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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
Commission File Number 0-29479
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WORLDWIDE WEB NETWORX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 58-2280078
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
521 FELLOWSHIP ROAD, SUITE 130
MT. LAUREL, NEW JERSEY 08054
(Address of principal (Zip Code)
corporate offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (856) 914-3100
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, Par
Value $0.001 Per Share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of shares of the Company's $0.001 par value
common stock held by non-affiliates as of December 29, 2000 was $3,444,449,
based upon the average bid and asked prices of our common stock on the OTC
Bulletin Board on December 29, 2000. Shares of common stock held by each
executive officer and director and by each person who beneficially owns more
than 5% of the outstanding common stock have been excluded in that such persons
may under certain circumstances be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination of affiliate
status for any other purpose.
As of December 29, 2000, there were 38,915,583 shares of common stock of
the registrant outstanding. The registrant's common stock currently trades on
the OTC Bulletin Board under the symbol "WWWX."
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DOCUMENTS INCORPORATED BY REFERENCE:
Certain exhibits to the registration statement on Form 10, as amended
(Registration number 000-29479), filed by the registrant with the Securities and
Exchange Commission on June 12, 2000 and the reports filed by the registrant
with the Securities and Exchange Commission on Form 8-K, on August 31, 2000 and
September 29, 2000, are incorporated by reference in certain portions of Item 14
of Part IV of this report.
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WORLDWIDE WEB NETWORX CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I PAGE
Item 1. BUSINESS...................................................1
WorldWide Web NetworX Corporation.......................1
Our Companies And Strategic Relationships...............3
ATMcenter.com...........................................7
Government Regulations and Legal Uncertainties
Foreign Laws and Regulations........................15
Investment Company Issues..............................16
Competition Facing the Companies in
Which We Own Interests..............................16
Competition in Attracting Companies....................17
Competition With Companies In Which We Own Interests...17
Intellectual Property and Other Proprietary Rights.....18
Employees..............................................18
Cautionary Statements - Risk Factors...................19
Item 2. PROPERTIES................................................25
Item 3. LEGAL PROCEEDINGS.........................................26
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................26
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................26
Item 6. SELECTED FINANCIAL DATA...................................28
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...................29
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................37
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............38
PART III
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................38
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........38
Item 11. EXECUTIVE COMPENSATION....................................40
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.........................................45
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............47
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K....................................52
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PART I
ITEM 1. BUSINESS
WORLDWIDE WEB NETWORX CORPORATION
GENERAL
WorldWide Web NetworX Corporation is a holding company that enters into
joint ventures with or acquires ownership interests in off-line
business-to-business companies in order to migrate the traditional business
transactions of those companies onto the Internet and new
business-to-business opportunities which improve the efficiency of
transactions, and that makes other opportunistic investments. We currently
have joint ventures with or have acquired ownership interests in eleven
companies. Although we still have ownership interests in four of these
companies, WWWX-Jencom, LLC ("WWWX-Jencom"), InterCommerce China, LLC
("InterCommerce China"), VideoNet Corporation ("VideoNet") and Vision
Technologies, Inc. ("Vision"), we have written down our interests in these
companies to zero because we have been unable to confirm that they presently
have any value. We currently derive revenues from two companies, ATM Service,
Ltd. ("ATM") and The Intrac Group, Ltd. ("Intrac"). ATM and Intrac
principally derive revenue by providing off-line inventory liquidation and
asset recovery services and from the purchase and resale of advertising,
merchandise or business services. However, ATM's web site has not, to date,
consummated any meaningful transactions or produced any meaningful revenue.
Please see the section entitled "We Cannot Assure You That ATMcenter.com Will
Conduct Internet Transactions."
As of September 30, 2000, we owned majority voting and economic interests
in the common stock of Intrac and ATM with the rights and in the percentages
stated in the following table:
Company Form of Interest Our Ownership Rights Our
Percentage
Interest
The Intrac Group, Ltd. Common Stock Voting and Economic 100%
ATM Service, Ltd. Common Stock Voting and Economic 52%
In November 2000, Warren Rothstein, our former Interim Chairman, President
and Chief Executive Officer, from September 23, 1999 to April 26, 2000,
relinquished his entire equity interest in ATM, which increased our percentage
interest in ATM to over 68%.
We also own interests ranging from 9% to 50% in three companies with the
rights and in the percentages stated in the following table:
Company Form of Interest Our Ownership Rights Our
Percentage
Interest
WWWX-Jencom, LLC LLC Interest Voting and Economic 50%
InterCommerce LLC Interest Voting and Economic 33%
China, LLC
Entrade Inc. Common Stock Voting and Economic 9%
As stated above, although we own 50% of WWWX-Jencom and 33% of InterCommerce
China, we have written these investments down to zero because we have been
unable to confirm that they have any value. For more information on
WWWX-Jencom and InterCommerce China, see the section entitled "WWWX-Jencom,
LLC and InterCommerce China, LLC." In addition, we have determined that the
decline in the market value of our investment in Entrade during fiscal 2000
is other than temporary and, accordingly, we have written this investment
down to its fair market value at September 30, 2000. See the section entitled
"Entrade."
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Lastly, we own interests of 5% or less in the common stock of New America
Network, Inc., One World Networks Integrated Technologies, Inc., Vision
Technologies, Inc., VideoNet Corporation, AssetTRADE.com, Inc. and Real Quest,
Inc.
LIQUIDITY
New management came to the Company on September 1, 2000 with the
appointment of Carol C. Knauff, a former AT&T executive, as our Chairman,
President and Chief Executive Officer. The immediate focus of the new management
team was on rationalizing our operating expenses and assessing the
value-creating potential of our affiliated companies. Their intent was to reduce
operating expenses, thereby conserving working capital, while evaluating the
investments the Company had previously made and seeking opportunities for new
investment.
Management has taken several steps to significantly reduce our expenses
going forward. These actions, which were initiated in late August and September
2000, included the reduction of employees, closing facilities that were no
longer needed, eliminating services that are not essential to our continuing
operations or to those of our majority owned or controlled affiliated companies,
ATM and Intrac, negotiating lower prices from vendors for services that are
still essential to our continuing operations, and renegotiating prior agreements
that required funding by the Company.
The specific actions that were taken by management are described in more
detail elsewhere in this annual report, but include the following:
- In late August and September 2000, we took a series of actions that
reduced the corporate workforce by 40% and our recurring payroll
expense by 22%.
- In September 2000, we determined to close our Mt. Laurel, New Jersey
office and began the transition of the general and administrative
functions performed at that location to our New York City office and
the process of searching for a subtenant for the Mt. Laurel
facility.
- Also in September 2000, we restructured our relationship with NAI
Direct, which eliminated our obligation to provide a substantial
amount of additional working capital to NAI Direct.
- In November 2000, ATM and Intrac each terminated its management
services contract with Warren Rothstein. Coincident with termination
of those contracts, we closed the ATM facility at Tarrytown, New
York and eliminated all of the jobs at that facility. The Tarrytown
facility has been sublet as of January 1, 2001.
Our operating results for the year ended September 30, 2000 do not
reflect substantial savings from the foregoing actions, because they were
initiated late in the fiscal year and there were implementation costs
associated with certain of these actions. However, management believes that
the impact on operating results in fiscal year 2001 will be material,
although the precise impact cannot be quantified at this time. These actions
have the cumulative effect, to date, of enabling the Company to continue to
operate through approximately May 2001. Had these actions not been taken,
cash and cash equivalents were expected to have been depleted by late
October 2000.
Management contemplates further reductions in general and operating
expenses. The cost of space that we no longer need or use will be reduced when
the Mt. Laurel facility has been sublet. There may also be additional payroll
reductions resulting from further job eliminations.
However, as of September 30, 2000, we have incurred recurring operating
losses and have a working capital deficiency. In addition, we will not be able
to meet our working capital needs after May 2001 or to satisfy our $3.6 million
of convertible secured debt with a cash payment upon maturity unless we are able
to raise additional capital. These conditions raise substantial doubt about our
ability to continue as a going concern. We will not be able continue to operate
beyond approximately May 2001
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unless we secure additional funding and we cannot assure you that we will be
successful in obtaining the necessary funding.
STRATEGY
If we are able to secure adequate financing, we plan to continue to enter
into joint ventures with or acquire ownership interests in off-line
business-to-business companies in order to migrate the traditional business
transactions of those companies onto the Internet; new business-to-business
opportunities which improve the efficiency of business transactions; and
makes other opportunistic investments. Our goal is to expand the markets,
services and products and improve the efficiencies of these businesses by,
among other things, initiating, increasing or changing their use of Internet
technology. We are continually searching for new opportunities to forge
relationships with companies which we believe would benefit from our business
strategy.
HISTORY
WorldWide Web NetworX Corporation was originally incorporated in Idaho in
July 1979 under the name "Gold Cache, Inc." We subsequently changed our name to
"Instra Corp" in August 1988. In July 1996, we changed our domicile to Delaware
by merging into a newly incorporated Delaware corporation named "Instra Corp."
On September 3, 1996, we filed a disclosure statement pursuant to Rule
15c2-11 of the Securities Exchange Act of 1934 with the National Association of
Securities Dealers, Inc. for the purpose of including our common stock, $0.001
par value per share, for trading on the OTC Bulletin Board, a quotation service
for securities which are not listed or traded on a national securities exchange.
Our common stock is currently listed on the OTC Bulletin Board under the symbol
"WWWX."
After a period of relatively little operating activity, we entered into
our current line of business in May 1998, when we acquired Keiretsu Corporation,
a privately-held Nevada corporation, incorporated on September 26, 1997
("Keiretsu"). The stockholders of Keiretsu exchanged all of their Keiretsu
shares for shares of our common stock. Our then current management resigned, the
management of Keiretsu became our new officers and directors, and we changed our
name to "WorldWide Web NetworX Corporation."
On June 12, 2000, we filed an amended registration statement with the
Securities and Exchange Commission on Form 10.
OUR COMPANIES AND STRATEGIC RELATIONSHIPS
The following is a description of our subsidiaries and the other companies
in which we have interests. For each of the following companies, we discuss, to
the extent applicable, the history of the company, joint venture partners,
traditional lines of business, corporate governance provisions and significant
agreements. See Corporate Governance for percentage ownership data.
ATM SERVICE, LTD. AND THE INTRAC GROUP, LTD.
ATM is an off-line business that assists companies to optimize their
return on excess assets, closeouts, discontinued merchandise, excess plant
capacity and production time and to develop new markets for their goods and
services. ATM also engages in media buying for its customers and clients. ATM's
customers include retailers, distributors, wholesalers, manufacturers (of
consumer products, industrial machinery, equipment and supplies, and commodities
such as petroleum products) and service providers such as printing companies,
telecommunications companies and companies engaged in the travel industry.
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Intrac is also an off-line business that, prior to our acquisition,
engaged in media buying for clients and purchased products and services for
trade credits (which are described in more detail below) which could be used for
or in connection with the purchase of advertising media and other products and
services.
For our fiscal year ended September 30, 2000, four of ATM and Intrac's
customers, Exxon/Mobil, Budget Rent A Car Corporation, State of Israel and
Candie's, each represented 10% or more of our consolidated revenues, totaling in
the aggregate 65% of our consolidated revenues. The loss of any one of these
four customers would be considered material.
HISTORY
In December 1998, we formed ATM with Warren Rothstein, who served as our
Interim Chairman, President and Chief Executive Officer until April 26, 2000, as
one of our directors until August 22, 2000 and as the Chairman of both ATM and
Intrac until October 19, 2000. Initially, WorldWide Web NetworX Corporation and
Mr. Rothstein each owned a 50% equity interest in ATM. In connection with the
formation of ATM, we agreed to issue 5,000,000 shares of our common stock to Mr.
Rothstein, subject to forfeiture. See "Our Stock Issuance Agreement with Warren
Rothstein." In July 1999, Mr. Rothstein relinquished his right to 1,000,000 of
these shares, as well as to a 26% interest in ATM, in order to enable us to use
those shares and a part of the 26% interest in ATM to acquire Intrac. Mr.
Rothstein later relinquished an additional 2,600,000 of his shares of our common
stock and the entire balance of his equity interest in ATM, in November 2000, in
connection with his resignation as the Chairman of ATM and Intrac.
In July 1999, we acquired Intrac, a privately held international marketing
and asset management organization through a merger with our wholly-owned
acquisition subsidiary, Intrac Acquisition Corporation, which later changed its
name to The Intrac Group, Ltd. Our acquisition subsidiary acquired Intrac from
its two stockholders, Thomas Settineri and Gary Levi, in exchange for (1)
1,000,000 shares of our common stock; (2) $1,500,000 in cash; and (3) 24% of
ATM's outstanding stock. The 1,000,000 shares of our common stock that were
issued to Messrs. Settineri and Levi were simultaneously released by Warren
Rothstein, reducing the number of shares issued to Mr. Rothstein and subject to
forfeiture to 4,000,000. The 24% interest in ATM that was issued to Messrs.
Settineri and Levi was also transferred by Warren Rothstein and, together with
an additional 2% of ATM released by Mr. Rothstein to us, reduced his interest in
ATM to 24%. We also agreed to provide Intrac with a $1,000,000 working capital
loan. We loaned this sum to ATM which, in turn, loaned this amount to Intrac.
In connection with our acquisition of Intrac, Thomas Settineri became
President and Chief Executive Officer of ATM and Intrac and Gary Levi became
Chief Operating Officer of ATM and Intrac. On September 23, 1999, Thomas
Settineri also became a director of WorldWide Web NetworX Corporation. Warren
Rothstein remained as Chairman of ATM and became Chairman of Intrac, thereby
making the management team for both companies identical.
On October 19, 2000, Warren Rothstein resigned as Chairman of ATM and
Intrac. Upon Mr. Rothstein's resignation, Thomas Settineri was elected Chairman
of ATM and Intrac and Gary Levi was elected President. On November 15, 2000, in
connection with Mr. Rothstein's resignation, he relinquished his entire equity
interest in ATM and an additional 2,600,000 shares of our common stock which,
together with the shares previously relinquished and shares sold by Mr.
Rothstein, reduced the number of shares of our common stock held by Mr.
Rothstein to 1,380,000.
BUSINESSES
ATM and Intrac offer the following services:
LIQUIDATION: In a simple liquidation, ATM purchases the assets of a
customer for cash. This method offers the customer the lowest form of
recovery for under-performing assets as the price ATM pays for the assets
is usually below what it cost the customer to acquire or produce the
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assets. ATM typically sells the assets at a price greater than the price
ATM paid for the assets to a buyer ATM has identified before actually
purchasing the assets.
