
Balance at December 31, 1996 1,050,000 1,050 156,450 ---- (44,338)
Issuance of common stock for cash and
capital subscriptions receivable 1,333,332 1,333 1,398,666 ---- ----
Issuance of common stock for services
rendered 8,006 8 9,075 ---- ----
Deferred compensation ---- ---- 346,325 ---- ----
Issuance of warrants ---- ---- ---- 108,000 ----
Net loss and comprehensive loss ---- ---- ---- ---- (1,806,438)
--------- ---------- ----------- ---------- ------------
Balance at December 31, 1997 2,391,338 2,391 1,910,516 108,000 (1,850,776)
Issuance of common stock and warrants 1,150,000 1,150 5,556,157 115,100 ----
Exercise of common stock options 833 1 2,082 ---- ----
Deferred compensation ---- ---- (1,785) ---- ----
Net loss and comprehensive loss ---- ---- ---- ---- (3,103,130)
--------- ---------- ----------- ---------- ------------
Balance at December 31, 1998 3,542,171 3,542 7,466,970 223,100 (4,953,906)
Issuance of common stock 285,994 286 199,714 ---- ----
Exercise of common stock options 12,760 13 17,532 ---- ----
Deferred compensation amortization ---- ---- ---- ---- ----
Forfeiture of stock options ---- ---- (140,078) ---- ----
Issuance of stock options ---- ---- 5,851 ---- ----
Net loss and comprehensive loss ---- ---- ---- ---- (1,556,747)
--------- ---------- ----------- ---------- ------------
Balance at December 31, 1999 3,840,925 $ 3,841 $ 7,549,989 $ 223,100 $ (6,510,653)
========= ========== =========== ========== ============
<CAPTION>
Total
Stockholders'
Deferred Equity
Compensation (Deficit)
------------ ---------------
<S> <C> <C>
Balance at Inception, September 17, 1996 $ ---- $ ----
Issuance of common stock for cash and
capital subscriptions receivable ---- 157,500
Net loss and comprehensive loss ---- (44,338)
----------- ------------
Balance at December 31, 1996 ---- 113,162
Issuance of common stock for cash and
capital subscriptions receivable
Issuance of common stock for services ---- 1,399,999
rendered ---- 9,083
Deferred compensation (322,812) 23,513
Issuance of warrants ---- 108,000
Net loss and comprehensive loss ---- (1,806,438)
----------- ------------
Balance at December 31, 1997 (322,812) (152,681)
Issuance of common stock and warrants ---- 5,672,407
Exercise of common stock options ---- 2,083
Deferred compensation 93,512 91,727
Net loss and comprehensive loss ---- (3,103,130)
----------- ------------
Balance at December 31, 1998 (229,300) 2,510,406
Issuance of common stock ---- 200,000
Exercise of common stock options ---- 17,545
Deferred compensation amortization 64,322 64,322
Forfeiture of stock options 140,078 ----
Issuance of stock options ---- 5,851
Net loss and comprehensive loss ---- (1,556,747)
----------- ------------
Balance at December 31, 1999 $ (24,900) $ 1,241,377
=========== ============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
27
<PAGE>
GlobalDigitalCommerce.com, Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
Inception
(September 17,
Year Ended Year Ended 1996) through
December 31, December 31, December 31,
1998 1999 1999
-------------- -------------- ---------------
<S> <C> <C> <C>
Operating activities
Net loss $ (3,103,130) $ (1,556,747) $ (6,510,653)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 86,333 30,860 145,967
Amortization of deferred compensation 91,727 64,322 179,562
Non-cash compensation and other expenses 111,950 6,948 1,317,268
Loss realized on sale of short-term investments 654,761 48,545 703,306
Changes in operating assets and liabilities:
Accounts receivable (116,805) 116,805 ----
Prepaid expenses and other (28,773) 8,521 (60,954)
Other assets, net ---- 50,313 50,313
Accounts payable (111,541) (39,523) 96,878
Accrued payroll and related (23,821) (13,059) 22,396
Accrued interest payable (12,500) ---- ----
Accrued royalty due to former stockholder (1,345) ---- ----
Other current liabilities 25,850 (23,770) 5,106
------------- ------------- -------------
Net cash (used in) operating activities (2,427,294) (1,306,785) (4,050,811)
------------- ------------- -------------
Investing activities
Bridge Loan to American Digital Network ---- (397,828) (397,828)
Purchases of short-term investments (4,000,000) ---- (4,000,000)
Proceeds from sales of short-term investments 1,115,992 2,180,702 3,296,694
Purchases of property and equipment, net (129,038) 3,819 (186,252)
Other assets (51,604) ---- (55,804)
------------- ------------- -------------
Net cash (used in) provided by investing activities (3,064,650) 1,786,693 (1,343,190)
------------- ------------- -------------
Financing activities
Proceeds from initial public offerings, net of deferred offering
costs 5,932,313 ---- 5,672,407
Proceeds from issuance of common stock 2,083 217,545 479,628
Proceeds from issuance of Bridge Notes and warrants ---- ---- 600,000
Repayment of Bridge Notes payable (600,000) ---- (600,000)
Repayment of capital lease obligations (5,321) (8,700) (14,719)
Deferred finance charges ---- ---- (26,820)
Advance from former stockholder ---- ---- 45,586
Repayment of advance from former stockholder ---- ---- (34,874)
Collection of capital subscriptions receivable from stockholders ---- ---- 97,500
------------- ------------- -------------
Net cash provided by financing activities 5,329,075 208,845 6,218,708
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (162,869) 688,753 824,707
Cash and cash equivalents at beginning of period 298,823 135,954 ----
------------- ------------- -------------
Cash and cash equivalents at end of period $ 135,954 $ 824,707 $ 824,707
============= ============= =============
Supplemental disclosures non-cash investing and financing
activities:
Capital subscriptions receivable from stockholders $ ---- $ ---- $ 197,500
Equipment acquired under capital lease obligations ---- ---- 18,276
Sale of equipment in exchange for note receivable ---- 16,875 16,875
Other cash flow information:
Interest paid 23,563 2,599 26,360
Income taxes paid 1,824 5,972 10,196
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
28
<PAGE>
GlobalDigitalCommerce.com, Inc.
