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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
Commission File Number 0-29479
WORLDWIDE WEB NETWORX CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 58-2280078
(State of Incorporation) (I.R.S. Employer Identification No.)
521 FELLOWSHIP ROAD, SUITE 130 08054
MOUNT LAUREL, NEW JERSEY (zip code)
(Address of principal executive offices)
(856) 914-3100
(Registrant's telephone number, including area code)
-----------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
----- -----
Number of shares of Common Stock outstanding as of May 15, 2000:
41,289,700 shares
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<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
QUARTERLY REPORT FORM 10-Q
INDEX
Part I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1 - Financial Statements:
Consolidated Balance Sheets........................................................................................ 3
March 31, 2000 (unaudited) and September 30, 1999
Consolidated Statements of Operations.............................................................................. 4
Three and Six Months Ended March 31, 2000 and 1999 (unaudited)
Consolidated Statements of Comprehensive Income.................................................................... 5
Three and Six Months Ended March 31, 2000 and 1999 (unaudited)
Consolidated Statements of Cash Flows.............................................................................. 6
Six Months Ended March 31, 2000 and 1999 (unaudited)
Notes to Consolidated Financial Statements......................................................................... 7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operation...................... 15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk................................................ 23
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings......................................................................................... 23
Item 2 - Changes in Securities and Use of Proceeds................................................................. 23
Item 3 - Defaults Upon Senior Securities........................................................................... 24
Item 4 - Submission of Matters to a Vote of Security Holders....................................................... 24
Item 5 - Other Information......................................................................................... 24
Item 6 - Exhibits and Reports on Form 8-K.......................................................................... 24
Signatures......................................................................................................... 25
Exhibit Index...................................................................................................... 25
</TABLE>
2
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
-------------------------------
MARCH 31 SEPTEMBER 30
-------------------------------
2000 1999
-------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $2,629 $7,234
Short-term investments.................................................. 55,575 29,475
Accounts receivable, net of allowance for doubtful accounts ............ 910 858
Prepaid expenses........................................................ 178 143
------- -------
Total current assets...................................................... 59,292 37,710
Property and equipment, net............................................... 495 295
Ownership interests and advances to Affiliated Companies.................. 4,641 2,744
Intangible assets, net.................................................... 5,624 4,884
Deferred financing costs, net............................................. -- 139
Other assets.............................................................. 303 49
Deferred income taxes..................................................... 2,940 1,690
------- -------
Total assets.............................................................. $73,295 $47,511
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses........................................................ 719 $1,157
Accounts payable........................................................ 2,292 1,530
Deferred revenue........................................................ 2,330 470
Current portion of capital lease obligation............................. 40 37
Convertible debentures ................................................. 125 990
Deferred income taxes................................................... 19,198 8,813
------- -------
Total current liabilities................................................. 24,704 12,997
Capital lease obligation, net of current portion.......................... 18 39
Stockholders' equity:
Preferred stock......................................................... -- --
Common stock............................................................ 41 39
Additional paid-in capital.............................................. 40,474 36,443
Retained earnings (deficit)............................................. (4,657) 1,393
Unearned stock compensation............................................. (3,000) (3,400)
Accumulated other comprehensive income.................................. 15,715 --
------- -------
Total stockholders' equity................................................ 48,573 34,475
------- -------
Total liabilities and stockholders' equity................................ $73,295 $47,511
======= =======
</TABLE>
See accompanying notes.
3
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARES)
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues..................................................... $498 $164 $1,539 $327
Operating expenses:
Cost of revenues............................................. 373 106 1,304 215
---------- ---------- ---------- ----------
Gross Profit............................................... 125 58 235 112
Selling, general and administrative........................ 3,710 455 6,383 533
Depreciation and amortization.............................. 390 75 764 75
Writeoff of purchased research and development............. -- 3,036 -- 3,036
---------- ---------- ---------- ----------
Loss from operations......................................... (3,975) (3,508) (6,912) (3,532)
Other income (expenses):
Impairment of advances to Affiliated Companies............. -- (5) -- (81)
Interest expense........................................... (14) -- (35) --
Amortization of debt issuance costs........................ (69) -- (139) --
Interest income............................................ 56 6 139 11
Equity income (loss)....................................... (165) (335) (353) (335)
---------- ---------- ---------- ----------
Total other income (expenses).............................. (192) (334) (388) (405)
---------- ---------- ---------- ----------
Loss before income taxes..................................... (4,167) (3,842) (7,300) (3,937)
Income tax benefit........................................... (733) -- (1,250) --
---------- ---------- ---------- ----------
Net loss..................................................... $(3,434) $(3,842) $(6,050) $(3,937)
========== ========== ========== ==========
Basic and diluted net loss per share.......................... $ (0.09) $ (0.22) $ (0.16) $ (0.28)
========== ========== ========== ==========
Basic and diluted weighted average shares oustanding.......... 37,921,833 17,836,394 36,778,097 14,271,040
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
--------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss).................................................... $ (3,434) $(3,842) $ (6,050) $(3,937)
Other comprehensive income:
Unrealized holding gains (losses) in available-for-sale
securities..................................................... (18,000) -- 26,100 --
Tax related to comprehensive income.............................. 7,200 -- (10,385) --
-------- ------- ------- -------
Net unrealized appreciation (depreciation) in available-for-
sale securities.................................................... (10,800) -- 15,715 --
-------- ------- ------- -------
Comprehensive income (loss).......................................... $(14,234) $(3,842) $ 9,665 $(3,937)
======== ======= ======= =======
</TABLE>
See accompanying notes.
5
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................................................... $(6,050) $(3,937)
Adjustments to reconcile net income (loss) to net cash used in
operating activities
Purchased research and development....................................... -- 3,036
Stock compensation....................................................... 600 --
Depreciation............................................................. 44 14
Amortization............................................................. 720 62
Deferred income taxes.................................................... (1,250) --
Amortization of debt issuance costs...................................... 139 --
Equity loss.............................................................. 353 335
Impairment of advance to Affiliated Companies............................ -- 81
Changes in operating assets and liabilities net of acquisitions:
Accounts receivable................................................... (52) (191)
Accounts payable...................................................... 762 18
Accrued expenses...................................................... 145 444
Prepaid expenses...................................................... (35) 16
Deferred revenue...................................................... 460 --
------- -------
Net cash used in operating activities...................................... (4,164) (122)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of ownership interests in Affiliated Companies, net of cash -- (1,849)
Advances to Affiliated Companies........................................... -- (1,550)
Acquisition of technology.................................................. -- (750)
Purchase of property and equipment......................................... (244) (354)
Decrease (increase) in other assets........................................ (179) --
------- -------
Net cash used in investing activities...................................... (423) (4,503)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures........................... -- 990
Proceeds from Loan......................................................... -- 2,295
Debt issuance costs incurred............................................... -- (129)
Payment of capital lease obligation........................................ (18) --
Net proceeds from issuance of common stock................................. -- 2,615
------- -------
Net cash provided by (used in) financing activities........................ (18) 5,771
------- -------
Net increase (decrease) in cash and cash equivalents....................... (4,605) 1,146
Cash and cash equivalents at beginning of period........................... 7,234 792
------- -------
Cash and cash equivalents at end of period................................. $2,629 $1,938
======= =======
NONCASH TRANSACTIONS
Exchange of convertible notes and accrued interest for common stock........ $995 --
ISSUANCE OF COMMON STOCK FOR:
Acquisition of ownership interests in Affiliated Companies................. 2,250 $9,023
Acquisition of technology.................................................. -- 5,250
Services rendered.......................................................... 30 --
Satisfaction of accrued expenses........................................... 512 --
</TABLE>
See accompanying notes.