PURCHASES AND RESALES OF MEDIA: Often, in connection with the utilization
of trade credits, which are described more fully below, Intrac purchases
and resells advertising media. Media is currently the predominant service
that Intrac provides to its customers to redeem trade credits. Such media
includes television air time, cable television air time, radio air time,
print media, outdoor advertising, special programming and other types of
media.
ASSET MANAGEMENT: In an asset management transaction, ATM acts as an agent
and remarkets a customer's assets for cash and receives a percentage of
the sale as a commission. This method generally provides a greater
recovery for customers than a liquidation because ATM is generally able to
sell the assets at higher prices by selling them selectively and over time
rather than selling the whole lot immediately. In some asset management
transactions, ATM also issues trade credits.
COST RECOVERY: In a cost recovery transaction, ATM buys the customer's
assets for cash and trade credits (a non-monetary form of currency which
are discussed in more detail below) at a price that is equal to the
customer's cost to acquire or produce the assets. A cost recovery
transaction is more complex than the previous two transactions and has
various aspects that are negotiated at the inception and during the
transaction.
The following list outlines the initial steps in a typical cost recovery
transaction:
- ATM buys the assets from the customer and then sells the assets for
cash.
- ATM pays a negotiated portion of the cash received to the customer
and ATM keeps the balance of the cash.
- Along with the cash payment, ATM or Intrac issues the customer trade
credits to make up the balance of the purchase price.
The following example demonstrates a reason a company may enter into a
cost recovery transaction:
A company has inventory in its warehouse that it cannot use or market at
the prices it expects and thus needs to dispose of this inventory. A
liquidation sale for cash would only bring 20% of the amount it cost the
customer to acquire or produce the inventory. In a cost recovery
transaction, by using a combination of cash and trade credits, ATM can
acquire the inventory for the same amount it cost the customer to acquire
or produce the inventory. The cash portion of the purchase price is
slightly less than 20% of the customer's cost to acquire or produce the
inventory and the trade credits make up the balance. The customer benefits
from this transaction by avoiding the loss associated with a liquidation
sale by recovering its costs in cash and trade credits that can be used in
the future to purchase goods and services it needs for its operations
using, typically, some combination of cash and trade credits as discussed
below. Recently our revenues have been concentrated in the media sales and
cost recovery areas, however, we do not expect that we are, or will be,
more dependent on any one of these services, or a group of any of these
services, in future periods.
TRADE CREDITS
The trade credits issued by ATM or Intrac represent the right to purchase
assets or services from their issuer and, in most cases, may only be used
if some portion of cash is also paid for the assets or services. A
customer can use its trade credits to purchase media, merchandise or any
business services that the customer would normally purchase on an all-cash
basis. Trade credits typically expire within two to five years after they
are issued, however, in certain cases, there is no specified
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expiration date for the trade credits issued by ATM. Many customers
negotiate to obtain trade credits that represent the ability to purchase
media, because they have a predetermined media budget and plan for each
fiscal year. The advertising and media services Intrac can obtain include
radio, television, print, Internet, and outdoor advertising, such as
billboards and bus stop shelters. Intrac also provides a wide range of
non-media trade credits which can include virtually any other asset or
business service a customer normally purchases on an all-cash basis.
The following is an actual example of such a transaction:
Intrac developed a five-year reciprocal trade program between an oil
company and a car rental company. The oil company had lubricant it desired
to sell and the car rental company required a steady supply of lubricant
for its rental fleet. The oil company agreed to sell to Intrac, for resale
to the car rental company, lubricant at fixed purchase prices, subject to
annual negotiation, for a five-year period. Intrac purchased the lubricant
for a combination of cash and trade credits and sold the oil to the car
rental company for cash. The oil company utilized the trade credits to
purchase advertising media and special events marketing from Intrac for a
purchase price of 30% trade credits and the remainder in cash.
In connection with each of the services described above, the merchandise
ATM purchases may remain in the custody of the seller until it is resold
or ATM may take care, custody, and control of the merchandise it purchases
from a customer. If ATM takes custody, ATM arranges for the transportation
and storage of the merchandise in an insured commercial warehouse facility
until it is resold. ATM may also manage the disposition process including
shipping, handling, billing, collecting, and remitting to customers the
proceeds of the sales made on their behalf.
ATM and Intrac's Relationship
Intrac and ATM are currently conducting their businesses in the following
manner:
- Intrac refers to ATM all new transactions involving the buying and
selling of assets and services and ATM refers to Intrac all
transactions involving the purchase and sale of media and uses
Intrac for the fulfillment of all of the trade credits issued by ATM
in connection with its transactions.
- ATM pays Intrac a fee for the fulfillment of the trade credits
issued by either ATM or Intrac in connection with ATM's transactions
equal to 110% of the costs incurred by Intrac, which include the
cost of purchasing the advertising media, assets or services
provided to ATM's customers in connection with their use of the
trade credits.
- Intrac also continues to provide fulfillment for the trade credits
that it issued prior to our acquisition of Intrac.
- Any cash paid by a customer in connection with the use of trade
credits that exceeds the 110% fee payable to Intrac is retained by
ATM.
- ATM provides billing and collection for Intrac, at no additional
cost.
- ATM and Intrac each pay one-half of the salary of Thomas Settineri,
the Chairman and Chief Executive Officer of both ATM and Intrac, and
Gary Levi, the President and Chief Operating Officer of both ATM and
Intrac.
Our management may determine to merge ATM and Intrac at some time in the
future.
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ATMCENTER.COM
ATM is an off-line business that assists companies to optimize their
return on excess assets, closeouts, discontinued merchandise, excess plant
capacity and production time. ATM uses the ATMcenter.com web site as a marketing
tool to list merchandise for sale and to elicit offers to buy or sell
merchandise. ATM and Intrac refer their existing customers to the ATMcenter.com
web site to obtain information about merchandise that is available for sale.
However, ATM consummates all of its transactions off-line and we expect that
this practice will continue.
INTERNATIONAL MARKETS
ATM owns a number of URLs, which are branded for use in different
countries and with various organizations. Each of these web sites is a
customized, one-page "front door" that links onto the ATMcenter.com web site.
The only difference between each country "front door" is the country's flag and
name on the "front door" web page. The web pages are used to recruit in-country
trading partners and distributors. ATM is planning to make available a Spanish
language version of the ATMcenter.com web site during fiscal year 2001. By using
these web sites in conjunction with its current and any future representatives
in foreign countries, the ATMcenter.com web sites can assist manufacturers,
retailers and industrial companies to promote their products to buyers around
the world.
ATMcenter.com and its related web sites offer a potentially cost-efficient
solution to promote the merchandise that companies have available for sale to a
larger market. By using translations of the ATMcenter.com web sites and
in-country representatives, ATM can market products to buyers and sellers within
a region or country to assist trade among such parties, and to encourage parties
outside that region or country to buy or sell products in that region or
country.
ATM's approach to marketing in countries other than the United States is
to recruit in-country representatives or master distributors that are
established companies in their respective regions. An in-country representative
may receive either the exclusive or the non-exclusive right to represent ATM in
a specific territory and does not pay any up-front fee to ATM. A master
distributor must pay an up-front fee to ATM and will receive the exclusive right
to represent ATM in a designated area. The amount of the up-front fee will
depend on the size of the territory and may be paid in either cash or in
products or services, or by a combination of these three forms of payment. A
master distributor may appoint sub-distributors within its territory, subject to
ATM's approval.
When their products are sold by ATM or through the ATMcenter.com site,
sellers will pay transaction fees to ATM. A potential buyer is not required to
pay any fee to utilize the ATMcenter.com service, but must register on the
website in order to purchase goods or services. An ATM representative will
receive a negotiated percentage of the net revenues that ATM receives from the
representative's territory, which will range from 25% to 30% depending upon the
investment made and the services to be performed by the representative. A master
distributor will receive 50% of any membership fees, annual renewals and
transaction fees paid by members enrolled by the master distributor in its
territory.
Currently ATM has agreements with the following companies:
MEXICO: CUARTO NIVEL, S.A. DE C.V.
ATM formed a joint venture with Cuarto Nivel, S.A. de C.V. ("Cuarto
Nivel"), a subsidiary of Operadora Protel, S.A. de C.V., ("Protel") in April
2000, to sell and promote the services provided by ATM in Mexico. In
consideration for Cuarto Nivel's interest in the joint venture, Cuarto Nivel
agreed to cause Protel to supply certain telecommunications services to the
joint venture, for distribution by the joint venture. Pursuant to the agreement
between the parties, ATM will share the net revenues derived from both the
distribution of Protel's telecommunications services and the sale of ATM's
services in Mexico. To date, ATM has not received any revenues from this joint
venture and we cannot assure you that ATM will receive any such revenues.
Howeever, ATM has already commenced the distribution of Protel's
telecommunication services between the United States and Mexico through Latino
Communications Corp.,
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an affiliate of Protel located in the United States, and ATM is entitled to
receive commissions in connection with the distribution of those services.
FUNDACION PRIMERO MEXICO
Intrac entered into an agreement, in March 1999, with Fundacion Primero
Mexico, a foundation for the development of social and welfare programs for the
citizens of Mexico, to act as the exclusive on- and off-line remarketer of the
assets donated to the Fundacion by Mexican corporations. The agreement has an
initial 24-month term which automatically extends each year for an additional
one year term until terminated by either party. The donated assets may include
consumer products and services, commodities, real estate, industrial equipment,
vehicles, construction services, building equipment/materials, or any other
assets. On April 22, 1999, the agreement was amended in order to add ATM as a
party to the contract.
The agreement with the Fundacion requires that ATM and Intrac remarket
donations on-line for each donating company. In return, ATM and Intrac will
provide acceptable products and services that the Fundacion requires for the
people of Mexico. The Fundacion has received donations of goods and ATM
is in the process of marketing those goods. However, to date, neither ATM nor
Intrac has received any revenues from their relationship with Fundacion Primero
or ATM's related web sites and we cannot assure you that either ATM or Intrac
will receive any such revenues.
FREETRADEZONES.COM
ATM entered into an agreement, in July 2000, with Juan Torrents & Assoc.,
whereby the parties agreed to form a joint venture known as FreeTradeZones.com.
The purpose of the joint venture is to use the ATM e-commerce platform to
provide asset management and disposition services, bulk and specific sales of
products and services, both off-line and on-line, auction services and other
transactions, such as trade and barter, to companies located within the Free
Trade Zones. ATM advanced $12,500 to the joint venture, in November 2000, to
cover the initial costs of travel and expenses of implementation. This
advance is to be repaid from the first funds available to the joint venture.
Representatives of both ATM and Juan Torrents & Association made a
presentation of ATM's services to the Free Trade Zone World Federation, in
Geneva, Switzerland, in September 2000. ATM has a 62% equity interest in the
joint venture and the right to receive 50% of any distributions of available
cash by the joint venture. However, to date, ATM has not received any
revenues from the joint venture and we cannot assure you that either ATM will
receive any such revenues. As of September 30, 2000 FreeTradeZones.com had
not begun operations nor did it have any assets or liabilities.
UNITED STATES HISPANIC CHAMBER OF COMMERCE FOUNDATION, INC.
ATM entered into an agreement, on September 25, 2000 with the United
States Hispanic Chamber of Commerce Foundation, Inc. (the "Foundation"),
whereby ATM will remarket and sell merchandise, goods, services and other
types of non-cash assets donated to the Foundation by various corporations
and receive a sales commission equal to 20% of the sale proceeds, as well as
reimbursement for the remarketing expenses incurred by ATM. The agreement has
an initial 12-month term which automatically extends each year for an
additional one year term until terminated by either party. The parties have
approved the form of solicitation that ATM will use to solicit donations to
the Foundation and expect to commence the solicitation process during the
first quarter of 2001. However, to date, ATM has not received any revenues
from its relationship with the Foundation and we cannot assure you that it
will receive any such revenues.
SALES AND MARKETING
ATM has a sales and marketing staff that consists of five employees and
one independent contractor. Two of ATM's employees, Thomas Settineri and Gary
Levi, also work for Intrac. ATM's sales and marketing staff identifies potential
transactions and finds buyers for the assets and services offered by ATM. The
sales and marketing staff employed by ATM are compensated with a base salary and
a commission of between 5% and 10% of ATM's gross profit on any transactions in
which the staff participated on ATM's behalf. Intrac has only two employees,
Thomas Settineri and Gary Levi, who are
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shared with ATM, and retains the services of one media purchasing consultant and
a media assistant. In addition, Intrac uses the services of other media
purchasing businesses to service its trade credits fulfillment and media
purchasing business. ATM also has informal arrangements with representatives in
the United States and abroad who bring potential transactions to ATM for a
negotiated percentage of the gross profit of the transaction, typically between
5% and 25% depending on the amount of effort expended and cost to the
representative. In addition, ATM has exclusive marketing agreements with
representatives in Mexico discussed in detail under the heading
"Business--International Markets." Currently, approximately 90% of ATM and
Intrac's transactions are generated from ATM's in-house sales and marketing
team.
FREED MAXICK ABL SERVICES, INC.
In July 2000, ATM entered into an agreement with Freed Maxick ABL
Services, Inc. ("Freed Maxick"), a professional services firm that provides
various accounting, auditing and related services to its clients. Pursuant to
this agreement, Freed Maxick agreed to endorse and promote the services provided
by ATM, and ATM agreed to offer and provide services to Freed Maxick's clients,
including asset management and inventory control, inventory liquidation and
disposition, trade finance and marketing (both domestic and international),
recoupment of non-performing receivables on a trade and/or cash basis,
end-to-end solutions through trade negotiations for the recovery of undervalued
or depreciated assets, e-commerce initiatives and other services. Freed Maxick
will receive a share of the net profits derived by ATM from each transaction
with a client of Freed Maxick or any other client introduced to ATM by Freed
Maxick. Although ATM has already had preliminary discussions with a number of
Freed Maxick clients, to date, ATM has not consummated transactions with any
Freed Maxick client or received any revenues from its relationship with Freed
Maxick, and we cannot assure you that it will receive any such revenues.
ATMCENTER.COM WEB SITE AND SOFTWARE
ATM currently uses certain software owned by entrade.com, Inc., a
subsidiary of Entrade Inc., to operate ATMcenter.com and its related web
sites. This software is described in more detail in "Business -Entrade Inc."