(a development stage company)
1. Summary of Significant Accounting Policies
Description of Business
- -----------------------
GlobalDigitalCommerce.com, Inc., formerly known as C2i Solutions, Inc., (the
"Company") was incorporated in the State of Delaware on September 30, 1997. The
Company was initially organized as a California limited liability company under
the name of Challenge 2000 International, LLC ("LLC") on September 17, 1996
("Inception"). From Inception through September 30, 1997, the Company operated
under the name of the LLC. On September 30, 1997, the Company reorganized as a
Delaware corporation and changed its name to C2i Solutions, Inc. On September
30, 1997, all LLC Owner Units were converted into 2,391,338 shares of the
Delaware corporation's common stock and all Owner options were converted into
options to acquire 547,500 shares of common stock. Concurrent with the formation
of the Delaware corporation, the LLC was dissolved. On December 22, 1999 the
Company changed its name from C2i Solutions, Inc. to GlobalDigitalCommerce.com,
Inc.
The accompanying financial statements have been adjusted to give retroactive
effect to the reorganization and capital structure of the Delaware corporation
from Inception.
The Company is focused on business-to-business e-commerce and information
technology services and solutions.
Basis of Presentation
- ---------------------
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of conducting business. Since Inception, the Company has been
primarily engaged in organizational activities, including raising capital,
recruiting personnel, and the marketing of its products and services. As of
December 31, 1999, the Company has not realized significant revenues and
therefore, is considered to be in the development stage. From Inception
(September 17, 1996) through December 31, 1999, the Company has incurred
recurring operating losses totaling $6,510,653. As of December 31, 1999, the
Company has limited working capital totaling $757,725.
The Company's ability to continue operations, and ultimately to attain
profitable operations, is dependent upon its ability to raise additional capital
through debt or equity financing and the successful market acceptance of its
products and services. As a result of the Company's failure to meet continued
listing requirements, the Company's securities were delisted from the Nasdaq
SmallCap Market, effective with the close of business on November 8, 1999. This
recent delisting is expected to have an adverse effect on the Company's ability
to raise capital. There can be no assurances that the Company's products and
services or its efforts to raise additional capital will be successful. The
accompanying financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
Fiscal Year End
- ---------------
The Company's fiscal year end is December 31.
Fair Value of Financial Instruments
- -----------------------------------
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures about Fair Value of Financial Instruments," the Company is required
to estimate fair value of all financial instruments included on its balance
sheets at December 31, 1998 and 1999. The Company's financial instruments
consist of cash and cash equivalents, short-term investments, accounts
receivable, accounts payable, accrued expenses and other current liabilities,
and capital lease obligations. The carrying amounts of these instruments at
December 31, 1998 and 1999, except for short-term investments (See Note 2)
approximate their fair values because of the relatively short maturity of these
instruments.
- --------------------------------------------------------------------------------
29
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires that all components of comprehensive income, including net
income or loss, be reported in the financial statements in the period in which
they are recognized. SFAS No. 130 requires the change in net unrealized gains
(losses) on available-for-sale securities to be included in comprehensive income
(loss). Comprehensive net loss for the years ended December 31, 1999 and 1998 is
equal to reported net income.
Concentration of Credit Risk
- ----------------------------
Financial instruments which potentially expose the Company to concentrations of
credit risk include short-term investments and accounts receivable. Credit is
extended based on an evaluation of the customer's financial condition and
generally, collateral is not required. The Company from time to time maintains a
substantial portion of its short-term investments and cash equivalents in money
market accounts with one financial institution. The Company previously invested
its excess cash in a mutual fund that holds debt instruments of corporations.
The Company has established guidelines relative to diversification and
maturities that attempt to maintain safety and liquidity. In 1998 and 1999, the
Company experienced realized and unrealized losses on its short-term
investments. (Note 2)
Significant Customers
- ---------------------
Revenue from one domestic customer accounted for 89% of the Company's total
revenue for the year ended December 31, 1999, none of which was outstanding at
December 31, 1999. Revenue from two domestic customers accounted for 73% and
19%, respectively, of the Company's total revenue for the year ended December
31, 1998. At December 31, 1998, 68% of the total accounts receivable balance
relates to the Company's largest customer; one other customer represents 32% of
the total accounts receivable balance.
Significant Suppliers
- ---------------------
Purchases from one supplier accounted for 100% of the Company's total cost of
revenues for the year ended December 31, 1999. At December 31, 1999, none of
these costs were outstanding.
Purchases from two suppliers accounted for 21% and 11% of the Company's total
cost of revenues for the year ended December 31, 1998. At December 31, 1998,
$10,308 of these costs were outstanding and have been included in accounts
payable in the accompanying balance sheets.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
- --------------------------------------------------------------------------------
30
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Short-Term Investments
- ----------------------
Short-term investments are accounted for in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Management
determines the appropriate classification of such securities at the time of
purchase and reevaluates such classification as of each balance sheet date.