6
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
WorldWide Web NetworX Corporation (the "Company") is a holding company
engaged in business-to-business, or "B2B" e-commerce through a network of
companies. The Company defines e-commerce as conducting or facilitating
business transactions over the Internet. As of March 31, 2000, the Company
owned interests in nine companies, which are referred to in these financial
statements as "Affiliated Companies." The Company enters into relationships,
including joint ventures, strategic relationships and acquisitions, with
off-line companies that have established distribution channels and
fulfillment capability and provides e-commerce technology, consulting,
marketing and business development services to the Affiliated Companies. The
Company's goal is to expand the markets, services and products and to improve
the efficiencies of these businesses.
2. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements as of March 31,
2000 and for the three and six month periods ending March 31, 2000 and 1999 have
been prepared in accordance with generally accepted accounting principles for
interim financial information pursuant to the rules and regulations of the SEC.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments, considered necessary for the fair presentation of the Company's
financial position at March 31, 2000 and its operations and cash flows for the
three and six month periods ending March 31, 2000 and 1999 have been included.
Operating results for the six month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2000 or for any other interim period. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations relating to interim financial
statements. The information included in this Form 10-Q should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Company's financial statements and notes thereto
included in the Company's Registration Statement on Form 10.
RESTATEMENT OF MARCH 31, 1999 FINANCIAL STATEMENTS
The financial statements as of March 31, 1999 and for the six months then
ended have been restated from those previously included in our private placement
memorandum dated May 26, 1999, in which the Company raised $11 million through
the sale of common stock. The restated amounts have been prepared to conform to
the audited financial statements for the year ended September 30, 1999 included
in the Company's Registration Statement on Form 10. The unaudited financial
statements previously issued have been restated as follows:
a) The Company's investment of $3,036,000 in the JenCom assets was
written off as purchased research and development in the statement of
operations for the three and six month periods ended March 31, 1999.
It was a condition of the Stock Purchase Agreement between the
Company and D.H. Blair Investment Banking Corp. that the Company
execute a definitive agreement with JenCom Digital Technologies for
the acquisition of a 50% interest in the JenCom projects.
Subsequent to March 31, 1999 the Company determined that the
purchased products represented research and development in process
and were not technologically feasible at the acquisition date. As
a result, the accounting standards require these costs to be
expensed at acquisition.
b) The Company's subsidiary Entrade Inc. is consolidated in the statement
of operations for the three and six month periods ended March 31,
1999. Previously, the subsidiary was reflected as an asset held for
sale.
c) The Company's valuation of common stock issued in connection with the
acquisition of investments and in payment for services rendered was
adjusted to reflect its fair value on the date of issuance.
The effect of the restatement on the previously reported amounts is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, 1999
-------------------------------
AS AS PREVIOUSLY
RESTATED REPORTED
-------- -------------
<S> <C> <C>
Net loss $(3,937,000) $(218,000)
Basic and diluted net loss per share $ (0.28) $ (0.01)
</TABLE>
7
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiary, The Intrac Group, Ltd. and its majority owned and
controlled subsidiaries, ATM Service, Ltd. and Real Quest, Inc. The various
interests that the Company acquires in its Affiliated Companies are accounted
for under three methods: consolidation, equity method and cost method. The
applicable accounting method is generally determined based on the Company's
voting interest in an Affiliated Company unless significant minority rights are
present.
CONSOLIDATION
Affiliated Companies in which the Company directly or indirectly owns more
than 50% of the outstanding voting securities are generally accounted for under
the consolidation method of accounting. Under this method, an Affiliated
Company's results of operations are reflected within the Company's statement of
operations. All significant intercompany accounts and transactions are
eliminated. Participation of other Affiliated Company shareholders in the
earnings or losses of a consolidated Affiliated Company is reflected in the
caption "Minority interest" in the Company's statement of operations. Minority
interest adjusts the Company's consolidated results of operations to reflect
only the Company's share of the earnings or losses of the consolidated
Affiliated Company.
EQUITY METHOD
Affiliated Companies whose results are not consolidated, but over whom the
Company exercises significant influence, are accounted for under the equity
method of accounting. Whether or not the Company exercises significant influence
with respect to an Affiliated Company depends on an evaluation of several
factors including, among others, representation on the Affiliated Company's
Board of Directors and ownership level, which is generally a 20% to 50% interest
in the voting securities of the Affiliated Company, including voting rights
associated with the Company's holdings in common, preferred and other
convertible instruments in the Affiliated Company. Under the equity method of
accounting, an Affiliated Company's results of operations are not included in
detail within the Company's statement of operations; however, the Company's
share of the earnings or losses of the Affiliated Company is reflected in the
caption "Equity income (loss)" in the statement of operations.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of Affiliated Companies accounted for under the
consolidation or equity method of accounting is recorded as goodwill and is
amortized on a straight-line basis over its estimated useful life. Goodwill
amortization adjusts the Company's share of the Affiliated Company's earnings or
losses.
COST METHOD
Affiliated Companies not accounted for under the consolidation or the
equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the consolidated statement of operations.
However, cost-method impairment charges are recognized in the consolidated
statement of operations and deducted from the carrying value in the consolidated
balance sheet, while the new cost basis is not increased if circumstances
suggest that the value of the Affiliated Company has subsequently recovered.
8
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company records its ownership interest in debt securities of Affiliated
Companies accounted for under the cost method at cost. The Company records its
ownership interest in equity securities of Affiliated Companies accounted for
under the cost method at cost, unless these securities have readily determinable
fair values based on quoted market prices, in which case these interests would
be recorded at fair value. In addition to the Company's investments in voting
and non-voting equity and debt securities, it periodically makes advances to its
Affiliated Companies in the form of promissory notes which are accounted for in
accordance with SFAS No. 114.
The Company continually evaluates the carrying value of its ownership
interests in and advances to each of its Affiliated Companies for possible
impairment based on achievement of business plan objectives and milestones, the
value of each ownership interest in the Affiliated Company relative to carrying
value, the financial condition and prospects of the Affiliated Company, and
other relevant factors. The business plan objectives and milestones the Company
considers include, among others, those related to financial performance such as
achievement of planned financial results or completion of capital raising
activities, and those that are not primarily financial in nature such as the
launching of a web site or the hiring of key employees. The fair value of the
Company's ownership interests in and advances to privately held Affiliated
Companies is generally determined based on the value at which independent third
parties have or have committed to invest in its Affiliated Companies.
TRADE CREDITS
The Company makes some purchases of goods and services in whole or in
part by issuing "trade credits" that customers can redeem to purchase goods
and services from the Company. The Company issues two types of trade credits,
"combination trade credits" and "straight trade credits." Under a combination
trade credit arrangement, the customer purchases goods and services from the
Company and pays for goods and services in both cash and the redemption of
trade credits. Straight trade credits are used for the same purposes as
combination trade credits, but differ in that the customer pays for goods and
services only through the redemption of trade credits, with no cash
components.