OUR STOCK ISSUANCE AGREEMENT WITH WARREN ROTHSTEIN
In connection with the formation of ATM Service, Ltd., Warren Rothstein
received 4,000,000 shares of our common stock, valued at $4,000,000, which were
subject to forfeiture. The Stock Issuance Agreement provided that, in each
fiscal quarter commencing with the fiscal quarter ended March 31, 1999, if Mr.
Rothstein provided listings of merchandise for ATMcenter.com with a retail value
of $1,250,000 or more, 200,000 of his shares would be automatically released
from the forfeiture provision of the agreement. Our agreement with Mr. Rothstein
does not specify who determines whether the required listings have been
provided. Mr. Rothstein provided us with evidence of listings on ATMcenter.com
in excess of $1,250,000 in each of the seven fiscal quarters commencing March
31, 1999 and 1,400,000 shares were, therefore, released from the forfeiture
provision. Mr. Rothstein relinquished his rights to the remaining 2,600,000
shares and to his entire equity interest in ATM, in November 2000, in connection
with his resignation as the Chairman of ATM and Intrac.
CORPORATE GOVERNANCE
We own approximately 68% of ATM and 100% of Intrac, and Thomas Settineri
and Gary Levi collectively own the remaining 32% of ATM's capital stock. The
boards of directors and executive officers of the two companies are identical.
ATM SHAREHOLDERS AGREEMENT
The relationship among WorldWide Web NetworX Corporation, ATM and ATM's
individual shareholders is governed by a shareholders agreement
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dated as of September 30, 2000. The shareholders agreement provides for a
five-member ATM board of directors consisting of three directors appointed by
us and one director each appointed by Settineri and Levi. We have designated
Carol C. Knauff, our Chairman, President and Chief Executive Officer, R.
Bruce Richardson, our Chief Financial Officer, and Glenn Starr as our
appointed directors. Thomas Settineri and Gary Levi are the other two
directors.
In addition, the ATM shareholders agreement provides as follows:
TRANSFERS OF ATM SERVICE, LTD. SHARES: No stockholder may encumber his or
its shares or transfer his or its shares without the unanimous consent of
ATM's board of directors, except for transfers to affiliates or for estate
planning purposes. The individual stockholders have the right to put a
portion of their shares to ATM upon death. The individual stockholders
also have tag-along rights on any sale of stock by us that constitutes
more than 50% of the outstanding stock of ATM. The board of directors of
ATM may compel the stockholders to sell and cooperate with the sale of ATM
to a third party.
FUNDING: In July 1999, we loaned $3.5 million to ATM, with interest
payable at the minimum rate permissible under the Internal Revenue Code,
$2.5 million of which was used to fund ATM's operations and $1 million was
loaned by ATM to Intrac to fund Intrac's operations. The principal and
accrued interest are due upon the earlier of 10 years, an initial public
offering of the securities of ATM or the receipt of $15 million in
financing for ATM. From June through August 2000, we loaned ATM an
additional $548,000, of which $83,000 was payable on or before September
16, 2000 and the balance is payable on or before August 24, 2003, with
interest. To date, only $10,000 has been repaid by ATM with respect to
the $83,000 loan that was payable on or before September 16, 2000. We
also made payments on behalf of ATM and provided ATM with services
totaling $165,000 during the period from December 1998 through
December 31, 2000, all of which remain unpaid. Our loans and advances to
ATM are secured by ATM's interest in AssetControl.com, LLC. See
"ASSETCONTROL.COM, LLC." These amounts are eliminated in our consolidated
financial statements.
ASSETCONTROL.COM, LLC
On March 10, 2000, ATM joined with Textron Financial Corporation, a
division of Textron, Inc., Entrade Inc. ("Entrade") and Safeguard Scientifics,
Inc. ("Safeguard") to form AssetControl.com, LLC ("AssetControl"), which is a
Delaware limited liability company that is owned 47.5% by Textron, 38% by
Entrade, 9.5% by ATM and 5% by Safeguard. ATM acquired its interest in
AssetControl in consideration for a contribution of its know-how and ATM did not
contribute any cash to the company. AssetControl provides asset disposition
services for excess industrial equipment, machinery and other assets, either on
its own or through companies with whom it contracts who will share the revenues
derived from the sale of such equipment, machinery and other assets.
ATM and Entrade have orally agreed that, although ATM owns only 9.5% of
AssetControl, ATM will receive 50% of the aggregate amount of any distributions
by AssetControl.com to Entrade and ATM. The AssetControl.com website became
operational at the end of April 2000. However, to date, there have been no
distributions by AssetControl and we cannot assure you that there will be any.
The operating agreement of AssetControl provides that each member must
contribute its proportionate share of any capital call upon the members and
that, if any member fails to contribute its share, its interest in AssetControl
will be diluted. We will be unable to pay our 9.5% share of any capital call
unless we can obtain additional financing and we cannot assure you that we will
be able to do so. Accordingly, if there is a capital call, our interest in
AssetControl may be diluted, based upon the amount of the capital call and the
valuation of AssetControl at the time of the capital call. We are unable to
estimate the extent of any possible dilution at this time.
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ATM has pledged its 9.5% interest in AssetControl to us as collateral for
the repayment of the loans and advances that we made to ATM. Even though one of
the loans that we made to ATM is currently in default, we have elected not to
exercise our rights with respect to the collateral for this and our other loans
and advances to ATM at this time.
NEW AMERICA NETWORK, INC. AND REAL QUEST, INC.
We currently own 4% of New America Network, Inc. and 1% of Real Quest,
Inc.
HISTORY AND BUSINESS
On September 23, 1999, we entered into a joint venture with New America
Network, Inc. to form NAI Direct, Inc. ("NAI Direct") and develop NAIdirect.com,
a web site that would permit corporate, governmental and institutional users, as
well as local business operators and private investors, to obtain commercial
real estate services on-line, either directly or through New America Network
member brokers or third parties. New America Network is a global system of real
estate service providers, branded as "New America International" and "NAI," that
provides brokerage, financial and investment services, property/facilities
management and strategic advisory services to the office, industrial and retail
sectors.
NAI Direct has modified and enhanced a software application called
REALTrac(TM) for use on NAIdirect.com. REALTrac(TM) is a proprietary commercial
real estate transaction management software developed by New America Network for
internal use. NAI Direct will pay New America Network a royalty fee equal to 5%
of NAI Direct's monthly gross revenue for the use of REALTrac(TM). Using
REALTrac(TM), NAIdirect.com will allow users to track transactions with bulletin
board, periodic reporting, contact listing and key document access features. The
transaction management software has been modified for use on NAIdirect.com. NAI
Direct is in the process of incorporating NAI broker information on the web site
and negotiating license agreements with third-party providers of information for
use by the commercial real estate community, including demographic,
environmental and comparable sales data. NAIdirect.com became operational in
June 2000. NAI has agreed to place all of its commercial real estate listings on
NAIdirect.com and to encourage all NAI member brokers to place all of their
local commercial real estate listings on NAIdirect.com. The site also offers a
researched database so that brokers and owners can instantly access potential
tenants, investors or lenders by delivering information to them electronically.
It will also be designed to offer large investment properties via privately
negotiated sales or auction. We anticipate that NAI Direct will receive revenue
from a variety of sources which will include transaction fees, property
marketing and hosting fees, referral fees from providers of related real estate
services, royalty fees from on-line sales of market and demographic data,
premium fees for auction services, and advertising fees.
Our ownership in NAIdirect.com was initially held through two
subsidiaries: Real Quest, Inc. and NAI Direct. In exchange for an 80% ownership
interest in Real Quest, Inc., ("Real Quest") we issued 750,000 shares of our
common stock to New America Network, Inc. and delivered an additional 750,000
shares in escrow to be transferred to New America Network, Inc. upon NAI Direct
earning cumulative revenue of $2 million within 24 months of the launch of the
NAIdirect.com web site. We also provided a $1 million working capital loan to
NAI Direct bearing interest at the minimum rate permissible under the Internal
Revenue Code and due at the earlier of 10 years from the date of issuance or the
occurrence of any of the following events: (1) the issuance by NAI Direct of a
note or other evidence of indebtedness (or the incurrence by NAI Direct in any
other manner of any indebtedness) or of a security or other instrument
evidencing an ownership interest in, or convertible into, or otherwise linked
to, an ownership interest, in NAI Direct, or the sale by NAI Direct of all or a
material part of its assets, whether or not such assets are thereafter leased by
NAI Direct or any affiliate of NAI Direct which, in each case, makes available
to NAI Direct, without material conditions that remain unsatisfied, funds equal
to or in excess of $5,000,000 or (2) a bona fide, underwritten public offering
of securities of NAI Direct, the net proceeds of which to NAI Direct are greater
than $5,000,000. In addition, we agreed to provide up to $4,000,000 in
additional working capital to NAI Direct within 18 months of September 23, 1999
in the form of a loan or otherwise, of which we funded $1,090,000.
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In September 2000, we restructured our relationships with NAI Direct, Real
Quest and New America Network, Inc. On that date, we loaned an additional
$250,000 to NAI Direct, which was guaranteed by New America Network. This loan
is convertible into shares of common stock of New America Network, at our
option, at a price equal to the lesser of $5 per share or the then-current
market value. In addition, pursuant to a Stock Purchase Agreement, dated as of
September 25, 2000, we (1) acquired a 4% equity interest in New America Network;
(2) were released from our obligation to provide an additional $2,650,000 in
working capital to NAI Direct; (3) transferred to New America Network the notes
evidencing the approximately $2.1 million in prior loans that we made to NAI
Direct and 79 of our 80 shares in Real Quest; and (4) agreed to cause the
escrowed 750,000 shares of our common stock to be released from escrow and
delivered to New America Network.
CORPORATE GOVERNANCE
We own 1% of Real Quest and 4% of New America Network, Inc. (which owns
the remaining 99% of Real Quest), and Real Quest owns 80% of NAI Direct. The
remaining 20% of NAI Direct is owned by the executive officers and employees of
NAI Direct and New America Network, including Gerald C. Finn, the Chief
Executive Officer of New America Network, and Jeffrey Finn, the President and
Chief Operating Officer of New America Network. New America Network is seeking
additional financing. Our interest in New America Network may be diluted if it
issues additional stock in order to obtain financing. We are unable to estimate
the extent of any possible dilution at this time.
The September 2000 Stock Purchase Agreement with New America Network also
provides for the following:
SIX MONTH LOCK-UP: For a period of six months commencing September 25,
2000, New America Network may not sell more than 325,000 shares of our
common stock without our prior written consent, which may not be
unreasonably withheld.
RIGHTS OF FIRST REFUSAL: If New America Network receives an offer to
purchase all or any portion of its Real Quest shares, or if Real Quest or
the other principal shareholders of NAI Direct receive an offer to
purchase all or any portion of their NAI Direct shares, within the
two-year period subsequent to September 25, 2000 and prior to the
registration of any of the shares of such company under the Securities Act
of 1933, which New America Network or Real Quest or the other principal
shareholders of NAI Direct desire to accept, it or they must first offer
the shares to us on the same terms.
TAG-ALONG RIGHTS: If Gerald C. Finn and/or Jeffrey Finn, the majority
shareholders of New America Network, receive an offer for all or any
portion of their shares of New America Network, which they desire to
accept, they must give notice of such offer to us and permit us to include
our shares of New America Network, on a pro rata basis, in the proposed
sale on the same terms.
WWWX-JENCOM, LLC AND INTERCOMMERCE CHINA, LLC
We own a 50% equity interest in WWWX-Jencom, LLC ("WWWX-Jencom")(see Item
7. "Certain Relationships and Related Transactions-D.H. Blair and JenCom
Digital.") and a 33-1/3% equity interest in InterCommerce China, LLC
("InterCommerce China"). However, we have written off our investments in
WWWX-Jencom and InterCommerce China, LLC because we have been unable to confirm
that our interest in either of these entities presently has any value.
HISTORY
In February 1999, we entered into an acquisition agreement to purchase
video technology and other projects in various stages of development from JenCom
Digital Technologies, LLC ("JenCom Digital"). In March 1999, we formed
WWWX-Jencom with JenCom Digital and contributed the purchased projects to
WWWX-Jencom to establish a joint venture for the commercialization of JenCom
Digital's
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technology projects. Our investment with JenCom Digital was a condition to the
Stock Purchase Agreement between us and D.H. Blair Investment Banking Corp.,
which served as placement agent in connection with a series of our private
placements.
Under our acquisition agreement with JenCom Digital, we issued 2,000,000
shares of our common stock, valued at $3,000,000, to JenCom Digital in
exchange for the various projects in development by JenCom Digital that we
contributed to WWWX-Jencom. In addition, in March 1999, we loaned $900,000 to
JenCom Digital, without interest, which JenCom Digital assigned to
WWWX-Jencom. The loan was to be repaid at the earliest of (1) ten years from
March 15, 1999, (2) a third-party investment in WWWX-Jencom of $10,000,000 or
(3) the sale of any asset by WWWX-Jencom having proceeds exceeding $5,000,000.
In December 1999, we executed an agreement with JenCom Digital, its
parent International Commerce Exchange Systems, Inc. ("ICES") and others in
which JenCom Digital agreed to enter into a new operating agreement which
would provide for sharing management control of WWWX-Jencom with us. In
consideration of this agreement, we agreed to file a registration statement
for JenCom Digital's 2,000,000 shares of our common stock before May 17,
2000, although we have not yet done so. JenCom Digital received an additional
1,500,000 shares of our common stock upon the execution and delivery of the
operating agreement for InterCommerce China, LLC, described below.
In connection with our agreement with JenCom Digital, described above, we
agreed with International Commerce Exchange Systems, Inc., Henry Kauftheil,
InterCommerce China, a joint venture between JenCom Digital and other parties,
that we would be issued 33.33% of InterCommerce China's equity.
We have been advised by Mordecai Gelber, General Counsel to ICES, that
WWWX-JenCom has discontinued the development of its technology products, due
to lack of funds, and that both WWWX-Jencom and InterCommerce China are
currently inactive. We have written down our investment in these companies to
zero because we have been unable to confirm that they presently have any
value.
ENTRADE INC.
On February 23, 1999, we entered into a merger agreement with Artra Group
Incorporated, a publicly-traded New York Stock Exchange listed company, in which
we agreed to sell our Entrade subsidiary to Artra. We completed the sale on
September 23, 1999. The transaction resulted in Entrade surviving as the parent
of Artra and succeeding to Artra's New York Stock Exchange listing under the
symbol ETA. As a result of the transaction, on September 23, 1999, we owned 1.8
million shares, or approximately 15%, of Entrade's common stock and received
$1.3 million in cash following the execution of the merger agreement.