Based on its intent, the Company's investments are classified as
available-for-sale and are carried at fair value, with unrealized holding gains
and losses, net of tax, included in accumulated other comprehensive income
(loss) in stockholders' equity.
Realized gains and losses and declines in value judged to be other than
temporary are determined based on the specific identification method and are
reported in the statements of operations.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Equipment under capital leases is
stated at the present value of future minimum lease payments at the inception of
the lease. Depreciation and amortization are calculated using the straight-line
method over the estimated useful lives or lease terms of the property and
equipment which range from three to seven years. Leasehold improvements are
amortized over the shorter of their estimated useful life or the term of the
underlying lease agreement, which is six months.
Accounts Payable
- ----------------
Accounts payable includes accrued expenses which totaled $67,500 and $54,549 at
December 31, 1998 and 1999, respectively.
Deferred Finance Charges
- ------------------------
The Company incurred certain costs totaling $26,820 in 1997, in connection with
a Bridge Financing, which it has capitalized. These charges were stated at cost,
and were being charged to expense using the interest method over the term of the
Bridge Notes (approximately 24 months). Amortization expense was $2,141, $0 and
$4,549 for the years ended December 31, 1998 and 1999, and for the period from
Inception (September 17, 1996) through December 31, 1999, respectively, and has
been included in interest expense in the accompanying statements of operations.
In 1998, in connection with the retirement of the Bridge Notes, the unamortized
deferred finance charge balance of $22,271 was charged to other expense in the
accompanying statements of operations.
Discount on Bridge Notes Payable
- --------------------------------
In 1997, the Company recorded a discount of $108,000 on the Bridge Notes it
issued in connection with a Bridge Financing. This discount was being amortized
using the interest method over the term of the Bridge Notes (approximately 24
months). Amortization expense was $8,623, $0 and $18,321 for the years ended
December 31, 1998 and 1999, and for the period from Inception (September 17,
1996) through December 31, 1999, respectively, and has been included in interest
expense in the accompanying statements of operations. In 1998, in connection
with the retirement of the Bridge Notes, the unamortized debt discount balance
of $89,679 was charged to other expense in the accompanying statements of
operations.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the balance sheet. Actual
results could differ from those estimates.
- --------------------------------------------------------------------------------
31
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Revenue Recognition
- -------------------
Revenue associated with performance under contracts to provide Year 2000
computer consulting and reengineering services was recognized utilizing the
percentage-of-completion method in the ratio that labor-hours incurred to-date
bear to estimated total labor-hours at completion, provided that collection of
the related receivable was probable. Adjustments to contract cost estimates were
made in the periods in which the facts which required such revisions become
known. When the revised estimates indicated a loss, such loss was provided for
in its entirety. The Company does not expect to incur any further costs to
provide warranty and follow-up customer support related to its Year 2000
computer consulting and reengineering services.
The Company recognized revenue from the sale of software and hardware products
upon delivery of the product to the customers when collection was assured.
Revenues on sales of software products to customers which required significant
continued obligation from the Company were deferred until such obligations were
no longer significant.
Accounting for Stock-Based Compensation
- ---------------------------------------
Awards by the Company of stock options are accounted for in accordance with
Accounting Principles Board Opinion No. 25 and related interpretations ("APB
25"). The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" (See Note 6). Option grants to consultants are accounted for in
accordance with Emerging Issues Task Force consensus 96-18 ("ETIF 96-18").
Income Taxes
- ------------
Prior to September 30, 1997, the Company elected to be treated as a Limited
Liability Corporation ("LLC") for tax purposes. In lieu of corporate income
taxes, all taxable income or loss of the Company was included in the income tax
returns of the individual stockholders. Accordingly, the accompanying historical
financial statements do not include a provision for federal income taxes, but
reflect a provision for the California minimum franchise tax. On September 30,
1997, the Company elected to terminate its LLC status and thereafter become
taxable as a "C" corporation.
Effective with its change to a "C" corporation, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". SFAS No. 109 utilizes the liability method, and
deferred taxes are determined based on the estimated future tax effects of
differences between financial statement and tax basis of assets and liabilities
given the provisions of the enacted tax laws.
Loss Per Share
- --------------
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS No. 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Earnings (loss) per share amounts for
all periods presented have been restated to conform to the SFAS 128
requirements.
- --------------------------------------------------------------------------------
32
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Loss Per Share (continued)
- --------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1999
--------------- ---------------
<S> <C> <C>
Numerator:
Net loss and numerator for EPS $ (3,103,130) $ (1,556,747)
-------------- --------------
Denominator:
Weighted average shares and
denominator for EPS 3,360,493 3,605,383
-------------- --------------
Loss per share (basic and diluted) $ (0.92) $ (0.43)
============== ==============
</TABLE>
The above calculations do not reflect any potential shares relating to options
or warrants totaling 3,540,305 and 2,805,845 in 1998 and 1999, respectively, due
to the Company's losses for these periods. The assumed issuance of any
additional shares would be anti-dilutive.
Segment Reporting and Disclosure
- --------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131 "Disclosures about Segments of an
Enterprise and Related Information". This standard defines segments of an
enterprise as the components of the company whose operations are reviewed
regularly by the chief operating decision-maker in deciding how to allocate
resources and in assessing performance. It requires disclosures about products
and services, geographic areas and major customers. The Company adopted this
standard during 1998 and determined that it operated in one segment.