Unredeemed combination trade credits totaled $9,526,000 at March 31, 2000
and $8,017,000 at September 30, 1999. Vendors must redeem the trade credits
within specified periods ranging from 2 to 5 years. Trade credits redeemable for
the next four years are as follows: $2,259,000 in 2000, $1,445,000 in 2001,
$1,270,000 in 2002, and $3,043,000 in 2003. Unredeemed straight trade credits of
$230,000 at September 30, 1999 and $350,000 at March 31, 2000 are included in
deferred revenue.
SHORT-TERM INVESTMENTS
The Company classifies its short-term investments as available for sale.
Such investments are recorded at fair value based on quoted market prices, with
unrealized gains and losses, which are considered to be temporary, recorded as
other comprehensive income or loss until realized. The cost of short-term
investments sold is based on the average cost method.
SOFTWARE DEVELOPMENT COSTS
Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional development costs are capitalized in accordance
with Statement of Financial Accounting Standard ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Capitalization ceases upon general release to customers. Amortization of such
capitalized costs is the greater of the amount computed using (i) the ratio that
current gross revenues for a product bear to the total of current and
anticipated future gross revenues of that product or (ii) the straight-line
method over the remaining estimated economic life of the product, including the
period being reported on. Amortization begins when the product is available for
general release to customers. During the three and six month periods ending
March 31, 1999, the Company recognized research and development expenses
totaling $3,036,000 for proprietary internet software technologies, which were
not technologically feasible at the date they were purchased. These technologies
were purchased from JenCom Digital Technologies, Inc. and contributed to
WWWX-Jencom, LLC. It was a condition of the Stock Purchase Agreement between the
Company and D.H. Blair Investment Banking Corp. that the Company execute a
definitive agreement with JenCom Digital Technologies for the acquisition of a
50% interest in the JenCom projects.
9
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company performs an ongoing review of the recoverability of its
capitalized software costs. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be generated
from the applicable software, any remaining capitalized amounts are written off.
INTANGIBLE ASSETS
Intangible assets consist of goodwill attributable to businesses acquired.
Goodwill represents the excess of the cost of businesses acquired over the fair
value of the related net assets at the date of acquisition. Intangible assets
are amortized using the straight-line method over their expected useful lives of
3 to 5 years.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding for the
period. Diluted net income (loss) per share reflects the potential dilution of
securities by including other common stock equivalents, including stock options,
convertible debt, and warrants to purchase common stock in the weighted average
number of common shares outstanding for a period, if dilutive. Contingently
issuable shares are included in diluted net income per share, if dilutive, based
on the number of shares, if any, that would be issuable under the terms of the
arrangement if the end of the reporting period were the end of the contingency
period.
Due to their antidilutive effect, dilutive securities were excluded from
the computation of diluted net loss per share for the three and six month
periods ended March 31, 2000 and 1999. The 750,000 and 1,500,000 contingently
issuable shares related to the acquisitions of the Real Quest, Inc. and
InterCommerce China, LLC investments, respectively, and the shares
contingently issuable to Warren Rothstein were not included in the earnings
per share calculation because the conditions related to the contingencies
were not satisfied at March 31, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES (SFAS No. 133), which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. Under SFAS No. 133, accounting for changes in fair value of a derivative
depends on its intended use and designation. SFAS No. 133, is effective for
fiscal years beginning after June 15, 2000. The Company has not yet determined
the impact of this pronouncement or when it will adopt it.
3. SHORT-TERM INVESTMENTS
Short-term investments at March 31, 2000 and September 30, 1999
consisted of 1,800,000 shares of common stock of Entrade Inc. received as
consideration for the sale of a subsidiary to Artra. These shares have
restrictions on their sale until September 23, 2000 that allow the Company to
only sell up to 50,000 shares in any 30 day period. However, the shares may
be pledged as collateral by the Company. The quoted market value of the
Entrade Inc. (a NYSE company) shares held by the Company was $17,500,000 at
May 16, 2000, a decrease of $38,075,000 from the amount recorded at March 31,
2000. Entrade Inc. is a public company subject to the reporting requirements
of the U.S. Securities and Exchange Commission.
10
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes the audited balance sheet and statement of
operations information reported by Entrade at December 31, 1999 and for the year
then ended and the unaudited balance sheet and statement of operations at March
31, 2000 and the three months then ended, respectively. (amounts in thousands,
except per share data)
<TABLE>
<CAPTION>
BALANCE SHEET MARCH 31, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Current assets........................................ $43,998 $15,326
Non-current assets.................................... 76,543 65,432
Current liabilities................................... 20,112 20,217
Non-current liabilities............................... 7,996 12,721
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1999 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Net revenues................................. $ 3,830 $ 4,542
Cost of revenues, exclusive of depreciation
and amortization........................... 1,556 1,759
Net loss applicable to common shares......... (8,373) (19,304)
Net Loss per Share:
Basic and diluted.......................... $ (0.53) $ (3.65)
</TABLE>
4. ACQUISITIONS OF OWNERSHIP INTERESTS IN AFFILIATED COMPANIES
INTERCOMMERCE CHINA, LLC
In January 2000, the Company obtained a 33.33% interest in InterCommerce
China, LLC ("ICC"). The Company issued 1,500,000 shares of its stock to
JenCom Digital Technologies in exchange for the ownership interest. The
shares were valued at $1.50 per share for a total investment in ICC of
$2,250,000. Additionally, the Company agreed to issue an additional 1,500,000
shares upon ICC's merger or conversion or consolidation into a publicly
traded entity in a transaction which involves $5,000,000 invested in ICC or a
$50,000,000 ICC market capitalization within a period of four years. ATM
Service, Ltd. has also entered into a ten-year exclusive operating agreement
to distribute and sell all merchandise, equipment, goods, and other products
that ICC receives, sells or distributes from or to the Peoples Republic of
China under agreements with the China Product TradeNet Center, a Chinese
government agency responsible for managing overstocked inventory in Chinese
state-owned factories throughout China. Pursuant to the operating agreement
of ICC, two of the Company's officers and directors each have the option to
purchase a 0.625% interest in ICC. The options become exercisable upon the
public issuance of any class of securities of ICC, at an exercise price equal
to 30% of the fair market value of the option interest as of the date of the
operating agreement.
THE INTRAC GROUP, LTD.
During the six month period ended March 31, 2000, the Company increased
the preliminary purchase price of The Intrac Group from $3,608,000 to
$5,008,000. The $1,400,000 increase related to additional liabilities assumed
that have been recorded as additional goodwill.
11
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes the Company's ownership interests in and advances
to Affiliated Companies accounted for under the equity method and cost method of
accounting. The ownership interests are classified according to applicable
accounting methods at March 31, 2000. Cost basis represents the Company's
original acquisition cost and advances less any impairment charges recorded by
the Company. (in thousands).