Additionally, we received $1.3 million in funding for the operations of Entrade
from Artra for the period from February 28, 1999, through September 23, 1999.
Since that time, the percentage of our ownership interest in Entrade has been
diluted because Entrade has issued stock to other investors and because we sold
225,000 of our Entrade shares. Under the merger agreement, for as long as our
percentage ownership of Entrade common stock is greater than five-percent,
Entrade must use its best efforts to cause our designee, if acceptable to the
Entrade board of directors, to be elected to the Entrade board of directors. On
October 7, 2000, our board of directors designated Carol C. Knauff as our
representative on the Entrade board of directors. However, to date, Ms. Knauff
has not been seated on Entrade's board.
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The quoted market value of our Entrade shares was $6,005,000 at September
30, 2000 and subsequently reached a low of $787,500 at December 26, 2000. We
have determined that the decline in the market value of our investment in
Entrade is other than temporary and, accordingly, we have written the investment
down to a new cost basis of $3.8125 per share, its fair market value at
September 30, 2000, which has been reflected as a realized loss in our financial
statements as of September 30, 2000.
Pursuant to the merger agreement, Entrade agreed to cause our Entrade
shares to be registered as promptly as practicable, however, Entrade has failed
to do so. As a result of Entrade's failure to register our Entrade shares, we
were unable to borrow against these shares prior to August 2000 in order to
raise funds for additional working capital and acquisitions. The Entrade shares
collateralize our $3.6 million convertible loan. (See Item 5.) Management is
presently evaluating its claims against Entrade as a result of its failure to
cause our Entrade shares to be registered in a timely manner.
On October 31, 2000, Entrade announced that it intends to focus on asset
disposition through its subsidiary, Nationwide Auction Systems, a 20-year-old
land-based auction company with six permanent facilities throughout the United
States, and Entrade has subsequently closed its only software development
facility located at Waterloo, Canada.
ENTRADE.COM SOFTWARE
entrade.com, Inc. is a subsidiary of Entrade Inc. entrade.com has
historically been a business-to-business e-commerce solutions provider which
owns proprietary e-commerce and online auction technologies and has licensed and
utilized these technologies to create online business communities and virtual
distribution centers for the purchase and sale of corporate assets, including
inventories, products and services.
ATM has a perpetual non-exclusive license to use the Entrade Transactional
Software owned by entrade.com as the operating system underlying the
ATMcenter.com web sites pursuant to a software license agreement, dated
September 23, 1999. In consideration for the license, ATM issued $1,500,000 of
trade credits to entrade.com, which it can use to acquire products and services
from ATM for a combination of cash and trade credits equal to the value of such
products and/or services. As entrade.com purchases products and services from
ATM using its trade credits, the trade credits will be reduced by the amount of
the trade credits utilized in each transaction. To date, entrade.com has not
used any of its trade credits.
Pursuant to the foregoing software licensing agreement, entrade.com agreed
to provide hosting, maintenance and support services for the ATMcenter.com web
sites, however, entrade.com no longer provides these services. We have copies of
the source code and object code for the Entrade Transactional Software and have
made arrangements with Web Instinct, Inc. for the hosting of the ATMcenter.com
web sites and are in the process of making other arrangements for maintenance
and support services as well.
SALE OF ENTRADE INC.
In connection with our sale of Entrade, our then Chairman, President and
Chief Executive Officer, Robert Kohn, entered into an employment agreement with
Artra Group Incorporated which was subsequently assigned to entrade.com. At the
closing of the sale, on September 23, 1999, Mr. Kohn resigned from all of his
positions with us. Mr. Kohn subsequently resigned his position with entrade.com
in May 2000.
ASSETTRADE.COM, INC.
In April 1999, we acquired a 2% ownership interest in the non-voting
common stock of AssetTRADE.com, Inc. ("AssetTRADE") in exchange for 750,000
shares of our common stock valued at $1,125,000. At September 30, 2000 our
shares of AssetTRADE represent approximately 1.2% of AssetTRADE, on a
fully-diluted basis. Our interest has subsequently been diluted and is currently
less than
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1%. AssetTRADE provides traditional off-line and on-line asset recovery,
disposal and marketing for industrial machinery and equipment.
In September 2000, AssetTRADE reported over $10 million in sales during
its first four months of operation.
ONE WORLD NETWORKS INTEGRATED TECHNOLOGIES, INC.
We own 1,661,090 shares of the common stock of One World Networks
Integrated Technologies, Inc. ("One World"), representing approximately 2.6% of
the issued and outstanding capital stock of One World on a diluted basis. One
World operates a web site, oneworldlive.com, which it uses as a gateway for
consumers to purchase products, find current information on a variety of
subjects and interact directly with celebrities.
VISION TECHNOLOGIES, INC.
We entered into a term sheet, dated March 19, 1999, with Vision
Technologies, Inc. ("Vision") to acquire Vision for stock and cash. We advanced
$650,000 in cash to Vision on March 23, 1999. In addition, JenCom Digital
Technologies contributed $350,000 to Vision on behalf of WWWX-Jencom on April
28, 1999. On July 12, 1999, we agreed with Vision to amend the term sheet so
that we would make an investment in Vision rather than acquire the company, and
we advanced an additional $200,000 to Vision. The amended term sheet terminated
on August 26, 1999. As a result of the termination, Vision had the option to
either return to us the cash we advanced to Vision within 180 days or to convert
that amount into Vision common stock at a conversion rate specified in the term
sheet. As a result of the conversion, we own 301,128 shares of Vision common
stock, representing 3.5% of Vision's total outstanding shares. To date, Vision
has not yet produced or sold any products. See "Item 7. Certain Relationships
and Related Transactions." See "Item 2. Financial Information-Management's
Discussion and Analysis of Financial Condition and Results of Operation." As
stated above, we have written down this investment to zero because we have been
unable to confirm that it has any value.
VIDEONET CORPORATION
In July 1999, we advanced $100,000 to VideoNet Corporation ("VideoNet"), a
company that was developing video conferencing technology. Our investment was
evidenced by a 12% convertible note which we converted, in November 1999, into
104,000 shares of convertible preferred stock, representing approximately 2.4%
of the equity of VideoNet. However, as stated above, we have written down our
investment in VideoNet to zero because we have been unable to confirm that it
presently has any value.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES
FOREIGN LAWS AND REGULATIONS
Because ATM has relationships in Mexico and may enter into relationships
in other countries, ATM may be subject to the laws of those jurisdictions which
pertain to our activities in those jurisdictions. Our activities may include the
buying, selling, shipping, storing and importing and exporting of merchandise,
the provision of services and transacting business over the Internet.
Additionally, because ATM and Intrac offer and facilitate the sales of goods and
services worldwide, foreign jurisdictions may claim that our companies are
required to comply with their laws. Any future foreign regulation may have a
negative impact on ATM or Intrac's methods of operations or result in additional
costs. We have not received any claims based upon alleged violation of
federal, state or local laws, nor do we have any material costs or expenses
for compliance with such laws.
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TAXES
ATM and Intrac do not collect or pay sales or other similar taxes for
assets or services purchased or for trade credits issued or redeemed. We may be
obligated to collect or pay such taxes in the future. The imposition of sales,
use, value-added or similar taxes could diminish our competitiveness and harm
our business.
INVESTMENT COMPANY ISSUES
We believe that we are actively engaged in the business of
business-to-business e-commerce through our affiliated companies that we are
considered to "control." Under the Investment Company Act of 1940, as amended,
we are presumed to control a company if we own more than 25% of that company's
voting securities. We may be required to register as an investment company if
more than 45% of our total assets consist of, and more than 45% of our
income/loss and revenue over the last four quarters is derived from, ownership
interests in companies we do not primarily control. It is not feasible for us to
register as an investment company because the Investment Company Act regulations
are inconsistent with our strategy of actively managing, operating and promoting
collaboration among our companies.
If we are deemed an investment company, we would be in violation of the
Investment Company Act and we would have to either comply with the Investment
Company Act or we could be ordered to cease selling our securities and could be
subject to civil and criminal actions for doing so. In addition, our contracts
would be voidable and a court could appoint a receiver to take control of us and
liquidate our business.
COMPETITION FACING THE COMPANIES IN WHICH WE OWN INTERESTS
The Internet has produced intense competition for products and services
because it has reduced transaction costs and increased the ability of companies
that offer products and services to market and communicate with potential
customers. As the market for business-to-business e-commerce grows, we expect
that competition will intensify as traditional business competitors move to the
Internet and Internet competitors expand their businesses and market reach.
Some of the companies in which we own interests compete to attract and
retain buyers and sellers. Several companies offer competitive solutions that
compete with one or more of the companies in which we own interests. We expect
that additional companies will offer competing solutions on a stand-alone or
combined basis in the future. Furthermore, our competitors may develop Internet
products or services that are superior to, or have greater market acceptance
than, the solutions offered by the companies in which we own interests. If the
companies in which we own interests are unable to compete successfully against
their competitors, such companies may fail.
Many of our competitors have greater brand recognition and greater
financial, marketing and other resources than the companies in which we own
interests. This may place the companies in which we own interests at a
disadvantage in responding to their competitors' pricing strategies,
technological advances, advertising campaigns, strategic partnerships and other
initiatives.
There are a number of companies that compete with ATM and Intrac in the
off-line asset remarketing business and with respect to the utilization of trade
credits. These companies include Active International, Tradewell, Inc. and Icon
International, Inc. Most of these companies are asset liquidators who, like ATM
and Intrac, utilize trade credits in full or partial payment for excess
inventories of products or services and then remarket these products or services
for cash. Thereafter, their customers can purchase products or services with
these trade credits or a combination of cash and trade credits, as agreed by the
parties in connection with the purchase and sale of the excess inventories.
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To our knowledge, none of ATM and Intrac's major competitors is involved
in new product sales. We believe that, of the major competitors that utilize
trade credits, Active International is the most dominant. Competition in the
asset recovery industry for transactions is intense, however, we believe that
ATM and Intrac compare favorably with competitors based upon their experience,
the breadth of their contacts in the asset recovery industry, their reputation
and relationships, and the quality of the service they provide to customers. We
expect that ATM and Intrac's competition will increase as traditional
competitors take advantage of the Internet and e-commerce by launching web sites
to advertise their products and services, communicate with potential customers
and effect transactions on-line.
As more competitors offer similar services over the Internet, it will be
more difficult for ATM to distinguish itself from its competitors. We believe
that ATM's reputation and relationships will continue to distinguish it from its
competitors, however, price, brand recognition and the appearance, functionality
and ease of use of ATM's web sites may ultimately become more important factors
in obtaining and retaining customers.
In addition, there are numerous companies that have developed or are in
the process of developing auction sites on the Internet to buy and sell products
and merchandise. These companies could compete directly with ATM and Intrac.
COMPETITION IN ATTRACTING COMPANIES
Unless we are unable to raise additional capital, we will not be able to
pursue our business plan. Historically, we have faced competition from other
capital providers such as publicly-traded Internet companies, venture capital
companies and other corporations. Most of these competitors have greater
financial resources and brand name recognition than we do and companies in
search of financing may be more likely to align themselves with a better known
company or investor and one with more financial resources. If we are able to
raise additional capital, these competitors may limit our opportunity to acquire
interests in new companies and, if we are able to raise additional capital but
are unable to acquire interests in attractive companies, our business strategy
may not succeed.
COMPETITION WITH COMPANIES IN WHICH WE OWN INTERESTS
We may compete with the companies in which we own interests for
Internet-related opportunities. We may also compete with the companies in which
we own interests to acquire interests in business-to-business e-commerce
companies, and the companies in which we own interests may compete with each
other for acquisitions or other business-to-business e-commerce opportunities.
The companies in which we own interests, therefore, may seek to acquire
companies that we would find attractive. While we may join with the companies in
which we own interests on future acquisitions, we have no current contractual
obligations to do so. We do not have any contracts or other understandings with
the companies in which we own interests that would govern the resolution of
these potential conflicts. Such competition may deter companies from entering
into strategic relationships with us and may limit our business opportunities.
ENTRADE INC.
We actively encourage the companies that we have equity interests in to
work together and develop relationships among each other. While we believe that
we benefit from such relationships, we recognize that we may compete with the
companies in which we have equity interests. Historically, we have considered
Entrade, which we sold to Artra Group Incorporated in September 1999, as a
competitor. Entrade owns or has equity interests in a group of
business-to-business Internet companies including entrade.com, utiliparts.com,
AssetTRADE.com, printeralliance.com, pricecontainer.com, TruckCenter.com,
AssetControl.com and TradeTextile.com. Entrade also acquired all of the capital
stock of Public Liquidations Systems, Inc. and Asset Liquidation Group, Inc.,
which engage in business under the name Nationwide Auction Systems. Until
November 2000, Entrade's strategy was similar to ours, in that it planned to
invest in and migrate the traditional off-line business transactions of its
businesses onto the
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Internet and operated businesses that buy and resell non-performing and other
assets. Entrade made investments in such companies by exchanging licenses in its
transaction technologies for equity interests. In addition, Entrade's strategy
encompassed e-commerce sales, marketing, and procurement applications. However,
on October 31, 2000, Entrade announced that it intends to focus in the future on
asset disposition through its subsidiary, Nationwide Auction Systems.
Accordingly, Entrade may no longer be a potential competitor.
As a competitor, Entrade has unusual access to and knowledge of our
business including the following:
- Robert Kohn, our former Chief Executive Officer and President was,
until April 2000, Chief Executive Officer and President of
entrade.com and a member of the board of directors of Entrade.
- A number of our former employees, who were members of our technical
and administrative staff, were, until recently, employees of
entrade.com.
- We use entrade.com's software to operate ATMcenter.com and its
related web sites. We sold this software to Artra Group Incorporated
in September of 1999 as part of the sale of Entrade.
- Until April 2000, we relied upon the technical staff at entrade.com
to maintain all of our computer systems and, until November 2000, we
also relied on its staff to host, support and maintain
ATMcenter.com's web sites. As a result of the provision of these
services, Entrade and entrade.com had unlimited access to all our
information systems and therefore all the files and documents that
are on our computer systems.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Pursuant to the non-exclusive software license agreement between ATM and
entrade.com, dated September 23, 1999, ATM currently uses software owned by
entrade.com, Inc. to operate the ATMcenter.com web sites. Any interruption in
ATM's web site's ability to process transactions could affect ATM's ability to
obtain and retain Internet customers. After Entrade announced that entrade.com
no longer intends to engage in the software development business, we made other
arrangements with a third-party vendor for the hosting of the ATMcenter.com and
related web sites and management intends to make other arrangements for the
maintenance and support of the software as well.