Implementation of this standard did not affect the Company's financial position
or results of operations.
2. Short-Term Investments
Short-term investments as of December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross
Revised Unrealized
Cost Loss Fair Value
---------- ------------ ----------
<S> <C> <C> <C>
Mutual Funds $2,229,247 $ ---- $2,229,247
</TABLE>
The Company realized losses of $161,098 on short-term investments during the
year ended December 31, 1998. In addition, the Company included declines in fair
value totaling $493,663 in its statements of operations in 1998 that were judged
to be other than temporary. The Company sold all remaining short-term
investments during 1999 and realized additional losses totaling $48,545 on
disposition.
3. Note Receivable
In August 1999, in connection with the Company's entering into an agreement to
merge with American Digital Network ("ADN"), the Company agreed to provide ADN
with working capital in the form of a loan prior to the closing of the merger
transaction. Amounts advanced under the loan agreement bear interest at a rate
of 10% per annum and are unsecured. The loan is due and payable immediately
prior to the consummation of the merger but no later than December 31, 1999.
- --------------------------------------------------------------------------------
33
<PAGE>
3. Note Receivable (continued)
In October 1999, ADN and the Company, jointly terminated the agreement to merge.
As a result of this termination and the uncertainty regarding the Company's
ability to collect the amount advanced to ADN under its loan agreement, the
Company had fully reserved for this note on September 30, 1999. In March of
2000, the Company received payment in full from ADN of the note receivable.
Accordingly for the year ended December 31, 1999, the Company reversed the
allowance provided. During the fiscal year ended December 31, 1999, the Company
advanced $428,333 under the note, including $13,630 of accrued interest.
4. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated
useful lives December 31,
------------------------------
(Years) 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Equipment 3-7 $ 98,904 $ 65,590
Furniture and fixtures .5-7 109,443 56,766
------------ -------------
208,347 122,356
Accumulated depreciation and amortization (90,813) (71,103)
------------ -------------
$ 117,534 $ 51,253
============ =============
</TABLE>
At December 31, 1998 and 1999 gross equipment under capital leases totaled
$13,983 and $10,333, respectively, with related accumulated depreciation of
$3,760 and $4,306, respectively. This equipment was subject to related capital
lease obligations of $12,256 and $3,556 at December 31, 1998 and 1999,
respectively. (See Note 7).
Depreciation expense was $75,569, $30,860 and $121,673 for the years ended
December 31, 1998 and 1999 and for the period from Inception (September 17,
1996) through December 31, 1999, respectively, including equipment under capital
leases.
5. Bridge Financing
In October 1997, the Company completed a Bridge Financing in which it sold, to
36 accredited investors, an aggregate of $600,000 face value, unsecured
promissory notes ("Bridge Notes") and 600,000 warrants ("Bridge Warrants") and
received net proceeds of $573,180, after expenses of the offering. For financial
statement purposes, the Bridge Financing has been allocated $108,000 to
warrants, $492,000 to Bridge Notes payable and $26,820 to deferred finance
charges (See Notes 1 and 6).
The Bridge Notes were payable, together with interest at the rate of 10% per
annum, on the earlier of September 30, 1999 or the closing of an initial public
offering. The Bridge Warrants entitle the holders thereof to purchase, during
the one-year period beginning February 24, 1999, one share of common stock at a
purchase price of $4.00 per share. The $134,820 of combined debt discount and
deferred finance charges were being charged to expense using the interest method
over the term of the Bridge Notes (approximately 24 months).
The bridge investors included four former employees of the Company, one of whom
was an executive officer of the Company. The face value of the Bridge Notes
payable to these four individuals totaled $75,704.
Interest expense related to the Bridge Financing includes amortization of the
debt discount ($8,623) and deferred finance charges ($2,141) plus accrued
interest ($8,913) and totaled $19,677 for the year ended December 31, 1998. The
effective interest rate on the Bridge Notes payable was 20.27%.
In February 1998, the Company completed its initial public offering and repaid
the Bridge Notes including all interest accrued thereon. In connection with this
retirement, the Company recognized a loss of $111,950 which represents the
unamortized balances of deferred finance charges ($22,271) and debt discount
($89,679), which is included in other expense in the accompanying statements of
operations.
- --------------------------------------------------------------------------------
34
<PAGE>
6. Stockholders' Equity (Deficit)
Description of Capital Stock
- ----------------------------
General. The Company's authorized capital stock consists of 10,000,000 shares of
common stock, par value $.001 per share ("Common Stock"), and 1,000,000 shares
of preferred stock, par value $.001 per share ("Preferred Stock").
Common Stock. The holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the holders of Common
Stock. The Certificate does not provide for cumulative voting, and accordingly,
the holders of a majority of the shares of Common Stock entitled to vote in any
election of directors may elect all of the directors standing for election.
Warrants. The holder of each warrant issued in connection with the initial
public offering ("Warrant") is entitled, upon payment of the exercise price of
$2.00, to purchase one share of Common Stock. At December 31, 1998, the original
exercise price of the warrants ($7.50) was adjusted to $2.00 per share in
accordance with the agreement which required a reduction of the original
exercise price by $.25 per share for every $200,000 that the Company's pre-tax
earnings from operations for the year ending December 31, 1998 were less than
$3,000,000 but in no event was the reduction to result in an exercise price of
less than $2.00 per share. Unless previously redeemed, the Warrants are
exercisable at any time during the four year period commencing February 24,
1999, provided that at such time a current prospectus relating to the underlying
Common Stock is in effect and the underlying shares of Common Stock are
qualified for sale or exempt from qualification under applicable state
securities laws. The Warrants are subject to redemption, as described below. The
Warrants expire on February 24, 2003.