<TABLE>
<CAPTION>
TOTAL CARRYING VALUE
VALUATION COST MARCH 31, SEPTEMBER 30,
INVESTMENT ADVANCES ALLOWANCE BASIS 2000 1999
---------- -------- --------- ----- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Equity method:
WJC........................ $ -- $900 $(175) $725 $11 $364
Cost Method:
VideoNet................... -- 100 -- 100 100 100
One World Direct........... 675 -- -- 675 675 675
Vision..................... -- 850 (850) -- -- --
AsseTrade.................. 1,605 -- -- 1,605 1,605 1,605
InterCommerce China........ 2,250 -- -- 2,250 2,250 --
Other...................... 81 -- (81) -- -- --
------ ------ ------- ------ ------ ------
4,611 950 (931) 4,630 4,630 2,380
------ ------ ------- ------ ------ ------
Total...................... $4,611 $1,850 $(1,106) $5,355 $4,641 $2,744
====== ====== ======= ====== ====== ======
</TABLE>
The Company also has an investment in Entrade Inc. which it accounts for
under the cost method and is included in short-term investments (Note 3).
5. CUMULATIVE CONVERTIBLE DEBENTURES
In March 1999, the Company sold, through a private placement, $990,000 of
Series A 6% Cumulative Convertible Debentures ("Debentures") due and payable 12
months from the issue date. The debenture holders have the right to convert into
shares of common stock of the Company after the earlier of 1) the effective date
of a registration statement to be filed by the Company registering the resale of
the shares or 2) 120 days after the filing of such registration statement. The
right to convert expires if not so exercised. The conversion price is the lesser
of 1) a 35% discount to the five-day average closing bid price preceding the
conversion date, as defined or 2) the five-day average closing bid price of the
common stock immediately preceding the closing date of the debenture offering.
The conversion price is not less than $.25 per share and not more than $1.50 per
share.
The placement agent received cash of $129,000 and 98,950 shares of the
Company's common stock valued at $149,000 for the offering of the debentures.
The amounts paid to the placement agent were recorded as debt issuance costs and
are being amortized over the term of the debt agreement.
The Debentures provide for penalties if a registration statement to
register the shares to be issued upon conversion is not filed within 60 days of
the sale of the Debentures and declared effective within 90 days from the date
of filing due to the failure of the Company to exercise reasonable diligence.
Management believes it has exercised reasonable diligence, however, a
registration statement has not been filed. Therefore, penalties of $49,000 and
$150,000 have been accrued at March 31, 2000 and September 30, 1999,
respectively.
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WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On March 27, 2000, 14 of the 16 holders of the Debentures, representing
$865,000 in principal amount, have converted their Debentures and accrued
interest and penalties into an aggregate of 705,014 shares of the Company's
common stock in full satisfaction of the Company's obligations to those holders.
The Company has committed to file a registration statement covering the 705,014
shares within 60 days of the effectiveness of the Company's registration
statement on Form 10.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets and
liabilities are measured using the enacted tax rates in effect for the year in
which the temporary differences are expected to be recovered or settled.
Significant components of the Company's net deferred income taxes included the
deferred gain on sale of a subsidiary, the loss in an unconsolidated subsidiary,
the effect of purchased research and development and other intangibles and NOL
carryforwards.
At September 30, 1999, the Company has available net operating loss
carryforwards of approximately $2,430,000 which expire in the years 2012 to 2019
for federal purposes and 2004 and 2006 for state purposes. The timing and manner
in which the Company will utilize net operating loss carryforwards in any year,
or in total, may be limited by Section 382 of the Internal Revenue Code.
7. STOCKHOLDERS' EQUITY
COMMON STOCK OPTIONS
The Company has an equity compensation plan whereby the Company may grant
either incentive or nonqualified stock options to purchase shares of the
Company's common stock or restricted shares of the Company's common stock.
Twenty-five percent of the options are exercisable on the first anniversary of
the date of the participant's hire date. The additional amounts become
exercisable at varying rates from 6.25% on the last day of each quarter
thereafter. The Company has reserved 3,860,000 shares of its common stock to be
issued under the plan.
The incentive stock options may be granted at not less than the fair market
value of the shares at the date of grant, and the nonqualified stock options are
to be granted at no less than eighty-five percent of the fair market value of
the shares at the date of grant. The fair market value of the Company's common
stock is determined by the Board of Directors based on the trading price of the
Company's stock at the date of grant. Under APB No. 25, if the exercise price of
the Company's employee stock options equals or exceeds the fair value of the
underlying stock on the date of grant, no compensation expense is recognized.
The following table summarizes information about stock options outstanding
at March 31, 2000:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED REMAINING
PER SHARE NUMBER OF AVERAGE CONTRACTUAL LIFE
PRICES SHARES PER SHARE PRICE (YEARS)
--------- --------- --------------- ----------------
<S> <C> <C> <C> <C>
March 31, 2000 (Unaudited) $2.30 - $5.65 1,280,000 $4.14 9.7
</TABLE>
No options were exercisable at March 31, 2000.
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WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK OPTION ACTIVITY
A summary of stock option activity follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, 2000
(UNAUDITED)
-----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ ----------------
<S> <C> <C>
Outstanding at beginning of period 915,000 $2.69
Options granted 825,000 5.11
Options cancelled or expired (460,000) 2.69
--------- -----
Outstanding at end of period 1,280,000 $4.14
========= =====
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company has operating leases covering office space and office
equipment. At September 30, 1999, future minimum lease payments on these
noncancelable operating leases having initial or remaining terms of more than
one year are $198,000 for 2000, $197,000 for 2001, $140,000 for 2002, $142,000
for 2003, and $133,000 for 2004.
The Company also leases equipment under capital leases. Future minimum
lease payments on capital leases, net of imputed interest of $11,000, are
$37,000 for 2000 and $39,000 for 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. THE FOLLOWING DISCUSSION SHOULD
BE READ IN CONJUNCTION WITH OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES THERETO INCLUDED IN OUR REGISTRATION STATEMENT ON FORM 10,
REGISTRATION NO. 000-29479.
GENERAL
We currently intend to pursue the following plan of operations during the
next twelve months:
INCREASE REVENUES BY DEVELOPING OUR OPERATING COMPANIES. ATM Service, Ltd. and
The Intrac Group, Ltd. will continue to develop their customer bases through the
efforts of their present sales and marketing team. ATM Service, Ltd. will also
look to develop emerging markets through its own efforts or through
representatives. We will continue to develop NAIdirect.com through our ownership
in Real Quest, Inc. NAIdirect.com is presently developing its transactional web
site and intends to have revenues from the site in the next twelve months.
MONITOR AND REPORT ON OUR EQUITY INTEREST INVESTMENTS. We intend to hire
additional staff to monitor, report on and help develop companies in which we
have interests. This will allow us to help expand markets, services and products
and improve efficiencies in these businesses. It will also allow us to
constantly monitor our investments, giving us vital information for future
additional investments in those businesses.
SEEK OUT NEW INVESTMENT OPPORTUNITIES. We intend to seek out new investment
opportunities through our affiliated companies and be active in the business,
venture capital and Internet communities, using our cash, stock and/or Internet
expertise as our capital contributions to create joint ventures.
We anticipate our operating expenses will increase by $2,500,000 during
the current fiscal year over those incurred during our last fiscal year as a
result of implementing our plan of operations. Our actual operating and
financial results and actual plan of operations may differ materially from
the stated plan of operations. Factors which may cause a change from our
actual results or actual plan of operations vary but include, without
limitation, decisions of our board of directors not to pursue the stated plan
of operations based on its reassessment of the plan, changes in the Internet
business, the wholesaling and asset recovery business and general economic
conditions.