ATM has applied for service mark applications for "ATMcenter.com,"
"Instant Invoice," "Instant P.O." and "Instant Purchase Order." Although
these applications are still pending, ATM intends to abandon its applications
for "Instant Invoice," "Instant P.O." and "Instant Purchase Order."
EMPLOYEES
As of September 30, 2000, after reducing the corporate workforce in late
August and September 2000 in order to reduce expenses:
- WorldWide Web NetworX Corporation had seven employees.
- ATM had eleven employees, two of whom, Thomas Settineri and Gary
Levi, were shared with Intrac.
- Intrac had two employees, Thomas Settineri and Gary Levi, who were
shared with ATM.
We consider our relationships with our employees to be good. None of our
employees are covered by collective bargaining agreements.
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CAUTIONARY STATEMENTS - RISK FACTORS
RISK FACTORS
An investment in our common stock involves a number of very significant
risks. You should carefully consider the following risks and uncertainties in
addition to other information in this annual report in evaluating the Company
and its business before purchasing shares of common stock. Our business and
results of operations could be seriously harmed by any of the following risks.
The trading price of our common stock could decline due to any of these risks,
and you may lose all or part of your investment.
IF WE DO NOT RAISE ADDITIONAL FUNDS FROM THIRD PARTY SOURCES OR
IMMEDIATELY BECOME PROFITABLE, WE MAY BE UNABLE TO CONTINUE OUR OPERATIONS.
Our recurring operating losses and growing working capital needs will
require us to obtain additional capital to operate our business before we
have established that our business will generate significant revenue. We have
accumulated significant losses from our business operations. The continuation
of our operations is dependent upon obtaining long-term financing and
achieving a profitable level of operations. While we are expending our best
efforts to meet our financing needs, there can be no assurance that we will
be successful in raising capital from third parties or generating sufficient
funds for operations and continued development. These circumstances raise
substantial doubt about our ability to continue a going concern. If
additional financing is obtained, the terms of the financing may be adverse
to the interests of existing stockholders, including the possibility of
substantially diluting their ownership position.
WE MAY HAVE DIFFICULTY OBTAINING FUTURE FUNDING SOURCES, IF NEEDED, AND WE
MIGHT HAVE TO ACCEPT TERMS THAT WOULD ADVERSELY AFFECT OUR STOCKHOLDERS.
Expenses are expected to continue to exceed revenue in fiscal 2001, and we
will need to raise funds from additional financings. Any financings may result
in dilution to our existing stockholders. We may have difficulty obtaining
additional funding, and we may have to accept terms that would adversely affect
our stockholders. For example, the terms of any future financing may impose
restrictions on our right to declare dividends or on the manner in which we
conduct our business. Also, lending institutions or private investors may impose
restrictions on a future decision by us to make capital expenditures,
acquisitions or significant asset sales. Or we may not be able to locate
additional funding sources at all. If we cannot raise funds on acceptable terms,
if and when needed, we will not be able to continue our operations and to pursue
our goal of future strategic acquisitions.
WE ANTICIPATE THAT WE WILL INCUR CONTINUED LOSSES FOR THE FORESEEABLE
FUTURE.
We expect to incur significant losses for the foreseeable future. To date,
we have not been profitable. Even if we are able to obtain additional financing,
we expect to incur significant costs associated with the pursuit of future
strategic acquisitions. Our revenue may not be sufficient to fund our expenses.
We may never be profitable or, if we become profitable, we may be unable to
sustain profitability. Some of our expenses are or will be fixed, including
non-cancelable agreements, equipment leases and real estate leases. Expenses may
also increase due to the potential impact of goodwill and other charges from any
future acquisitions.
OUR SUBSIDIARIES, ATM SERVICE, LTD. AND THE INTRAC GROUP, LTD., HAVE
LIMITED OPERATING HISTORIES UPON WHICH YOU MAY EVALUATE THEIR OPERATIONS.
We formed ATM in December 1998 and acquired Intrac in July 1999.
Accordingly, we have limited operating history upon which you may evaluate us.
Our lack of operating history, and evolving revenue model make it difficult to
evaluate our future prospects and evaluate our business strategy.
This means that you will have only limited information upon which to base
an investment decision. Because of our lack of operating history, we also
believe that period-to-period comparisons of our results of operations will not
be meaningful in the short term and should not be relied upon as indicators of
future performance.
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We will encounter risks and difficulties frequently encountered by
early-stage companies in new and rapidly evolving markets. Many of these risks
are described in more detail in this "Risk Factors" section. We may not
successfully address any of these risks. If we do not successfully address these
risks, our business would be seriously harmed.
ACQUISITIONS AND NEW STRATEGIC ALLIANCES MAY DISRUPT OR OTHERWISE HAVE A
NEGATIVE IMPACT ON OUR BUSINESS.
We plan to make investments in complementary companies, technologies and
assets. Future acquisitions are subject to the following risks:
- acquisitions may cause a disruption in our ongoing business,
distract our relatively new management team and make it difficult to
maintain our standards, controls and procedures;
- we may acquire companies or make strategic alliances in markets in
which we have little experience;
- we may not be able to successfully integrate the services, products
and personnel of any acquisition or new alliance into our
operations;
- we may be required to incur debt or issue equity securities to pay
for acquisitions, which may be dilutive to existing stockholders;
and
- our acquisitions may not result in any return on our investment and
we may lose our entire investment.
OUR SUCCESS IS DEPENDENT ON RETAINING OUR CURRENT KEY PERSONNEL.
We believe that our success will depend on continued employment of our
management team and our ability to attract large businesses to use our on-line
websites for the effective management, purchase and sale of inventory and other
assets. Their experience in e-commerce asset management, sales and procurement
is important to the establishment of our on-line websites. We do not maintain
key-man life insurance on our key personnel. The loss of the services of one or
more of our management personnel could seriously harm our business. Our success
also depends on having a trained sales force, telesales group and technical and
customer support personnel. We will need to continue to hire additional
personnel as our business grows. Competition for personnel, particularly for
employees with technical expertise, is intense. New hires also frequently
require extensive training before they achieve desired levels of productivity.
If we cannot hire and retain suitable personnel, we may not be able to expand
and develop new business communities effectively or support those that are
developed, resulting in loss of customers and revenues.
THE INTERESTS OF OUR SIGNIFICANT STOCKHOLDERS MAY CONFLICT WITH OUR
INTERESTS AND THE INTERESTS OF OUR OTHER STOCKHOLDERS.
Our current directors, officers and holders of more than 5% of the
outstanding shares of our common stock collectively own approximately 31% of our
outstanding common stock. As a result of their stock ownership, one or more of
these stockholders may be in a position to affect significantly our corporate
actions, including, for example, mergers or takeover attempts, in a manner that
could conflict with the interests of our public shareholders.
D.H. Blair Investment Banking Corp. is our largest shareholder and
Blair Ventures-Fund I, Inc. ("Fund"), an affiliate of D.H. Blair, is
our largest creditor and holds a $3.6 million convertible promissory note
which is secured by all of our assets. D.H. Blair's interest as a shareholder
may conflict
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with Fund's interest as a creditor and Fund's exercise of its rights with
respect the collateral may conflict with the interests of other shareholders.
OTHER CONFLICTS.
Warren Rothstein, who was our interim chairman, president and chief
executive office from September 23, 1999 to April 26, 2000, and who continued
to serve as one of our directors until August 24, 2000, also served as the
chairman of ATM from December 1998 until October 19, 2000 and as chairman of
Intrac from July 23, 1999 until October 19, 2000. Mr. Rothstein's duties and
responsibilities with respect to certain of these positions may have been in
conflict with his duties and responsibilities with respect to others.
Thomas Settineri, who was one of our directors from September 23, 1999
until December 27, 2000, was also the president and chief executive officer of
ATM and Intrac from July 23, 1999 to October 19, 2000 and has been the
chairman of ATM and Intrac since October 19, 2000. Mr. Settineri's duties and
responsibilities with respect to certain of these positions may have been in
conflict with his duties and responsibilities with respect to others.
FLUCTUATIONS IN OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT OUR STOCK
PRICE.
Our quarterly operating results will likely vary significantly in the
future. Our operating results will likely fall below the expectations of
investors in some future quarter or quarters. Our failure to meet these
expectations would likely adversely affect the market price of our common stock.
Our quarterly operating results may vary depending on a number of factors,
including:
- demand of buyers and sellers to use our websites to list and
purchase or sell products and/or services;
- actions taken by our competitors, including new product
introductions, fee schedules, pricing policies and enhancements;
- size and timing of sales of our services;
- our ability to control costs;
- budget cycles of buyers and sellers of products and/or services and
changes in these budget cycles; and
- general economic factors.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
The market price of our common stock is likely to be highly volatile, as
the stock market in general, and the market for Internet-related and technology
companies in particular, has been highly volatile. Our stockholders may not be
able to resell their shares of our common stock following periods of volatility
because of the market's adverse reaction to this volatility. The trading prices
of many technology and Internet-related companies' stocks have been highly
volatile and have reached historical highs and lows within the past 18 months
and have reflected relative valuations substantially above historical levels. We
cannot assure you that our stock will trade at the same levels as other Internet
stocks or predict the market prices for Internet stocks in general.
Factors that could cause this volatility may include, among other things:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new sales formats or new products or services;
- changes in financial estimates by securities analysts;
- conditions or trends in the asset management industry;
- conditions or trends in the Internet industry;
- changes in the market valuations of other Internet companies;
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- announcements by us or our competitors of significant acquisitions,
strategic partnerships or joint ventures;
- changes in capital commitments;
- additions or departures of key personnel; and
- sales of our common stock; and
- adequacy of liquidity and capital resources.
Many of these factors are beyond our control. These factors may materially
adversely affect the market price of our common stock, regardless of our
operating performance.
SHARES ELIGIBLE FOR FUTURE SALES BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY
AFFECT OUR STOCK PRICE.
If our existing stockholders sell in the public market substantial amounts
of our common stock, including shares issued on the exercise of outstanding
options and warrants, then the market price of our common stock could fall.
OUR E-COMMERCE BUSINESS MAY NOT DEVELOP ADDITIONAL REVENUE SOURCES.
We plan to generate revenues through relationships with strategic partners
for the sale of assets and services. To generate significant revenues from
Internet business-to-business e-commerce, we will have to continue to build
these business relationships through our contacts and the expertise of our
current or future personnel. We may not be able to form new strategic alliances
due to a lack of sufficient financial resources or expertise in a newly targeted
industry. If we are not able to build these relationships with strategic
partners, we will have difficulty developing additional businesses to generate
revenues.
MARKETING AND DISTRIBUTION ALLIANCES MAY NOT GENERATE REVENUES OR MAY BE
TERMINATED.
We intend to use marketing, distribution and strategic alliances with
other Internet companies to create traffic on our on-line business communities
and, consequently, to generate revenues. These marketing and distribution
alliances will allow us to link our on-line websites to Internet search engines
and other websites. The success of these relationships depends on the amount of
increased traffic we receive from the alliance partners' websites.
We may have difficulty entering into marketing and distribution alliances.
Also, these arrangements may not generate revenue. Some of the marketing and
distribution alliances and arrangements that we have previously entered into
have not, to date, generated revenue. We also cannot assure you that we will be
able to enter into these marketing and distribution alliances or renew any
marketing and distribution alliances that we are able to establish or that any
or all of these arrangements will generate revenue.. If we are unable to
establish these alliances or if any of these agreements is terminated, no
revenue will be generated.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH OTHER PROVIDERS OF
E-COMMERCE SERVICES.
We believe that the strongest potential competition for e-commerce
services does not come from traditional service groups but rather the evolution
of the Internet and the types of business-to-business service providers that
such evolution will create. As applications for business-to-business e-commerce
begin to proliferate and mature, we will continue to compete with other
technology companies and traditional service providers that seek to integrate
on-line business technologies with their traditional service mix.
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Competition for Internet products and services and electronic business
commerce is intense. We expect that competition will continue to intensify.
Barriers to entry are minimal, and competitors can launch new websites at a
relatively low cost. We expect that additional companies will establish
competing on-line business communities on a stand-alone basis.
E-commerce applications are in the early stages of development. Currently,
the principal focus of e-commerce business-to-business groups is to provide
information and generate revenues for advertisement. As e-commerce evolves,
however, we expect that other entrepreneurs and large, well-known leaders in
various industries will create other niche business-to-business services that
may compete with our services.
These large industry leaders would have better name recognition in the
markets that we may target. We also expect competition from large consulting
firms and software solution providers, which have begun developing e-commerce
applications for their existing clients. The larger financial resources of these
competitors may enable them to market to potential buyers and sellers of
inventory and other assets and launch more widespread marketing campaigns that
would make it more difficult for us to compete.
OUR SUCCESS DEPENDS, IN PART, ON OUR ABILITY TO USE EFFECTIVE INTERNET AND
OTHER MARKETING STRATEGIES THAT DEPEND ON INTERNET GOVERNANCE AND REGULATION,
WHICH ARE UNCERTAIN.
The future success of our business is dependent, in part, on our ability
to use an effective Internet marketing strategy. Because the original role of
the Internet was to link the government's computers with academic institutions'
computers, the Internet was historically administered by organizations that were
involved in sponsoring research. Private parties have assumed larger roles in
the enhancement and maintenance of the Internet infrastructure. Therefore, it is
unclear what organization, if any, will govern the administration of the
Internet in the future, including the authorization of domain names.
The lack of an appropriate organization to govern the administration of
the Internet infrastructure and the legal uncertainties that may follow pose
risks to the commercial Internet industry and our specific website business. In
addition, the effective operation of the Internet and our business is also
dependent on the continued mutual cooperation among several organizations that
have widely divergent interests, including the government, Internet service
providers and developers of system software language. These organizations may
find that achieving a consensus may become difficult, impossible, time-consuming
and costly.
Although we are not subject to direct regulation in the United States
other than federal and state business regulations generally, changes in the
regulatory environment could result in the Federal Communications Commission or
other United States regulatory agencies directly regulating our business.
Additionally, as Internet use becomes more widespread internationally, there is
an increased likelihood of international regulation.
We cannot predict whether or to what extent any new regulation affecting
e-commerce will occur. New regulation could increase our costs. For example, we
do not collect sales or other similar taxes with respect to the equipment,
inventory and other products sold through our on-line communities. One or more
states may seek to impose sales tax collection obligations on out-of-state
companies like ours that engage in or facilitate e-commerce. State and local
governments have made proposals that would impose additional taxes on the sale
of goods and services over the Internet. A successful assertion by one or more
states or any foreign country that we should collect sales and other taxes on
the exchange of equipment, inventory and other goods on our system could
increase costs that we could have difficulty recovering from users of our
websites.