Redemption. Commencing February 24, 1999, the Warrants are subject to redemption
by the Company, on not less than 30 days written notice, at a price of $.01 per
Warrant, if the closing bid price of the Common Stock is at least 150% of the
then current exercise price of the Warrants for any 20 consecutive business days
ending on the third day prior to the date on which the notice of redemption is
given. Holders of Warrants will automatically forfeit their rights to purchase
the shares of Common Stock issuable upon exercise of such Warrants unless the
Warrants are exercised before the close of business on the business day
immediately prior to the date set for redemption. All of the outstanding
Warrants, except for the underwriter's warrants, must be redeemed if any of that
class are redeemed.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price in certain events, such as stock
dividends, stock splits, mergers, sale of substantially all of the Company's
assets, and for other extraordinary events in order to enable the holders of the
Warrants to obtain the same or equivalent rights which they would have obtained
if the Warrants had been exercised prior to the event.
Underwriter's Warrants. The Company agreed to grant to the underwriter, upon the
closing of its initial public offering in February 1998, warrants
("Underwriter's Warrants") to purchase up to 100,000 shares of Common Stock
and/or 100,000 Warrants. These shares and Warrants will be identical to the
shares and Warrants offered to the public. The Underwriter's Warrants cannot be
transferred, sold, assigned or hypothecated for one year, except to officers of
the Underwriter or members of the selling group. The Underwriter's Warrants are
exercisable during the four-year period commencing February 13, 1999, at an
exercise price of $8.10 per share of Common Stock and $0.135 per Warrant,
subject to adjustment in certain events to protect against dilution. The holders
of the Underwriter's Warrants and underlying securities have certain demand and
piggyback registration rights. The existence of the Underwriter's Warrants and
the inability of the Company to redeem the Warrants may hinder the Company's
future financing or business transactions.
Bridge Warrants. Each Bridge Warrant issued by the Company in connection with
the Bridge Financing entitles the holder to purchase one share of Common Stock
of the Company at an exercise price of $4.00 per share. The Bridge Warrants are
exercisable for a one-year period beginning February 24, 1999 and expired on
February 24, 2000.
- --------------------------------------------------------------------------------
35
<PAGE>
6. Stockholder's Equity (Deficit) (continued)
Preferred Stock. The Preferred Stock may be issued in series, and shares of each
series will have such rights and preferences as are fixed by the Board in the
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock, the Board may, without further action by the
holders of Common Stock, fix the number of shares constituting that series and
fix the dividend rights, dividend rate, conversion rights, voting rights (which
may be greater or lesser than the voting rights of the Common Stock), rights and
terms of redemption (including any sinking fund provisions), and the liquidation
preferences of the series of Preferred Stock. It is to be expected that the
holders of any series of Preferred Stock, when and if issued, will have priority
claims to dividends and to any distributions upon liquidation of the Company,
and that they may have other preferences over the holders of the Common Stock.
Before issuing any Preferred Stock the Company will obtain approval of a
majority of its independent directors who do not have an interest in the
transaction and who have access to legal counsel.
The Board may issue series of Preferred Stock without action of the stockholders
of the Company. Accordingly, the issuance of Preferred Stock may adversely
affect the rights of the holders of the Common Stock. In addition, the issuance
of Preferred Stock may be used as an "anti-takeover" device without further
action on the part of the stockholders. Issuance of Preferred Stock may dilute
the voting power of holders of Common Stock (such as by issuing Preferred Stock
with super-voting rights) and may render more difficult the removal of current
management, even if such removal may be in the stockholders' best interests. The
Company has no current plans to issue any of the Preferred Stock. In the event
that the Company issues Preferred Stock in the future, it will permit executive
officers, directors or promoters to purchase shares only on the same terms as
other purchasers.
Delaware Section 203. As a Delaware corporation, the Company is subject to
Section 203 of the Delaware General Corporation Law ("Section 203"), which
regulates large accumulations of shares, including those made by tender offers.
Section 203 may have the effect of significantly delaying a purchaser's ability
to acquire the entire interest in the Company if such acquisition is not
approved by the Company's Board. In general, Section 203 prevents an "Interested
Stockholder" (defined generally as a person with 15% or more of a corporation's
outstanding voting stock) from engaging in a "Business Combination" (defined
below) with a Delaware corporation for three years following the date such
person became an Interested Stockholder. For purposes of Section 203, the term
"Business Combination" is defined broadly to include mergers and certain other
transactions with or caused by the Interested Stockholder; sales or other
dispositions to the Interested Stockholder (except proportionately with the
corporation's other stockholders) of assets of the corporation or a subsidiary
equal to ten percent or more of the aggregate market value of the corporation's
consolidated assets or its outstanding stock; the issuance or transfer by the
corporation or a subsidiary of stock of the corporation or such subsidiary to
the Interested Stockholder (except for transfers in a conversion or exchange or
a pro rata distribution or certain other transactions, none of which increase
the Interested Stockholder's proportionate ownership of any class or series of
the corporation's or such subsidiary's stock); or receipt by the Interested
Stockholder (except proportionately as a stockholder), directly or indirectly,
of any loans, advances, guarantees, pledges or other financial benefits provided
by or through the corporation or a subsidiary.