EFFECT OF VARIOUS ACCOUNTING METHODS ON OUR RESULTS OF OPERATIONS
The various interests that we acquire in the companies in which we own
interests are accounted for under one of three methods: consolidation, equity
method and cost method. The applicable accounting method is generally determined
based on our voting interest in a company in which we own an interest unless
significant minority rights are present.
CONSOLIDATION. Companies in which we directly or indirectly own more than 50% of
the outstanding voting securities and exercise control are generally accounted
for under the consolidation method of accounting. Under this method, a company's
results of operations are reflected within our Consolidated Statements of
Operations. Participation of other company stockholders in the earnings or
losses of a consolidated company is reflected in the caption "Minority interest"
in our Consolidated Statements of Operations. Minority interest adjusts our
consolidated results of operations to reflect only our share of the earnings or
losses of the consolidated company. ATM Service, Ltd., The Intrac Group, Ltd.,
and Real Quest, Inc. were our only consolidated companies through March 31,
2000. ATM Service, Ltd. was recorded using the equity method from December 1998
through July 23, 1999, when we acquired a controlling interest. From that date
through March 31, 2000, we have consolidated ATM Service, Ltd. and included the
detail of its results of operations in our consolidated results of operations.
EQUITY METHOD. Companies whose results we do not consolidate, but over whom we
exercise significant influence, are accounted for under the equity method of
accounting. Whether or not we exercise significant influence with respect to a
company depends on an evaluation of several factors including, among others,
representation on the company's board of directors and ownership level, which is
generally a 20% to 50% interest in the voting securities of the company,
including voting rights associated with our holdings in common, preferred and
other convertible instruments in the company. Under
15
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the equity method of accounting, the detail of a company's results of operations
are not reflected within our Consolidated Statements of Operations; however, our
share of the earnings or losses of the company is reflected in the caption
"Equity income (loss)" in the Consolidated Statements of Operations. During the
fiscal year ended September 30, 1999, we accounted for two companies under the
equity method of accounting, WWWX-Jencom, LLC, and ATM Service, Ltd., as
described in the previous paragraph. For the three and six month periods ended
March 31, 2000, we accounted for WWWX-Jencom, LLC under the equity method of
accounting.
The net effect of a company's results of operations on our net results of
operations is generally the same under either the consolidation method of
accounting or the equity method of accounting, as under both of these methods
only our share of the earnings or losses of a company is reflected in our net
results of operations in the Consolidated Statements of Operations.
COST METHOD. Companies not accounted for under the consolidation or the equity
method of accounting are accounted for under the cost method of accounting at
cost. Under this method, our share of the earnings or losses of these companies
is not included in our Consolidated Statements of Operations. As of March 31,
2000 we accounted for six companies under the cost method of accounting.
EFFECT OF VARIOUS ACCOUNTING METHODS ON THE PRESENTATION OF OUR FINANCIAL
STATEMENTS
The presentation of our financial statements may differ from period to
period primarily due to whether or not we apply the consolidation method of
accounting, the equity method of accounting or the cost method of accounting.
RESULTS OF OPERATIONS-THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO
MARCH 31, 1999
REVENUES
Revenues were $498,000 for the three months ended March 31, 2000 as
compared to revenues of $164,000 for three months ended March 31, 1999. The
increase in revenue was primarily due to the acquisitions of interests in ATM
Service, Ltd. and The Intrac Group, Ltd. Revenues for the three months ended
March 31, 1999 were principally derived from consulting services provided by our
Entrade subsidiary which we sold in September 1999.
For the three month period ended March 31, 2000, 27% of our revenue was
provided by liquidation and cost recovery services, 46% of our revenue came from
the purchase and resale of media, 10% of our revenue was provided by asset
management, 4% of our revenue came from consulting and 13% of our revenues came
from providing management services. For the three months ended March 31, 1999,
100% of our revenue was from consulting services.
COST OF REVENUE
Cost of revenue primarily consists of goods, freight, and warehousing of
inventory held for sale and media costs. Cost of revenue was $373,000 and
$106,000 for the three months ended March 31, 2000 and 1999, respectively. The
increase in cost of revenue was primarily due to the increase in revenues due to
the acquisitions of ATM Service, Ltd. and The Intrac Group, Ltd. The cost of
revenue for the three months ended March 31, 1999 consisted primarily of
salaries and fees paid to programmers and consultants.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of payroll and
related costs, professional fees, consulting fees, facilities cost and
marketing expenses. General and administrative expenses were $3.7 million and
$455,000 for the three months ended March 31, 2000 and 1999, respectively.
The increase was primarily due to an increase in the operations of our
affiliated companies, and the acquisitions of Real Quest, ATM Service, Ltd.
and The Intrac Group, Ltd. As the number of our employees grew to support our
operations and those of our subsidiary companies, our general and
administrative costs increased.
We expect selling, general, and administrative expenses to increase due to
the consolidated companies being included in our consolidated statement of
operations for the entire year and the expansion of support necessary for the
increase in our growth and the growth of our consolidated subsidiaries to
implement our plan of operations.
16
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DEPRECIATION AND AMORTIZATION
Amortization expense consists of amortization of goodwill. Depreciation
expense consists of depreciation of furniture, fixtures, machinery and computer
equipment. Depreciation and amortization expense was $390,000 and $75,000 for
the three months ended March 31, 2000 and 1999, respectively. The increase in
depreciation and amortization was primarily due to goodwill amortization
relating to The Intrac Group and Real Quest, Inc. acquisitions.
LOSS FROM OPERATIONS
During the three months ended March 31, 2000, we incurred a loss from
operations of $4.0 million compared with $3.5 million for the three months
ended March 31, 1999. The increased loss is primarily the result of increased
selling, general, and administrative expenses to support our operations
offset by a non-recurring, non-cash charge of $3 million related to the
write-off of acquired in-process research and development for the JenCom
projects.
IMPAIRMENT OF ADVANCES TO COMPANIES
We continually evaluate the carrying value of our ownership interests in
each of the companies in which we own interests for possible impairment based on
achievement of business plan objectives and milestones, the value of each
ownership interest in each company relative to carrying value, the financial
condition and prospects of each company, and other relevant factors.
At March 31, 2000, we did not have a need to adjust our valuation
allowances for advances made to affiliated companies. At March 31, 1999, we
evaluated the carrying value of an advance in the amount of $5,000 made to a
company in anticipation of acquiring an equity position in that company. Based
on our review of its business plan, we have recorded a 100% valuation allowance
of $5,000 representing the advances made.
INTEREST EXPENSE
Interest expense represents interest on our convertible debt and capital
lease obligations. Interest expense was $14,000 and $0 for the three months
ended March 31, 2000 and 1999, respectively.
EQUITY INCOME (LOSS)
Equity income (loss) represents our share of the earnings or losses of our
companies accounted for under the equity method. For the three months ended
March 31, 2000, and 1999, equity loss includes our share of the loss from
WWWX-Jencom of $165,000 and $135,000, respectively. Additionally, equity loss
for the three months ended March 31, 1999 includes $200,000 of stock
compensation paid for listings provided to ATM Service, Ltd. which we accounted
for using the equity method through July 23, 1999 when we aquired a controlling
interest.
AMORTIZATION OF DEBT COSTS
Deferred finance costs consist of expenses related to the issuance the
convertible debentures entered into in March 1999. Amortization of debt issuance
costs was $69,000 for the three months ended March 31, 2000. There was no
amortization of debt costs in the three months ended March 31, 1999.