Governmental agencies and their designees regulate the acquisition and
maintenance of web addresses generally. For example, in the United States, the
National Science Foundation had appointed Network Solutions, Inc. as the
exclusive registrar for the ".com," ".net" and ".org" generic top-level
addresses. Although Network Solutions no longer has exclusivity, it remains the
dominant registrar. The
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regulation of web addresses in the United States and in foreign countries is
subject to change. As result, we may not be able to acquire or maintain relevant
web addresses in all countries where we conduct business that are consistent
with our brand names and marketing strategy. Furthermore, the relationship
between regulations governing website addresses and laws protecting trademarks
is unclear.
WE MAY FACE INCREASED ACCESS COSTS FROM BROWSER PROVIDERS AND INTERNET
DISTRIBUTION CHANNELS.
Leading website, browser providers and other Internet distribution
channels may begin to charge us to provide access to our products and services.
If any of these expenses are not accompanied by increased revenues, our
e-commerce business will be negatively impacted.
CONCERNS REGARDING SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL
INFORMATION OVER THE INTERNET MAY NEGATIVELY IMPACT OUR E-COMMERCE BUSINESS.
We believe that concern regarding the security of confidential information
transmitted over the Internet, including, for example, business and supply
requirements, credit card numbers and other forms of payment methods, prevent
many potential customers from engaging in online transactions. If we do not add
sufficient security features to future product releases, our services may not
gain market acceptance or we may face additional legal exposure.
Despite the measures we have taken in the area of security, our
infrastructure is potentially vulnerable to physical or electronic break-ins,
computer viruses, hackers or similar problems caused by employees, customers or
other Internet users. If a person circumvents our security measures, that person
could misappropriate proprietary information or cause interruptions in our
operations. Security breaches that result in access to confidential information
could damage our reputation and expose us to a risk of loss or liability. These
risks may require us to make significant investments and efforts to protect
against or remedy security breaches, which would increase the costs of
maintaining our websites.
WE MAY BE SUBJECT TO LEGAL LIABILITY FOR PUBLISHING OR DISTRIBUTING
CONTENT OVER THE INTERNET.
We may be subject to legal claims relating to the content in our
industry-specific on-line websites, or the downloading and distribution of
content. Providers of Internet products and services have been sued in the past,
sometimes successfully, based on the content of material. The representations as
to the origin and ownership of licensed content that we generally obtain may not
adequately protect us.
In addition, we draw some of the content provided in our on-line business
communities from data compiled by other parties. This data may have errors. If
our content is improperly used or if we supply incorrect information, it could
result in unexpected liability. Our insurance may not cover claims of this type,
or may not provide sufficient coverage. Costs from these claims that are not
covered by our insurance or exceed our coverage would damage our business and
limit our financial resources.
WE DEPEND ON THE CONTINUOUS INTRODUCTION OF ENHANCED SOFTWARE CAPABILITIES
AND EXPANSION OF OUR SOFTWARE SERVICES, WHICH WE MAY NOT BE ABLE TO PROJECT
ACCURATELY.
If traffic in our on-line businesses develops, we may need to expand and
upgrade our technology, transaction processing systems and network hardware and
software. We are not able to predict these needs. In addition, we may not be
able to expand and upgrade our systems and network hardware and software
capabilities to accommodate our future needs. If we do not appropriately upgrade
our systems, network hardware and software on an ongoing basis, we may have
difficulty competing effectively.
The life cycles of the software used to support our e-commerce services
are difficult to predict because the market for our e-commerce websites for
sales and procurement of inventory and other assets is new and emerging and is
characterized by changing customer needs and industry standards. The
introduction of on-line products employing new technologies and industry
standards could render our
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existing system obsolete and unmarketable. If a new software language becomes
the industry standard, we may need to rewrite our software to remain
competitive. We may not be able to respond in a cost-effective way and lose
business as a result.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE
A THIRD-PARTY ACQUISITION OF THE COMPANY DIFFICULT.
WorldWide Web NetworX Corporation is a Delaware corporation. Anti-takeover
provisions of the Delaware law could make it more difficult for a third party to
acquire control of us, even if a change in control would be beneficial to our
stockholders.
Our articles of incorporation provide that our Board of Directors may
issue preferred stock without shareholder approval. The issuance of preferred
stock could make it more difficult for a third party to acquire us. Our Board of
Directors may issue preferred stock with voting or conversion rights that may
have the effect of delaying, deferring or preventing a change of control of us
and would adversely affect the market price of our common stock and voting and
other rights of holders of our common stock.
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS, AND WE MAY INFRINGE
ON THE PROPRIETARY RIGHTS OF OTHERS. PROPRIETARY RIGHTS ARE IMPORTANT TO OUR
SUCCESS AND OUR COMPETITIVE POSITION.
We have applied for federal registration of "atmcenter.com" as a service
mark for use in connection with our electronic commerce services.
Although we seek to protect our proprietary rights, our actions may be
inadequate to protect any trademarks and other proprietary rights or to prevent
others from claiming violations of their trademarks and other proprietary
rights. We may not be able to protect our domain names for our on-line
industry-specific websites as trademarks because those names may be too generic
or perceived as describing a product or service or its attributes rather than
serving a trademark function.
If we are unable to protect our proprietary rights in trademarks, service
marks and other indications of origin, competitors will be able to use names and
marks that are identical to ours or sufficiently similar to ours to cause
confusion among potential customers between us and our services and our
competitors and their services. This confusion may result in the diversion of
business to our competitors or the loss of potential or existing customers.
Also, to the extent these competitors have problems with the quality of their
services, this confusion may injure our reputation for quality.
Except for a search for the name ATMcenter.com, we have not conducted
searches to determine whether our service marks, trademarks and similar items
may infringe on the rights of third parties.
DIFFICULTY OF PROTECTING PROPRIETARY RIGHTS IN OTHER COUNTRIES.
Copyrights and trademarks may receive limited or no protection in some
countries, and the global nature of the Internet makes it impossible to control
the ultimate destination of our work.
ITEM 2. PROPERTIES
Our corporate headquarters are located at 521 Fellowship Road, Suite 130,
Mt. Laurel, New Jersey. Our lease commenced on July 19, 1999 with a term of 61
months. Our monthly base rent over the term of the lease ranges from
approximately $11,000 to $12,000. We also pay a proportionate share of the
building's operating expenses, and our share is currently approximately $3,200
per month. Our lease covers 11,802 square feet. We are in default under this
lease by virtue of our failure to pay rent due for the months of December 2000
and January 2001 in accordance with the terms of the lease. We occupy only
approximately 2,000 square feet of this facility and are attempting to sublease
the entire space.
We also have a five-year sublease from RDR Associates, Inc. ("RDR") for
offices and the use of a conference room at 888 Seventh Avenue, New York, New
York. The term of the lease commenced on May
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1, 1999. We paid our occupancy rights under the sublease by issuing 50,000
shares of our common stock to RDR. We currently use this space as our New York
City offices.
ATM has a lease for offices at 220 White Plains Road, Tarrytown, New York.
The lease commenced on October 1, 1999 for a term of five years. The lease
covers approximately 8,754 square feet and the monthly base rent over the
remaining term of the lease ranges from approximately $17,326 to $18,055. ATM no
longer uses any of this space and has subleased the entirety of the leased space
for the period from January 1, 2001 through September 30, 2004 for a monthly
base rent of $12,500. ATM will be required to pay the difference between the
rent payable by ATM under the prime lease and the rent payable to ATM under the
sublease.
Intrac has a lease for offices at 424 Madison Avenue, New York, New York.
The lease commenced on October 1, 1997 for a term of five years. The lease
covers 4,130 square feet and the base monthly rent over the remaining term of
the lease ranges from approximately $9,200 to $10,400. This space is currently
used by both ATM and Intrac for their corporate headquarters.
ITEM 3. LEGAL PROCEEDINGS
There are no legal actions pending which we are required to disclose in
this annual report. Informal claims have been asserted by the two holders of our
Series A 6% cumulative convertible debentures, dated March 22, 1999, in the
aggregate amount of $125,000, who did not accept our offer to convert their
convertible debentures to our common stock. These claims are for the principal
sum of $125,000 plus interest from March 22, 1999 and liquidated damages as per
the terms of the convertible debentures as a result of our failure to file a
registration statement and to have such registration statement declared
effective in accordance with the terms of the convertible debentures. The
Company intends to pursue all appropriate means of resolving this claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of the fiscal year that ended September 30, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is currently quoted on the OTC Bulletin Board under the
symbol "WWWX." The following table sets forth the highest and lowest bid prices
for our common stock for each fiscal quarter during the last two years and
subsequent interim periods as reported by the National Quotation Bureau.
At December 29, 2000, there were 1075 record holders of our common stock.
The prices set forth below represent interdealer quotations, without
retail markup, markdown or commission and may not be reflective of actual
transactions.
No cash dividends have been declared on any class of common equity for the
two most recent fiscal years.
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HIGH BID LOW BID
-------- -------
FISCAL 1998
First Quarter..................
Second Quarter.................
Third Quarter.................. 3 1-1/4
Fourth Quarter................. 2-3/8 11/16
FISCAL 1999
First Quarter.................. 1-5/16 21/64
Second Quarter................. 9-3/8 17/32
Third Quarter.................. 9-1/4 3-3/16
Fourth Quarter................. 4-5/8 2-9/16
FISCAL 2000
First Quarter.................. 7-1/2 2-1/8
Second Quarter................. 8-1/8 3-15/16
Third Quarter.................. 4-3/4 3/8
Fourth Quarter................. 25/32 3/16
$3.6 MILLION CONVERTIBLE LOAN
Pursuant to a commitment letter, dated August 21, 2000, D.H. Blair
Investment Banking Corp. caused its affiliate, Blair Ventures-Fund I, Inc.
("Ventures"), to make a loan in the principal amount of $3,600,000 to us, on
August 22, 2000, which is evidenced by a Convertible Promissory Note. The loan
is secured by a first priority security interest in all of our assets.
The outstanding principal amount of the loan is due on or before September
1, 2001, however, the maturity date may be extended, at Ventures' sole option,
for up to an additional two years. Interest is payable, at a rate of 10% per
year, and is due upon maturity. The loan may be converted by Ventures at any
time prior to the maturity date into our common stock at the rate of $0.75 per
share. Any shares of our common stock issued to Ventures will be subject to
anti-dilution rights. In addition, Ventures will have two demand registration
rights and unlimited piggyback registration rights pursuant to the terms of the
note with respect to any common stock that it receives.
We can prepay the loan, in whole or in part, at any time, upon at least
ten days written notice to Ventures, however, in the event of any prepayment, we
must issue to Ventures a warrant to purchase our common stock in an amount equal
to the prepayment, at $0.75 per share. The common stock underlying such warrant
will be subject to anti-dilution rights and Ventures will have two demand
registration rights and unlimited piggyback registration rights with respect to
such shares.
WARRANTS
On February 10, 2000, we issued warrants to purchase 500,000 shares of our
common stock to Elminor Portfolio Corp. for services rendered by S. Allan Kline.
These warrants were exercisable at $4.00 per share and expired on September 1,
2003. The fair value for these warrants was estimated at $430,000 at the date of
grant, using the Black-Scholes method and assuming a risk-free interest rate of
6%, a dividend yield of 0%, an average expected life of the warrants of two
years and volatility of 215%. Mr. Kline subsequently assigned 250,000 of these
warrants to VentureTek L.P., an affiliate of D. H. Blair Investment Banking
Corp. On August 28, 2000, in connection with the $3.6 million convertible loan
discussed above, we agreed to re-price these warrants at $0.75 per share and to
extend them for three years. The additional value of these
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warrants as a result of the re-pricing and extension was estimated at $195,000
at August 28, 2000, using the Black-Scholes method with the same assumptions.
On September 1, 2000, we issued warrants to purchase an additional
1,500,000 shares of our common stock to Elminor Portfolio Corp. for services to
be rendered by S. Allan Kline during the period from October 1, 2000 to
September 30, 2002. These warrants are exercisable at $0.75 per share and expire
on September 1, 2003. The fair value for these warrants was estimated at
$1,050,000 at the date of grant, using the Black-Scholes method with the
foregoing assumptions.
Sales of Unregistered Securities
In December 1999, we issued 50,000 shares of our common stock for the
lease of office space at 888 Seventh Avenue, New York, New York. See "Lease of
Office Space." The lease is effective for a term of 60 months, commencing
September 1, 1999. We currently utilize this space as our executive offices.
OPTIONS
During fiscal 2000, we issued a total of 9,475,000 options to purchase
shares of our common stock pursuant to the 2000 Incentive Stock Plan. See "2000
Incentive Stock Plan" and "Summary of Executive Compensation."
DEBENTURES
During fiscal 2000, pursuant to an offer that we extended to the holders
of our 6% cumulative debentures, holders of $865,000 in principal amount of the
debentures elected to convert them into our common stock. Debentures in the
principal amount of $125,000 remain outstanding.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION
You should read the following selected financial information in
conjunction with our consolidated financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Report. The statement of operations data
for the last three years ended September 30, and the balance sheet data as of
September 30, 2000, 1999 and 1998 are derived from our audited financial
statements, which are included elsewhere in this Report. The statement of
operations data for the year ended September 30, 1997 and the balance sheet data
as of September 30, 1997 are that of Instra Corp., a predecessor company, and
have been derived from Instra Corp.'s audited financial statements that are not
included in this Report. We have not included financial information for periods
prior to September 30, 1997, as the prior operations are not meaningful.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998 1997
---- ---- ---- ----
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenues................................ $ 6,772 $ 1,339 $ 50 $ -
Loss from operations.................... (19,091) (13,949) (139) (166)
Impairment of investments............... (19,786) - - -
Impairment of investments in and
advances to affiliated companies...... (2,350) (1,106) - -
Loss on sale of investments............. (2,328) - - -
Gain on sale of subsidiary.............. - 25,426 - -
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Net (loss) income ...................... (37,081) 1,612 (219) (165)
Net (loss) income per share:
Basic................................... (.97) .07 (.03) (.08)
Diluted................................. (.97) .07 (.03) (.08)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
(IN THOUSANDS)
2000 1999 1998 1997
---- ---- ---- ----
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C>
Cash and cash equivalents............... $ 2,271 $ 7,234 $ 792 1
Investments............................. 6,005 29,475 - -
Investments in and advances to
affiliated companies.................. 3,319 2,744 - -
Total assets............................ 15,707 47,511 986 25
Convertible debt........................ 3,725 990 - -
Total stockholders' equity.............. 4,692 34,475 923 25
</TABLE>
THE FLUCTUATIONS FROM 1998 TO 1999 AND 2000 REFLECTED IN THE ABOVE TABLES ARE
EXPLAINED IN DETAIL IN ITEM 7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" THE DETAIL DESCRIPTIONS CAN BE FOUND IN THE
SUBTITLES LISTED ABOVE.