Capital Transactions
- --------------------
In 1996, the Company issued 1,050,000 shares of Common Stock to three
individuals. In accordance with the Operating Agreement (the "Agreement"), these
individuals were required to contribute total capital of $157,500, of which
$60,000 had been received by the Company as of December 31, 1996. The Company
recorded the remaining $97,500 to be received as capital subscriptions
receivable in the accompanying balance sheet. The subscription amounts were
received in January 1997.
In June 1997, the Company issued an additional 1,333,332 shares of Common Stock
to existing and new stockholders. In exchange for these shares, the Company
received a $100,000 cash payment and $100,000 was recorded as capital
subscriptions receivable. These subscription amounts were received $50,000 in
August 1997, and $50,000 in September 1997. The Company recognized $1,199,999 of
compensation expense, which is included in selling, general and administrative
expenses in the accompanying statement of operations, related to the issuance of
these shares, representing the difference between the deemed value of the shares
of Common Stock and the cash consideration received.
- --------------------------------------------------------------------------------
36
<PAGE>
6. Stockholder's Equity (Deficit) (continued)
In addition, from June 1997 to September 30, 1997, the Company issued 8,006
shares of Common Stock valued at $9,083 to consultants in exchange for services
received.
In March 1998, the Company issued 833 shares of its Common Stock to a former
employee of the Company for total cash consideration of $2,083 as a result of
the exercise of stock options.
In July 1999, the Company issued 12,760 shares of its Common Stock to a director
of the Company for total cash consideration of $17,545 as a result of the
exercise of stock options.
In October 1999, the Company issued an aggregate of 285,994 shares of its common
Stock to two directors of the company in connection with a private placement for
total cash consideration of $200,000.
Initial Public Offering
- -----------------------
In February 1998, the Company completed an initial public offering of 1,000,000
shares of Common Stock and 1,150,000 Warrants (which included 150,000 Warrants
pursuant to the underwriter's over-allotment option) of the Company. The Company
received net proceeds of $5,365,150, after deducting an underwriting discount of
10% of the gross proceeds of the offering and a non-accountable expense
allowance of 3% of the gross proceeds of the offering, and before deducting
expenses of $475,743 related to the offering (net of $45,000 previously paid by
the Company).
In March 1998, the underwriter exercised its over-allotment option with respect
to 150,000 shares of Common Stock of the Company. The Company received
additional net proceeds of $783,000, after deducting an underwriting discount of
10% of the gross proceeds of the offering and a non-accountable expense
allowance of 3% of the gross proceeds of the offering.
Common Stock Reserved For Future Issuance
- -----------------------------------------
At December 31, 1999, the Company had an aggregate of 4,841,000 shares of Common
Stock reserved for future issuance as follows:
Number of
Shares
---------
Existing stock options 855,845
1997 Stock Option Plan 2,035,155
Bridge Warrants 600,000
Initial Public Offering:
Common Stock and Warrants 1,150,000
Underwriter's Warrants (Common Stock and Warrants) 200,000
---------
4,841,000
=========
- --------------------------------------------------------------------------------
37
<PAGE>
6. Stockholders' Equity (Deficit) (continued)
Stock Plan
- ----------
In January 1998, the Company's Board of Directors and stockholders approved the
1997 Stock Option Plan ("Option Plan"), which had an initial share reserve of
82,500 shares of Common Stock. Under the Option Plan, options may be granted to
employees, including officers, consultants, advisors and directors, although
only employees and directors and officers who are also employees may receive
"incentive stock options" ("ISO's") intended to qualify for certain tax
treatment. The exercise price of all nonqualified stock options ("NSO's") must
equal at least 85% of the fair market value of Common Stock on the date of
grant, and the exercise price of incentive stock options must be no less than
the fair market value on the date of grant. Options granted under the Option
Plan are generally immediately exercisable, vest over periods ranging from one
to four years and must be exercised within ten years.
In June 1998, the Company's stockholders approved an amendment to the Option
Plan to (a) increase by 2,650,000 the maximum number of shares of the Company's
Common Stock reserved for issuance under the Option Plan, (b) increase the limit
on the number of shares issuable on exercise of outstanding options under the
Option Plan to no more than 90% of the outstanding shares of the Company's
Common Stock, and (c) to limit to 100,000 the maximum number of shares for which
options may be granted to any employee in any fiscal year.
Stock Options
- -------------
During the period from June 1997 through December 1997, the Company granted
nonqualified options to purchase an aggregate of 625,000 shares of the Company's
Common Stock, at exercise prices ranging from $2.50 to $5.40 per share, to
employees, consultants and directors of the Company. These options vest over
periods ranging from one to four years, are exercisable at various dates and
expire five to ten years from the date of grant, or earlier in the event of
termination of employment, directorship or consulting engagement.