INTEREST INCOME
Interest income represents interest on our cash and cash equivalents, which
are primarily invested in money market accounts. Interest income was $56,000 and
$6,000 for the three months ended March 31, 2000, and 1999, respectively.
INCOME TAX EXPENSE
Income tax benefit for the three months ended March 31, 2000 of $733,000
principally results from the income tax benefit of $1.4 million calculated at
federal statutory rates offset by an increase in our valuation allowance of
17
<PAGE>
$582,000 with respect to deferred tax assets of a subsidiary not consolidated
for income tax purposes for which realization is uncertain. There was a
provision of $1.3 million for income taxes offset by $1.3 million increase in
the valuation allowance for the three months ended March 31, 1999.
NET LOSSES
For the three months ended March 31, 2000, we had net losses of $3.4
million compared to net losses of $3.8 million for the three months ended
March 31, 1999.
RESULTS OF OPERATIONS-SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO MARCH 31, 1999
REVENUES
Revenues were $1.5 million for the six months ended March 31, 2000 and
$327,000 for the six months ended March 31, 1999. The increase in revenue was
primarily due to the acquisitions of interests in ATM Service, Ltd. and The
Intrac Group, Ltd. Included in revenues for the six months ended March 31, 1999,
were $327,000 of consulting revenue from entrade.com which we sold in September
1999.
For the six months ended March 31, 1999, substantially all of our revenue
was derived from consulting services predominantly provided by Entrade which
we sold to Artra in September 1999. For the six months ended March 31,
2000, the purchase and resale of media accounted for 48% of our revenue; asset
management provided 5% of our revenue; liquidation and cost recovery provided
39% of our revenue; consulting revenues provided 2% if our revenue; and
management services provided 6% of our revenues.
COST OF REVENUE
Cost of revenue primarily consists of goods, freight, and warehousing of
inventory held for sale and media costs. Cost of revenue was $1.3 million and
$215,000 for the six months ended March 31, 2000 and 1999, respectively. The
increase in cost of revenue was primarily due to the increase in revenues due to
the acquisitions of ATM Service, Ltd. and The Intrac Group, Ltd. The cost of
revenue for the six months ended March 31, 1999 consisted primarily of salaries
and fees paid to programmers and consultants.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of payroll and
related costs, professional fees, consulting fees, facilities cost and marketing
expenses. General and administrative expenses were $6.4 million and $533,000 for
the six months ended March 31, 2000 and 1999, respectively. The increase was
primarily due to an increase in the operations of our affiliated companies, and
the acquisitions of Real Quest, ATM Service, Ltd. and The Intrac Group, Ltd. As
the number of our employees grew to support our operations and those of our
subsidiary companies, our general and administrative costs increased.
We expect selling, general, and administrative expenses to increase due to
the consolidated companies being included in our consolidated statement of
operations for the entire year and the expansion of support necessary for the
increase in our growth and the growth of our consolidated subsidiaries to
implement our plan of operations.
DEPRECIATION AND AMORTIZATION
Amortization expense consists of amortization of goodwill. Depreciation
expense consists of depreciation of furniture, fixtures, machinery and computer
equipment. Depreciation and amortization expense was $764,000 and $75,000 for
the six months ended March 31, 2000 and 1999, respectively. The increase in
depreciation and amortization was primarily due to goodwill amortization
relating to The Intrac Group and Real Quest, Inc. acquisitions.
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WRITE-OFF OF PURCHASED RESEARCH AND DEVELOPMENT
In March 1999, we acquired projects in various stages of development from
JenCom Digital Technologies, Inc. The total cost of the acquisition was $3
million through the issuance of 2 million shares of our common stock. In
conjunction with the acquisition of these projects, we recorded a charge to
operations of $3 million for in-process research and development at the time of
the acquisition, representing the fair value of products under development that
had not reached technological feasibility at the time of the acquisition. We
transferred our ownership interest in these assets to our 50% owned joint
venture WWWX-Jencom, LLC.
The in-process technology acquired was four significant research and
development projects which the WWWX-Jencom continues to develop. The
technologies acquired are VuCam, a remote-control real-time streaming video
software; True Sound, a sound compression format; School Network Application, an
interactive web-based system designed to facilitate involvement in school
activities and the flow of school-related information; and Power Broker, a
communications and trading management program.
The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relates to the
completion of all planning, designing, and testing activities that are necessary
to establish that the product or service can be produced to meet its design
requirements, including functions, features, and technical performance
requirements. Future developments in technology, changes in other products and
service offerings, or other developments may cause us to alter or abandon our
plans for these projects.
LOSS FROM OPERATIONS
During the six months ended March 31, 2000, we incurred a loss from
operations of $6.9 million compared with $3.5 million in the six months ended
March 31, 1999. The increased loss is primarily the result of increased
selling, general, and administrative expenses to support our operations
offset by a non-recurring, non-cash charge of $3 million related to the
write-off of acquired in-process research and development for the JenCom
projects.
IMPAIRMENT OF ADVANCES TO COMPANIES
At March 31, 2000, we did not have a need to adjust our valuation
allowances for advances made to affiliated companies. During the six months
ended March 31, 1999, we evaluated the carrying value of advances totaling
$81,000 made to a company in anticipation of acquiring an equity position in
that company. Based on our review of its business plan, we have recorded a 100%
valuation allowance of $81,000 representing the advances made.
INTEREST EXPENSE
Interest expense represents interest on our convertible debt and capital
lease obligations. Interest expense was $35,000 and $0 for the six months ended
March 31, 2000 and 1999, respectively.
EQUITY INCOME (LOSS)
Equity income (loss) represents our share of the earnings or losses of our
companies accounted for under the equity method. For the six months ended March
31, 2000, and 1999, equity loss includes our share of the loss from WWWX-Jencom
of $353,000 and $135,000, respectively. Additionally, equity loss for the six
months ended March 31, 1999 includes $200,000 of stock compensation paid for
listings provided to ATM Service, Ltd. which we accounted for using the equity
method through July 23, 1999 when we aquired a controlling interest.
AMORTIZATION OF DEBT COSTS
Deferred finance costs consist of expenses related to the issuance of the
convertible debt agreements entered into in March 1999. Amortization of debt
issuance costs were $139,000 for the six months ended March 31, 2000. There was
no amortization of debt costs in the six months ended March 31, 1999.
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INTEREST INCOME
Interest income represents interest on our cash and cash equivalents, which
are primarily invested in money market accounts. Interest income was $139,000
and $11,000 for the six months ended March 31, 2000 and 1999, respectively.
INCOME TAX EXPENSE
Income tax benefit for the six months ended March 31, 2000 of $1.3 million
principally results from the income tax benefit of $2.6 million calculated at
federal statutory rates offset by an increase in our valuation allowance of $1
million with respect to deferred tax assets of a subsidiary not consolidated for
income tax purposes for which realization is uncertain. There was a provision of
$1.4 million for income taxes offset by $1.4 million increase in the valuation
allowance for the three months ended March 31, 1999.
NET INCOME (LOSS)
For the six months ended March 31, 2000, we had net losses of $6 million
compared to net losses of $3.9 million for the six months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations with a combination of cash
proceeds from the sale of our common stock, convertible debentures and our
Entrade Inc. subsidiary. Since inception, we have raised approximately $12.9
million from the sale of our common stock and approximately $1.5 million from
the sale of our convertible debentures. Proceeds from the sale of Entrade Inc.
stock generated cash proceeds of approximately $2.6 million.