ITEM 7. 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 ELSEWHERE IN THIS REPORT.
OVERVIEW OF THE NATURE OF THE COMPANY'S BUSINESS
WorldWide Web NetworX Corporation is a holding company that enters into
joint ventures with or acquires ownership interests in off-line
business-to-business companies in order to migrate the traditional business
transactions of those companies onto the Internet, new business-to-business
opportunities which improve the efficiency of transactions, and to make other
opportunistic investments.
PLAN OF OPERATIONS
On September 1, 2000, new management came to the Company. The immediate
focus of the new management team was on rationalizing the operating expenses and
assessing the value-creating potential of our affiliated companies. Their intent
was to reduce operating expenses, thereby conserving working capital, while
evaluating the investments the Company had previously made and seeking
opportunities for new investment.
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We took several steps to significantly reduce expenses going forward.
These actions, initiated beginning in late August 2000, included elimination of
positions, closing facilities no longer needed, eliminating services not
essential to our continuing operations and to that of our wholly or majority
owned affiliated companies, ATM and Intrac, negotiating lower prices from
vendors for services still essential to continuing operations, and negotiating
agreements that required funding by the Company. These steps included the
following actions.
In late August and September 2000, we took a series of actions that
reduced the corporate workforce by 40% and our recurring payroll expense by 22%.
These actions included the elimination of positions no longer critical to our
continuing operations.
In September 2000, we decided to close our Mt. Laurel, New Jersey office
and began the transition of the general and administrative functions performed
at that location to our New York City office and the process of procuring a
subtenant for the space. Excluding payroll expense, the cost of operating this
facility was approximately $325,000 in the fiscal year ended September 30, 2000.
Until June 2000, Entrade shared this facility with us and paid for 70% of the
costs.
Also in September 2000, we restructured our relationship with NAI
Direct. This action eliminated our obligation to provide NAI Direct with an
additional $2,660,000 in working capital by March 2001. See Item 1,
"Business, New America Network, Inc. and Real Quest, Inc."
In October 2000, ATM and Intrac each terminated its management services
contract with Warren Rothstein. Coincident with termination of these contracts,
the ATM facility at Tarrytown, New York was closed and all jobs at that facility
were eliminated. Excluding facility related expenses, the expenses related to
the terminated contracts and eliminated jobs totaled $1.1 million for the fiscal
year ended September 30, 2000.
Limited impact of these changes is reflected in operating results for the
year ended September 30, 2000, because these actions were initiated late in the
fiscal year and there were implementation costs associated with certain actions.
However, we expect that the impact on operating results in fiscal year 2001 will
be significant. Some of the benefits of the actions described here are already
accruing to the Company, ATM and Intrac. Monthly general and operating expenses
are lower due to the decreased payroll and professional services resulting from
the actions described. Our working capital requirements have also been reduced
as a result of the restructured relationship with NAI Direct. Management expects
to continue its efforts to reduce expenses, including the subletting of the Mt.
Laurel facility and the further reduction of payroll expenses.
The foregoing actions have the cumulative effect, to date, of enabling the
Company to continue to operate through at least May 2001. Had these actions not
been taken, cash and cash equivalents would have been expected to have been
depleted by late October 2000.
If we are successful in obtaining additional funding, we intend to
pursue the following plan of operations during the next twelve months:
INCREASE REVENUES BY DEVELOPING OUR OPERATING COMPANIES. ATM and Intrac
will continue to develop their customer bases through the efforts of their
present sales and marketing team. ATM and Intrac will also look to develop
emerging markets through their own efforts or through representatives.
SEEK NEW INVESTMENT OPPORTUNITIES. We intend to seek new investment
opportunities, using our cash, stock and/or Internet expertise as our
capital contributions or to create joint ventures.
If we are successful in raising additional capital for new investment
opportunities, we anticipate that our operating expenses will increase over the
next twelve months. Without additional sources of funding, we will continue our
efforts to reduce our operating expenses. However, without funding we will
not be able to continue beyond approximately May 2001. These conditions raise
substantial doubt about our ability to continue as a going concern. Our
actual operating and financial results and actual plan of operations may
differ materially from the stated plan of operations. Factors which
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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 or in our business strategy, the wholesaling and asset
recovery business and general economic conditions.
GENERAL
We had declining and comparatively small operations until May 18, 1998
when we entered our current line of business by acquiring Keiretsu Corporation.
See "ITEM 1. Business." Over the past three fiscal years, we have had $8.2
million in revenues from operations, $33.2 million in losses from operations,
other expenses of $2.5 million and net losses of $35.7 million. Administrative
costs incurred to date have been expended in connection with software
development, marketing expenses, and operating expenses. Operating expenses have
also included general and administrative expenses related to all of our
activities.
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. Affiliated 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, an affiliated company's results of operations are reflected within our
Consolidated Statements of Operations. At September 30, 2000, the consolidated
financial statements include the Company, its majority owned and controlled
subsidiary, ATM Service, Ltd., and its wholly owned subsidiary, The Intrac
Group, Ltd. Additionally, the results of operations of Real Quest, Inc. have
been included in the consolidated statement of operations through September 27,
2000 at which point, our investment was restructured and we commenced accounting
for this investment under the cost method of accounting. ATM was recorded using
the equity method from December 1998 through July 23, 1999, when we acquired a
controlling interest.
EQUITY METHOD. Affiliated companies whose results are not consolidated,
but over which 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 company, including voting
rights associated with our holdings in common, preferred and other convertible
instruments in the company. Under the equity method of accounting, the detail of
an affiliated company's results of operations are not reflected within our
Consolidated Statements of Operations; however, our share of the earnings or
losses of the affiliated company is reflected in the caption "Equity (income)
loss" in the Consolidated Statements of Operations. During the fiscal year ended
September 30, 2000, we accounted for WWWX-Jencom, LLC and InterCommerce China
under the equity method of accounting. In fiscal 2000, we recorded our share of
WWWX-Jencom's losses until our investment was reduced to zero. At September 30,
2000, we determined that our investment in InterCommerce China was impaired and
accordingly, recorded a valuation allowance of $2.3 million. ATM was accounted
for using the equity method from December 1998 through July 23, 1999, when we
acquired a controlling interest, and we commenced accounting for ATM under the
consolidation method of accounting.
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 these companies is not included in the Consolidated
Statements of Operations. However, cost-method impairment charges are recognized
in the Consolidated Statements 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.
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As of September 30, 2000, we accounted for seven companies under the cost method
of accounting. Of these seven companies, Vision Technologies and VideoNet were
determined to have an impaired value with the value carried on the Consolidated
Balance Sheet reduced by $850,000 and $100,000, respectively.
EFFECT OF VARIOUS ACCOUNTING METHODS ON THE PRESENTATION OF OUR FINANCIAL
STATEMENTS
The presentation of our financial statements may differ from period to
period as a result of whether we apply the consolidation method of accounting,
the equity method of accounting or the cost method of accounting.
RESULTS OF OPERATIONS - Three-year period ended September 30, 2000
REVENUES
The Company principally derives its revenue by providing inventory
liquidation and asset recovery services and from the purchase and resale of
advertising media, merchandise or business services through its consolidated
affiliated companies, ATM Service, Ltd. and The Intrac Group, Ltd. For the year
ended September 30, 2000, the Company derived approximately 89% of its revenue
from customers in the United States. Approximately 11% of revenue were derived
from customers outside the United States, principally in Israel and Mexico. For
the year ended September 30, 2000, four customers for whom the Company provided
these services each accounted for 10% or more of the Company's total revenue.
These four customers combined provided 65% of the Company's total revenue for
the year ended September 30, 2000. For the year ended September 30, 1999, no
customer for whom the Company provided these services accounted for 10% or more
of the Company's total revenue.
Revenues were $6.8 million for the year ended September 30, 2000, $1.3
million for the year ended September 30, 1999, and $50,000 for the year ended
September 30, 1998. The growth in revenues is attributable to the acquisition of
The Intrac Group, Ltd and the formation of ATM Service, Ltd., on July 23, 1999.
For the year ended September 30, 2000, these two affiliated companies provided
revenue for the entire fiscal year, but in fiscal year 1999 they provided
revenue only for the period July 23, 1999 to the fiscal year's end on September
30, 1999. Prior to acquisition and formation of the two affiliated companies,
revenue was primarily derived from consulting services provided by Entrade which
was sold in September 1999.
Deferred revenue from asset management, liquidation and cost-recovery, and
media buying services, was $3.1 million and $470,000 as of September 30, 2000
and 1999, respectively.
The Company will contract with a customer to sell for the customer large
blocks of assets or inventory under asset management, liquidation, or cost
recovery agreements. In an asset management agreement, the Company acts as an
agent, sells the assets for cash, and receives a percentage of the sale as a
commission. The Company records the commission received as revenue when the
asset is shipped.
Under most liquidation and cost-recovery agreements, the Company takes
title to the assets but does not assume the risk of loss. The Company is not
required, by either type of agreement, to make any cash payment to the customer
for the assets purchased until such time as the Company sells the assets. These
payments pertain to the portion of assets actually sold. The ultimate cost to
the Company is a fixed percentage of the sale price of the inventory for, which
is unknown until a sale occurs. Accordingly, the Company usually does not record
inventory for any assets purchased under these agreements. Only when the Company
assumes the risk of loss and the value of the goods purchased can be reasonably
estimated is inventory recorded. Only one such cost recovery contract was in
effect during the year ended September 30, 2000 and, as a general rule, the
Company does not plan to enter into such agreements in the future.
The transactions conducted under asset management and cost recovery
agreements can also be settled, in part, in trade credits to purchase
advertising media, merchandise, or business services ("trade credits"). The
amount of trade credits issued to customers represents the difference between
the contracted
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value of the inventory as negotiated with the customer and the cash paid to the
customer upon the sale of the inventory. Trade credits are not redeemable by
customers for cash. The contracted value of the inventory is mutually agreed
upon by the Company and the customer at the time an agreement is reached and is
usually in excess of the cash liquidation value. The Company is not required to
remit cash or any other form of payment other than trade credits for the
difference between the contracted value and the cash paid for the inventory.
Revenues associated with asset management and cost recovery services are
typically recognized when the inventory sold is shipped. However, if the
transactions involve the issuance of trade credits, the Company will defer a
portion of the revenue attributable to cash received under asset management and
cost-recovery agreements to reflect the outstanding costs applicable to the
future redemption of the trade credits.
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 in exchange for trade
credits and cash. The ratio of cash to combination trade credits that make up
the total purchase price to be used in purchases from the Company are determined
on a transaction-by-transaction basis. When the Company redeems combination
trade credits, it recognizes revenue equal to the cash received from the
customer for the goods and services plus, if applicable, the pro rata portion of
the deferred revenue relating to the liquidation of the assets that gave rise to
the trade credits. Cost of revenue is recognized for the cash the Company paid
for the goods and services.
Straight trade credits are issued to purchase goods and services from the
Company without the requirement to pay us a portion of the purchase price in
cash. Straight trade credits are issued to purchase pre-negotiated types of
goods and services, which have readily estimable costs. The Company records
deferred revenue for straight trade credits approximating the estimated cost to
purchase future goods and services plus a normal profit margin. When the Company
redeems straight trade credits, it recognizes revenue equal to the pro rata
portion of the deferred revenue relating to straight trade credits. Cost of
revenue is recognized for the cash the Company paid for the goods and services.
The source of our revenue, and its attendant costs, has changed
dramatically in the year ended September 30, 2000 from previous fiscal years.
Nearly 57% of our revenue in fiscal year 1999 was from technology consulting
services sold by Entrade. In the year ended September 30, 2000, that share of
our total revenue dropped below 2%, with sales of cost recovery services and
media by ATM and Intrac accounting for 94% of our revenue. The dramatic change
in the source of our revenue was due to the sale of Entrade in September 1999,
after which time Entrade's operating results, which included the revenues
derived from the consulting services provided by Entrade, were no longer
included in our consolidated financial statements, and the inclusion of Intrac's
operations for an entire year. Intrac was not included in our consolidated
operating results until July 23, 1999, when the Company acquired Intrac.
COST OF REVENUE
Cost of revenue consists of goods, freight, warehousing of inventory held
for sale, media purchases, commissions and, in 1999, also included salaries paid
to programmers and consultants. Cost of revenue was $6.2 million for the fiscal
year ended September 30, 2000, $792,000 for the fiscal year ended September 30,
1999 and $36,000 for the fiscal year ended September 30, 1998. The increases in
cost of revenue from 1999 to 2000 corresponds with the increases in our revenues
due to the inclusion of ATM and Intrac in our consolidated financial statements
for the entire year in fiscal 2000 as compared to only 2 months in fiscal 1999.
The increase in cost of revenue from 1998 to 1999 also corresponds to an
increase in revenue from the inclusion of Entrade, ATM and Intrac in 1999.
With the dramatic change in the source of our revenue described in
"REVENUES" above, came a corresponding change in the cost of our revenue. The
cost of producing technology-consulting revenues is significantly lower than the
cost of producing either media sales or cost recovery revenue. Therefore, with
the bulk of revenue in the year ended September 30, 2000 derived from sources
with higher costs of
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production, the total cost of revenue as a percentage of total revenue has grown
dramatically in 2000 over 1999.
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 $14.3 million, $5.3 million,
and $140,000 for the years ended September 30, 2000, 1999 and 1998,
respectively. The increases from 1998 to 1999 and to 2000 were primarily due to
an increase in the operations of Entrade, and the acquisitions of Entrade, ATM
Service, Ltd., The Intrac Group and Real Quest, Inc. As the number of our
employees grew to support our operations and those of our subsidiary companies,
our general and administrative costs increased.
Unless we are able to obtain additional financing, we will be unable to
continue to pay these expenses.
The increases from 1999 to 2000 were primarily due to the inclusion of the
consolidated affiliated companies for the entire year, development of
ATMcenter.com, development and launch of the NAIDirect.com website, severance
agreements, and costs associated with the registration filing of the Company.