The following table summarizes certain information regarding stock options
during the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
Option Weighted average Options Weighted average
Shares exercise price exerciseable exercise price
---------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1998 625,000 $2.96
Granted 1,259,305 3.57
Exercised (833) 2.50
Forfeited (293,167) 5.19
--------- ----------------
Outstanding at December 31, 1998 1,590,305 3.03 218,122 $3.52
Granted 207,200 1.60
Exercised (12,760) 1.38
Forfeited (928,900) 3.79
--------- ----------------
Outstanding at December 31, 1999 855,845 $1.89 329,612 $2.17
========= ================
</TABLE>
- --------------------------------------------------------------------------------
38
<PAGE>
6. Stockholder's Equity (Deficit) (continued)
The following summarizes information regarding options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted
average Weighted average Weighted
remaining average Exercise remaining average Exercise
Number contractual exercise price Number contractual exercise price
Outstanding life (years) price range Exercisable life (years) price range
- ------------------------------------------------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
623,345 9.1 $1.31 $1.06-$1.75 173,053 9.0 $1.30 $1.06-$1.75
179,500 7.8 $2.59 $2.50-$3.25 131,250 7.6 $2.52 $2.50-$3.25
53,000 8.4 $6.35 $5.50-$7.50 25,309 8.4 $6.35 $5.50-$7.50
</TABLE>
In accordance with APB 25, the Company recognized $91,727, $64,322 and $179,562
of compensation expense during the years ended December 31, 1998 and 1999, and
for the period from Inception (September 17, 1996) through December 31, 1999,
respectively, related to the grant of options, as the exercise price of options
granted was below the deemed fair value on the date of grant. Had compensation
cost related to the options been determined based upon the fair value of options
at their grant dates, as prescribed in SFAS 123, the Company's net loss would
have been as follows:
<TABLE>
<CAPTION>
Period From
Inception
Year Ended Year Ended through
December 31, December 31, December 31,
1998 1999 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
As Reported
-----------
Total $ (3,103,130) $ (1,556,747) $ (6,510,653)
Per Share $ (0.92) (0.43) ----
As Adjusted
-----------
Total $ (3,568,622) $ (1,805,495) $ (7,238,454)
Per Share $ (1.06) $ (0.50) ----
</TABLE>
The fair value of options at date of grant was estimated using the minimum value
method for all options granted from Inception (September 17, 1996) through
February 13, 1998, the date the Company became a public reporting entity. The
fair value of options at date of grant for all options granted subsequent to
February 13, 1998 was estimated using the Black-Scholes method. The following
weighted average assumption were used:
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 1999
---- ----
<S> <C> <C>
Expected life (years)................................................................................ 4.0 to 5.0 4.0 to 5.0
Risk-free interest rate.............................................................................. 4.75% to 5.50% 6.00%
Dividend yield....................................................................................... 0.0% 0.0%
Fair value of option grants-exercise price less than the fair value of the related stock............. $0.00 $1.34
Fair value of option grants-exercise price equal to the fair value of the related stock............. $2.54 $1.51
Fair value of option grants-exercise price greater than the fair value of the related stock.......... $0.84 $0.00
Expected volatility.................................................................................. 1.00 1.44
</TABLE>
- --------------------------------------------------------------------------------
39
<PAGE>
6. Stockholder's Equity (Deficit) (continued)
Because options vest over several years and additional option grants are
expected to be made in future years, the above pro forma results applying the
provisions of SFAS 123 are not representative of pro forma results for future
years.
7. Commitments
Obligations Under Capital Leases
- --------------------------------
During the year ended December 31, 1997, the Company entered into an agreement
to lease office equipment under a lease agreement which was classified as a
capital lease. The lease term is for thirty-six month periods, with minimum
lease payments as follows as of December 31, 1999:
Year Ending December 31, 2000 $3,793
Less amount representing interest (237)
------
Capital lease obligations, current $3,556
======
This obligation was collateralized by the related equipment, which had a net
value of $8,044 and $6,027 at December 31, 1998 and 1999, respectively. (See
Note 4).
Operating Lease Commitments
- ---------------------------
The Company leases its office facilities under lease agreements which are
classified as operating leases. At December 31, 1999, future minimum payments
under these noncancelable operating leases total $89,775, all of which is to be
paid in 2000. Subsequent to December 31, 1999, the Company entered into a new
office lease agreement and agreed to sublease its existing office space. (See
Note 10)
Rent expense totaled $191,546, $110,374 and $338,342 for the years ended
December 31, 1998 and 1999, and for the period from Inception (September 17,
1996) through December 31, 1999, respectively, and has been included in selling,
general and administrative expenses in the accompanying statements of
operations.
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary difference
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1998 and
1999 are shown below. At December 31, 1999, a valuation allowance of $1,930,000
has been recognized to offset the amount of net deferred tax assets, as
realization of such assets is uncertain.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 1,110,000 $ 1,640,000
Other, net 269,000 290,000
-------------- -----------------
Total deferred tax assets 1,379,000 1,930,000
Valuation allowance (1,379,000) (1,930,000)
-------------- -----------------
Net deferred tax asset $ ---- $ ----
============== =================
</TABLE>
- --------------------------------------------------------------------------------
40
<PAGE>
8. Income Taxes (continued)
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
Current: December 31, 1998 December 31, 1999
----------------- -----------------
Federal $ ---- $ ----
State 5,340 4,147
----------- -----------
$ 5,340 $ 4,147
=========== ===========
The reconciliation of income tax attributable to continuing operations computed
at the U.S. statutory rate to income tax expense is as follows:
<TABLE>
<CAPTION>
1998 1999
------------- ----------
<S> <C> <C>
Loss before income taxes at statutory rate $ 1,239,000 $ 546,000
Permanent differences (6,000) (3,000)
Change in deferred tax asset valuation allowance (1,233,000) (543,000)
State income taxes 5,340 4,147
------------ ----------
$ 5,340 $ 4,147
============ ==========
</TABLE>
At December 31, 1999, the Company had federal and California tax net operating
loss carryforwards of approximately $4,063,000 and $3,789,000, respectively.
These federal and California tax net operating loss carryforwards begin expiring
in 2012 and 2002, respectively, unless previously utilized.