Cash used in operations increased to approximately $4.2 million in the six
months ended March 31, 2000, compared to $122,000 in the six months ended March
31, 1999, as a result of our increased operating expenses which were only
partially offset by increased net revenues.
Cash used in investing activities decreased to approximately $423,000 in
the six months ended March 31, 2000, compared to $4.5 million in the six months
ended March 31, 1999, because in the six months ended March 31, 2000 we did not
acquire ownership interests in affiliated companies with cash, we did not
purchase technology, nor did we make advances to un-consolidated affiliated
companies, each of which we did in the six months ended March 31, 1999.
Consolidated working capital increased to $34.6 million at March 31, 2000,
compared to $24.7 million at September 30, 1999. The increase resulted primarily
from the increase in the value of our Entrade Inc. stock, partially offset by
the increase in deferred income taxes related to the increase in the value of
our Entrade Inc. stock and cash used in operations. Our ability to sell our
shares of Entrade is limited to 50,000 shares per month until September 23,
2000, after which our ability to sell may be limited by market considerations.
Excluding our marketable securities and related deferred income taxes, we
would have a working capital deficit at March 31, 2000, of $1.8 million.
Our operations are not capital intensive and we have not incurred
significant capital expenditures through March 31, 2000 and do not anticipate
significant capital expenditures in the remainder of fiscal 2000. There were no
material capital asset purchase commitments at March 31, 2000.
We have committed to directly provide up to $1,000,000 of funding to our
affiliated company, NAI Direct, Inc., to fund its operations, which we have
placed in an escrow account for this purpose. As of March 31, 2000, the balance
in this account was approximately $100,000. We have also committed to loan or
otherwise obtain $4,000,000 of additional funding for NAI Direct as required to
meet its working capital requirements before March 2001. We expect to fund this
obligation during the balance of calendar year 2000 from the proceeds of loans
against our Entrade Inc. stock, the sale of a portion or all of Entrade Inc.
stock or from future equity offerings, as discussed below.
Holders of $865,000 in principal amount of our 6% cumulative convertible
debentures elected to convert into common stock. If the remaining Debentures are
not converted into common stock in accordance with the terms of the
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Debentures, we will have to pay the remaining $125,000 principal amount plus
interest and related costs to the remaining holders.
We believe that cash and cash equivalents on hand at March 31, 2000, will
be adequate to fund our current operating needs and those of our consolidated
subsidiaries at current levels at least through June 2000. In order to continue
to implement our growth strategy of making additional investments in or advances
to our companies, we will need additional cash resulting from either the
proceeds of loans against our Entrade Inc. stock, the sale of a portion or all
of our Entrade Inc. stock or from future equity offerings. The value of our
Entrade Inc. stock has fluctuated during calendar year 2000 from approximately
$15.5 million to approximately $100 million.
We anticipate that we will be able to obtain loans from a financial
institution or brokerage firm using our Entrade Inc. stock as collateral. These
loans against our Entrade Inc. shares are expected to provide part of the funds
required to finance our expansion over the next 6 months, which we expect to
cost up to $15 million. In order to fund the difference, we will either sell a
portion of our Entrade Inc. stock or sell equity interests in ourself or our
subsidiaries. During that time, we do not anticipate that we or any of our
subsidiaries will have a positive cash flow from operations.
Our long-term plans call for the expansion of our operations and the
operations of our subsidiaries, as well as the acquisition of interests in new
businesses. In order to execute our plan over the next 6 to 24 months, we
anticipate that we will sell equity interests in us and our subsidiaries, in
private and public transactions. We anticipate that over the next 24 months
these equity fund-raising activities could range from $150 million to $200
million.
We cannot be sure that we will be able to borrow against our Entrade Inc.
stock, sell our Entrade Inc. stock at a desirable price or be able to obtain the
additional equity funding at an acceptable valuation or at all. Further, if we
sell a portion of our Entrade Inc. stock we would be subject to income taxes
based on the value of the Entrade Inc. stock at the time of the sale.
Additionally, the publicly-traded market for Entrade Inc.'s shares fluctuates
significantly, reducing our ability to attractively borrow against our Entrade
Inc. stock. If we cannot raise the additional funding, we may be forced to
curtail our planned growth strategy and reserve our cash resources to fund our
ongoing operations.
COST OF YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products were coded
to accept only two-digit entries in date code fields. Both before and after the
year 2000, these date code fields will need to accept four-digit entries to
enable the computer systems and software products to distinguish twenty-first
century dates from twentieth century dates. Any of our computer programs or
hardware that have date-sensitive software or embedded computer chips which have
not been upgraded to be compliant with the requirements of the year 2000
changeover may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to properly process transactions internally or in conjunction with external
computer systems on which we depend to provide our customers with our product
and services. Although we have not suffered from any of these types of events to
date, we may do so in the future.
OUR GENERAL READINESS
The year 2000 requirements affect the computers, software and other
equipment that we use, operate or maintain for our operations. Substantially all
of our software was developed after awareness of these issues became wide spread
in the software industry, such that our software was designed with reference to
preventing year 2000 related difficulties from arising. Nonetheless, we have
adopted an internal policy to ensure that our product remains year 2000
compliant. To the best of our knowledge, none of our internal systems or
equipment which are necessary for the conduct of our business has any defects,
errors or deficiencies relating to the year 2000 which are not capable of being
remedied.
COST OF OUR YEAR 2000 EFFORTS
We have incurred no direct expenses since our inception in connection with
this process, and do not expect to incur any significant additional expenditures
in this regard.
21
<PAGE>
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS
We believe that it is not possible to determine with complete certainty
that all year 2000 related problems affecting us have been identified or
corrected. The number of devices and systems that could be affected and the
interactions among these devices and systems are numerous. We believe that there
exists the potential for a significant number of operational inconveniences and
inefficiencies, and possible disputes and claims related to products or services
used or provided by us.
CONTINGENCY PLANS
We have taken measures to ensure that our internal systems and equipment
are year 2000 compliant for both hardware and software. All of our operating
systems on all critical servers have been upgraded, and all individual computers
and tools have been verified as year 2000 compliant. We perform a daily back-up
of all critical information. In the event of a failure, we estimate that the
information technology infrastructure necessary to run our internal business
operations could be restored.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This registration statement contains forward-looking statements that are
subject to a number of risks and uncertainties, many of which are beyond our
control, which may include statements about our:
- plans for and ability to hire additional personnel, including a full
time Chief Executive Officer;
- separating our office space and administrative and technology services
from entrade.com, Inc.
- business strategy, including transacting business on our web sites and
developing the companies in which we own interests;
- expectations for future expansion both in the U.S. and
internationally;
- anticipated growth in revenue;
- uncertainty regarding our future operating results;
- anticipated sources of funds to fund our operations; and
- plans, objectives, expectations and intentions contained in this
registration statement that are not historical facts.