Pursuant to Internal Revenue Code Sections 382, use of the Company's net
operating loss carryforwards may be limited if a cumulative change in ownership
of more than 50% occurs within any three-year period.
9. Litigation and Regulation
The Company is subject to certain legal and regulatory proceedings, claims and
inquiries, some of which involve claims for damages. The ultimate outcome of
such proceedings, claims or inquiries cannot be predicted at this time.
10. Subsequent Events (Unaudited)
In February 2000, the Company entered into new office lease agreement and agreed
to sublease its existing office space for the remaining term. Future minimum
payments under these noncancelable operating leases, net of sublease rental
income is as follows:
<TABLE>
<CAPTION>
Rental Payments Sublet Income Net Rental Payment
<S> <C> <C> <C>
Year Ending December 31:
2000 $ 111,535 $ 64,838 $ 46,697
2001 4,352 ---- 4,352
--------------- ------------- -------------
Total $ 115,887 $ 64,838 $ 51,049
=============== ============= =============
</TABLE>
In March of 2000, the Company reached an agreement with ADN and received payment
in full of the note receivable in the amount of $449,379 which included $427,172
of principal and $22,207 of accrued interest. As part of the settlement all of
the ADN stock certificates, held by the Company as collateral, were returned to
the principal shareholders of ADN.
- --------------------------------------------------------------------------------
41
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereto duly authorized, on the 30th day of March, 2000.
GLOBALDIGITALCOMMERCE.COM, INC.
By: /s/ John Anthony Whalen, Jr.
---------------------------------------
John Anthony Whalen, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
In accordance with the Securities Exchange Act of 1934, this Report has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John Anthony Whalen, Jr. Chief Executive Officer and March 30, 2000
---------------------------- Director (Principal Executive
John Anthony Whalen, Jr. Officer)
/s/ RICHARD H. MIDDELBERG Chief Financial Officer (Principal March 30, 2000
---------------------------- Financial and Accounting Officer)
Richard H. Middelberg
/s/ WILLIAM J. KAFFER Director March 30, 2000
----------------------------
William J. Kaffer
/s/ JAMES A. LONERGAN Director March 30, 2000
----------------------------
James A. Lonergan
</TABLE>
- --------------------------------------------------------------------------------
42
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
GLOBALDIGITALCOMMERCE.COM, INC.
INTO
C2I SOLUTIONS, INC.
C2i Solutions, Inc., a corporation organized and existing under the laws of
Delaware,
DOES HEREBY CERTIFY:
FIRST: That this corporation was incorporated on the 30th day of September,
1997, pursuant to the General Corporation Law of the State of Delaware.
SECOND: That this corporation owns all of the outstanding shares of stock of
GlobalDigitalCommerce.com, Inc. a corporation incorporated on the 2nd day of
August, 1999, pursuant to the General Corporation Law of the State of Delaware.
THIRD: That this corporation filed with the minutes of the Board the following
resolutions duly adopted by its Board of Directors at a meeting held on December
16, 1999:
RESOLVED, that C2i Solutions, Inc. merge, and it hereby does merge
itself into said GlobalDigitalCommerce.com, Inc. and assumes all of its
obligations; and
FURTHER RESOLVED, that the merger shall be effective upon filing with
the Secretary of State of Delaware.
FURTHER RESOLVED, that proper officer is this corporation be and he or
she is hereby directed to make and execute a Certificate of Ownership
and Merger setting forth a copy of the resolutions to merge said
GlobalDigitalCommerce.com, Inc. and assume its liabilities and
obligations, and the date of adoption thereof, and to cause the same to
be filed with the Secretary of State and to do all acts and things
whatsoever, whether within or without the State of Delaware, which may
be in anywise necessary or proper to effect said merger; and
FURTHER RESOLVED, that this corporation change its corporate name by
changing Article FIRST of the Certificate of Incorporation of this
corporation to read as follows:
- --------------------------------------------------------------------------------
45
<PAGE>
FIRST: . The name of the corporation is
-----
GlobalDigitalCommerce.com, Inc. (hereinafter
sometimes referred to as the "Corporation").
IN WITNESS WHEREOF, said C2i Solutions, Inc. has caused this Certificate
to be signed by ___________________________________, its _____________________,
this _____ day of December, 1999.
C2i Solutions, Inc.
By________________________
- --------------------------------------------------------------------------------
46
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Post Effective Amendment No. 1 on Form S-3 to Form SB-2 (No.333-39425) and to
the Registration Statement on Form S-8 (No. 333-78021) of our report dated March
24, 2000 with respect to the financial statements of GlobalDigitalCommerce.com,
Inc. included in the Annual Report (Form 10-KSB) for the year ended December 31,
1999.
ERNST & YOUNG LLP
San Diego, California
March 27, 2000
- --------------------------------------------------------------------------------
43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 824,707
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 885,661
<PP&E> 122,356
<DEPRECIATION> 71,103
<TOTAL-ASSETS> 1,369,313
<CURRENT-LIABILITIES> 127,936
<BONDS> 0
0
0
<COMMON> 3,841
<OTHER-SE> 1,237,536
<TOTAL-LIABILITY-AND-EQUITY> 1,369,313
<SALES> 0
<TOTAL-REVENUES> 462,673
<CGS> 0
<TOTAL-COSTS> 255,074
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,600
<INCOME-PRETAX> (1,552,600)
<INCOME-TAX> 4,147
<INCOME-CONTINUING> (1,556,747)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,556,747)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