All statements, other than statements of historical included in this
registration statement, regarding our strategy, future operations, financial
position, estimated revenues or losses, projected costs, prospects, plans and
objectives of management are forward-looking statements. When used in this
registration statement, the words "will", "believe", anticipate", "intend",
estimate", "expect", "project" and similar expressions are intended to identify
forward-looking statements, although not all forward- looking statements contain
such identifying words. All forward-looking statements speak only as of the date
of this registration statement. Although we believe that our plans, intentions
and expectations reflected in or suggested by the forward-looking statements we
make in this registration statement are reasonable, we can give no assurance
that theses plans, intentions or expectations will be achieved.
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are restricted from selling more than 50,000 shares our Entrade Inc.
stock per month until September 23, 2000. We are exposed to equity price risks
on our ownership interest in the common stock of Entrade Inc. which is a New
York Stock Exchange publicly traded security denominated in U.S. dollars. Since
March 31, 2000, the value of our Entrade stock has fluctuated from a low of
$15.5 million on May 19, 2000 to a high of $55.6 million on March 31, 2000. A
20% decrease in equity prices would result in an approximate $11.1 million
decrease in the fair value of our holdings of Entrade stock at March 31, 2000.
The value of our holdings may continue to fluctuate. We have not attempted to
reduce or eliminate our market exposure on our holdings.
We are exposed to interest rate risk on our holdings of money market
instruments. Historically, our investment income has not been material to our
financial results, and we do not expect that changes in interest rates will have
a material impact on the results of operations. A 1/2% increase in interest
rates would result in an approximate $25,000 increase in interest income.
We also have issued fixed-rate debt, which is convertible into our common
stock at a pre-determined conversion price. Convertible debt has characteristics
that give rise to both interest rate risk and market risk because the fair value
of the convertible security is affected by both the current interest rate
environment and the underlying price of our common stock. As of March 31, 2000,
$865,000 in principal amount of the debt has been converted into common stock.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Changes In Securities
On March 27, 2000, we closed on an exchange offer to the holders of the
Company's Series A 6% Cumulative Convertible Debentures. Pursuant to that
exchange offer, 14 of the 16 holders of the Debentures, representing $864,500 in
principal amount, accepted the Company's exchange offer to convert their
Debentures into an aggregate of 705,014 shares of the Company's common stock in
full satisfaction of the Company's obligations to those holders. We have
committed to file a registration statement covering the 705,014 shares within 60
days of the effectiveness of the Company's registration statement on Form 10.
On February 11, 2000, we issued warrants to purchase 500,000 shares of our
common stock to S. Allan Kline at an exercise price of $4.00 which is
exercisable for one year as consideration of his settlement of and release from
any claims for compensation associated with services he rendered.
On January 7, 2000, we issued 1,500,000 shares of our common stock, valued
at $2,250,000, or $1.50 per share, to JenCom Digital Technologies, Inc., in
consideration for a 33.3% interest in InterCommerce China, LLC.
The Company from time to time has granted options to purchase our common
stock to employees and directors. For the three months ended March 31, 2000,
the Company granted the following options to purchase shares of common stock:
On March 20, 2000, we issued options exercisable for 200,000 shares of our
common stock to Gerard T. Drumm, one of our employees, at an exercise price of
$5.15 per share.
On March 20, 2000, we issued options exercisable for 105,000 shares of our
common stock to Tim Sexton, one of our employees, at an exercise price of $5.15
per share.
23
<PAGE>
On March 20, 2000, we issued options exercisable for 75,000 shares of our
common stock to Michael Metzger, one of our employees, at an exercise price of
$5.15 per share.
On March 20, 2000, we issued options exercisable for 50,000 shares of our
common stock to Luc Morgan, one of our employees, at an exercise price of $5.15
per share.
On March 20, 2000, we issued options exercisable for 20,000 shares of our
common stock to Angela Gray, one of our employees, at an exercise price of $5.15
per share.
On January 14, 2000, we issued options exercisable for 250,000 shares of
our common stock to John Banigan, one of our employees, at an exercise price of
$5.65 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
* 4.1 Warrant to Purchase 500,000 shares of common stock of WorldWide Web NetworX Corporation
dated February 10, 2000, issued to Elminor Portfolio Corp. B.V.I.
*10.1 Amended and Restated Operating Agreement of WWWX-JenCom, LLC, dated as of January 7, 2000,
between WorldWide Web NetworX Corporation and JenCom Digital Technologies, Inc.
*10.2 Amended and Restated Operating Agreement of InterCommerce China, LLC, dated as of January 7,
2000, among WorldWide Web NetworX Corporation, International Commerce Exchange Systems,
Inc., Lester Wolff International Investment, Ltd., Henry Kauftheil, Peter Zhenxiang Lu, and
Uncas Holdings Limited Partnership.
*10.3 Distribution and Operating Agreement, dated as of January 7, 2000, between ATM Service,
Ltd., and Intercommerce China, LLC.
*10.4 Employment Agreement, dated as of January 14, 2000, between WorldWide Web NetworX
Corporation and John T. Banigan.
*10.5 Employment Agreement, dated as of February 14, 2000, between WorldWide Web NetworX
Corporation and Gerard T. Drumm.
*10.6 Employment Agreement, dated as of March 20, 2000, between WorldWide Web NetworX Corporation
and Allan M. Cohen.
*10.7 I Israel In-Country Representative Agreement dated March 2, 2000, between ATM Service, Ltd.,
and MG Capital, Ltd.
*10.8 ATM Contribution Agreement (Textron)
</TABLE>
24
<PAGE>
<TABLE>
<S> <C>
27.1 Financial Data Schedule
</TABLE>
- -------------
* Incorporated by reference from WorldWide Web NetworX Corporation's
registration statement of Form 10, Registration No. 000-29479.
REPORTS ON FORM 8-K
On May 4, 2000, we filed a Current Report on Form 8-K dated May 2, 2000, to
report under Item 5 several changes in the management of the Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 22, 2000 WORLDWIDE WEB NETWORX CORPORATION
(Registrant)
By: /s/ John T. Banigan
-------------------------------------
John T. Banigan
Chief Financial Officer & Treasurer
(Principal Financial and
Principal Accounting Officer)
(Duly Authorized Officer)
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION
- -------------- ------------
27.1 Financial Data Schedule
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000 AND THE UNAUDITED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-2000 SEP-30-2000 SEP-30-1999 SEP-30-1999
<PERIOD-START> OCT-01-1999 JAN-01-2000 OCT-01-1998 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-2000 MAR-31-1999 MAR-31-1999
<CASH> 2,629 0 0 0
<SECURITIES> 55,575 0 0 0
<RECEIVABLES> 910 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 59,292 0 0 0
<PP&E> 495 0 0 0
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 73,295 0 0 0
<CURRENT-LIABILITIES> 24,704 0 0 0
<BONDS> 125 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 41 0 0 0
<OTHER-SE> 48,532 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 73,295 0 0 0
<SALES> 1,539 498 327 164
<TOTAL-REVENUES> 1,539 498 327 164
<CGS> 1,304 373 215 106
<TOTAL-COSTS> 7,147 4,100 3,644 3,566
<OTHER-EXPENSES> 353 165 335 335
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 35 14 0 0
<INCOME-PRETAX> (7,300) (4,167) (3,937) (3,842)
<INCOME-TAX> (1,250) (733) 0 0
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (6,050) (3,434) (3,937) (3,842)
<EPS-BASIC> (.16) (.09) (.28) (.22)
<EPS-DILUTED> (.16) (.09) (.28) (.22)
</TABLE>