Increases were in payroll and related costs of $5.8 million, professional fees
of $1.4 million, consulting fees of $376,000, advertising and promotion expense
of $754,000, travel and entertainment expense of $1.1 million and rent of
$399,000.
The increases from 1998 to 1999, excluding $1.6 million attributable to
the operations of entrade.com, which was sold in September 1999, were primarily
due to increases in payroll and related costs of $2.1 million, professional fees
of $524,000, consulting fees of $372,000, software development expense of
$366,000, travel and entertainment expense of $227,000 and rent of $118,000.
DEPRECIATION AND AMORTIZATION
Amortization expense consists of amortization of goodwill and other
intangible assets. Depreciation expense consists of depreciation of furniture,
fixtures, machinery and computer equipment. Depreciation and amortization was
$1.5 million, $597,000 and $13,000 for the years ended September 30, 2000, 1999
and 1998, respectively. The increase in depreciation and amortization in fiscal
2000 was primarily due to the amortization of goodwill of $1.1 million and
$277,000 for the acquisitions of Intrac in July 1999 and Real Quest in September
1999, respectively. The increase in depreciation and amortization in fiscal 1999
was primarily due to goodwill amortization of $109,000 relating to The Intrac
Group acquisition, and $430,000 relating to Entrade, which was sold in September
1999.
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 consist of four research and
development projects. WWWX-Jencom discontinued development of these projects due
to the lack of funds. The technologies acquired are VuCam, a remote-control
real-time streaming video software; True Sound, a sound compression format;
Student 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.
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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.
WRITE-OFF OF INTANGIBLES
We evaluate impairment of our intangible and long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and Accounting Principles Board Opinion No. 17, "Intangible Assets." In
making such determination, management compares the estimated future cash flow
performance, on an undiscounted basis, of the underlying operations or assets as
compared with their carrying value to determine if any impairment charge is
necessary. At September 30, 2000, we compared the estimated future cash flows
from Intrac's known and consummated transactions with the carrying value of the
goodwill recorded on this investment. As a result of the evaluation, we
wrote-off the remaining unamortized goodwill related to Intrac totaling $3.9
million.
During fiscal year 1999, we determined that the ATM Center System
technology did not meet ATM Service, Ltd.'s current business model and
decided that it would no longer use this technology to support its
operations. We also determined that there was no value to the technology and
recorded a charge to operations for the unamortized value of the technology
of $5.6 million. In September 1999, ATM Service, Ltd. entered into a license
agreement with entrade.com to use the Entrade Transaction Software to run the
ATMcenter.com web sites.
LOSS FROM OPERATIONS
During the year ended September 30, 2000, we incurred a loss from
operations of $19.1 million compared with $13.9 million and $139,000 in the
years ended September 30, 1999 and 1998, respectively. The increased loss is
primarily the result of a $9 million increase in selling, general and
administrative expenditures previously discussed, and a $1 million increase in
depreciation and amortization expenses, offset by the non-recurring 1999 charges
for the write-off of acquired in-process research and development costs of $3
million and the decrease in impairment of intangible assets of $1.7 million.
The increased loss from 1998 to 1999 is primarily the result of increased
operations and the inclusion of our consolidated subsidiaries.
GAIN ON SALE OF SUBSIDIARY
In September 1999, we completed the sale of Entrade to Artra Group
resulting in a gain of $25.4 million. On the date of the closing, we received
cash of $1.3 million and 1.8 million shares of Entrade common stock, which
were valued at $29.5 million. Additionally, we received $1.3 million in
funding for operations of Entrade from Artra for the period February 28, 1999
through September 23, 1999.
LOSS ON SALE OF INVESTMENT
In fiscal year 2000, we raised working capital through the sale of shares
of Entrade Inc. The shares, received as compensation from sale of a 90% owned
subsidiary in 1999, were sold for prices ranging from $4.50 per share to $9.375
per share in the period May 2000 through August 2000. These prices, which
reflected market transactions, were all less than our cost basis of $16.375 per
share. The resulting loss from the sale of 225,000 shares of Entrade Inc. was
$2.3 million. At September 30, 2000, we evaluated the financial position,
results of operations, liquidity and capital resources, and the trend of the
market price decline of Entrade Inc. We also considered the overall industry
conditions in which Entrade Inc operates. Based upon our review, we believe that
the decline in the market value of our investment in Entrade, Inc. is other than
temporary. Accordingly, at September 30, 2000, we recorded an impairment loss of
$19.8 million in the statement of operations and established at new cost basis
of $3.8125 per share for our holdings in Entrade Inc.
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IMPAIRMENT OF INVESTMENT IN AND ADVANCES TO AFFILIATED COMPANIES
We continually evaluate the carrying value of our ownership interests in
each of the companies in which we have interests for possible impairment based
on the 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 September 30, 2000, we evaluated the carrying value of our ownership
interest in VideoNet and InterCommerce China. Based on our review, we have
recorded valuation adjustments of $2.4 million in the year ended September 30,
2000. At September 30, 1999, we evaluated the carrying value of our ownership
interest in Vision Technologies, Inc. and WWWX-Jencom and recorded a valuation
allowance of $1.1 million.
INTEREST EXPENSE
Interest expense represents interest on our convertible debt and capital
lease obligations. Interest expense was $67,000, $219,000 and $10,000 for the
years ended September 30, 2000, 1999 and 1998, respectively.
EQUITY INCOME (LOSS)
Equity income (loss) represents our share of the earnings or losses of our
investments accounted for under the equity method. In the year ended September
30, 2000, equity income (loss) is wholly attributable to WWWX-Jencom and
represents our share of its loss until the carrying value of this investment was
reduced to $0. In the year ended September 30, 1999, equity income (loss)
includes $417,000 of goodwill amortization relating to the amount by which our
carrying value exceeded our share of the underlying net assets of ATM Service,
Ltd. and $800,000 of stock compensation earned by Warren Rothstein, the former
Chairman of ATM and Intrac and our former Chairman, President and CEO, for
listings provided to ATM Service, Ltd. The operations of ATM Service, Ltd. are
included in our consolidated operations from July 23, 1999, the date which we
acquired a controlling interest, through September 30, 1999. Additionally, our
fiscal 1999 equity loss includes our share of the loss from WWWX-Jencom of
$361,000.
AMORTIZATION OF DEBT ISSUANCE COSTS
Deferred finance costs consist of expenses related to the issuance of the
convertible debt agreements entered into in March 1999 and the convertible
promissory note issued in August 2000. Amortization of debt issuance costs was
$156,000, $155,000 and $80,000 for the years ended September 30, 2000, 1999 and
1998, respectively.
INTEREST INCOME
Interest income represents interest on the Company's cash and cash
equivalents, which are primarily invested in money market accounts. Interest
income was $193,000, $56,000 and $10,000 for the years ended September 30, 2000,
1999 and 1998, respectively.
INCOME TAX EXPENSE
The deferred income tax benefit for the year ended September 30, 2000 of
$6,863,000 principally results from the impairment loss recorded for the shares
of Entrade Inc. A deferred tax liability for the same amount was created in
prior year as a result of the initial investment in Entrade Inc.
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NET INCOME (LOSS)
For the year ended September 30, 2000, we had a net loss of $37.1 million,
compared with net income of $1.6 million for the year ended September 30, 1999
and a net loss of $219,000 for the year ended September 30, 1998. The decrease
in income resulted primarily from the impairment loss in the value of the
Company's holdings in Entrade Inc., the realized losses on the sale of Entrade
Inc. stock, the impairment of the goodwill recorded on the Intrac acquisition,
the valuation adjustments in advances to other companies, and the increased
operating loss, all of which have been previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
During the three fiscal years ended September 30, 2000, 1999 and 1998, we
funded our operations with a combination of cash proceeds from the sale of our
common stock, our convertible debentures and our Entrade subsidiary. Since
inception, we have raised approximately $12.9 million from the sale of our
common stock and approximately $5.1 million from the sale of our convertible
debentures. Proceeds from the sale of Entrade stock generated cash proceeds of
approximately $1.4 million.
Cash used in operations increased to $9.3 million in 2000 compared to $3.4
million in 1999, and $95,000 in 1998. The increased cash demand has been paid
for almost entirely from cash flows from the financing activities mentioned
above, a slight decrease in accounts receivable and a modest increase in net
revenues being the only notable exceptions.
Cash used in investing activities was $1 million in 2000 compared with
$3.1 million in 1999 and $145,000 in 1998. The proceeds of $1.4 million from the
sale of short-term investments offset the purchase of $314,000 of property
and equipment.
The Company's operations are not capital intensive and it has not incurred
significant capital expenditures through September 30, 2000 and does not
anticipate significant capital expenditures in fiscal 2001. There were no
material capital asset purchase commitments at September 30, 2000.
In fiscal 2000, holders of $865,000 in principal amount of the Company's
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 debentures, the Company 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 September 30, 2000
will be adequate to fund the Company's current operating needs at current
levels through approximately May 2001. In order to continue its operations,
the Company will need additional cash resulting from future equity offerings
or other debt financing. We anticipate extending the maturity date of the
$3.6 million convertible loan due on September 1, 2001, however there can be
no assurance that we will be able to do so.
We believe that raising additional capital will be difficult and
that sources of additional financing for the Company are limited at this time.
If we are able to obtain additional financing, the interests of our existing
shareholders may be diluted, and we are unable to predict the amount of such
possible dilution.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. From September 30, 2000 through January
10, 2001, the aggregate value of our Entrade stock has fluctuated from a low of
$787,500 on December 26, 2000 to a high of $5.3 million on October 2, 2000. A
20% decrease in equity prices would result in an approximate $1.2 million
decrease in the fair value of our holdings of our Entrade stock at September 30,
2000. The value of our holdings may continue to fluctuate. We have not attempted
to reduce or eliminate our market exposure on our holdings.
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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 $5,000 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 September 30,
2000, $865,000 in principal amount of the convertible debentures have been
converted into common stock and $125,000 in principal amount remains
outstanding. In addition, we have a $3.6 million convertible loan due on
September 1, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and related documents that are filed with this
report are listed in Item 14 of this report on Form 10-K.
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
Our directors and executive officers are currently as follows:
NAME AGE POSITION
Carol C. Knauff 52 Chairman, President and Chief Executive Officer
R. Bruce Richardson 53 Chief Financial Officer
Nahum G. Shar 62 Assistant Secretary and Assistant Treasurer
CAROL C. KNAUFF has been our Chairman since August 28, 2000 and our
President and Chief Executive Officer since September 1, 2000. From March 2000
to August 2000, Ms. Knauff was an independent consultant engaged in various
assignments; from December 1998 to March 2000, Ms. Knauff was Vice President,
Consumer Product Management, for AT&T Corporation ("AT&T"); from December 1995
to December 1998, Ms. Knauff was Vice President, Global Consumer Markets, for
AT&T. Ms. Knauff received her bachelor's degree from Penn State University in
1969 and masters degrees in engineering management and business administration,
respectively, from the University of Missouri and Fairleigh Dickinson University
in 1978.
R. BRUCE RICHARDSON has been our Chief Financial Officer since October
1, 2000. From April 1999 to April 2000, Mr. Richardson was Chief Executive
Officer of iOnet Solutions, Inc., a company which he co-founded; from May
1995 to March 1998, he was a Client Partner of AT&T Solutions, a
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division of AT&T of which he was also a founder. Mr. Richardson received his
bachelor's degree from Pittsburgh State University in 1970.
NAHUM G. SHAR has been our Assistant Secretary and Assistant Treasurer
since August 28, 2000. Mr. Shar provides consulting services to both us and
ATM pursuant to oral consulting agreements and is not an employee of either
the Company or any of our subsidiaries. Mr. Shar is also a director of
Pentland USA Inc. ("Pentland"), a position that he has held since November
1998. From 1994 to 1997, Mr. Shar was Chairman and President of Pentland.
Mr. Shar received his degree as a chartered accountant (CPA) from the
University of Capetown, South Africa, in 1967.
NUMBER OF DIRECTORS
Our certificate of incorporation requires that we have not less than three
and no more than five directors, as determined by our stockholders. On December
27, 2000, the Board of Directors accepted the resignations of Thomas Settineri
and Ronald Tobia as directors of the Company. Since December 27, 2000, we have
had only one director. Mr. Tobia retains the 150,000 options that were granted
to him in consideration for his services as a director. All directors hold
office until the next annual meeting of stockholders and until their successors
have been elected and qualified. Under the terms of the Agency Agreement between
us and D.H. Blair Investment Banking Corp., dated May 26, 1999, D.H. Blair was
given the right to appoint one of our directors, however, to date, D.H. Blair
has not exercised that right. Management expects that these vacancies will be
filled as soon as acceptable candidates can be identified.
Carol C. Knauff joined our Board on August 22, 2000. We intend to seek
stockholder consent to amend the certificate of incorporation and bylaws in
order to give our Board the right to determine the size of the Board of
Directors, to consist of not less than three nor more than nine directors, and
to appoint additional outside directors to the current Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
We have established two committees of our Board of Directors: an audit
committee and a compensation committee. The basic functions of these
committees are summarized below.
COMPENSATION COMMITTEE. The Compensation Committee is authorized to review
and make recommendations to the Board of Directors on all matters regarding the
remuneration of its executive officers, including the administration of the
compensation plans of the Company. Robert Kohn, our former Chairman, Chief
Executive Officer and President, served as the sole member of the compensation
committee from August 12, 1999 until his resignation from all his positions on
September 23, 1999. From December 1999 until his resignation as a member of the
Board of Directors on August 24, 2000, the sole member of this committee was
William Weld. Mr. Weld's position on this committee has not yet been filled,
although the board intends to do so during the current fiscal year. The
Compensation Committee did not hold any meetings during fiscal year 2000 and all
decisions of the Compensation Committee for the fiscal year were relegated to
the full Board of Directors.
AUDIT COMMITTEE. The Audit Committee is responsible for making
recommendations to the Board of Directors as to the selection of the independent
auditors of the Company, maintaining communication between the Board of
Directors and the independent auditors, reviewing the annual audit report
submitted by the independent auditors, and determining the nature and extent of
issues, if any, presented by such audit warranting consideration by the Board of
Directors. Robert Kohn also served as the sole member of this committee from
August 12, 1999 until his resignation from all his positions on September 23,
1999 and, from December 1999 until his resignation as a member of the Board of
Directors on August 24, 2000, the sole member of this committee was William
Weld. Mr. Weld's position on this committee has not yet been filled, although
the board intends to do so during the next year. The Audit Committee did not
hold any meetings during fiscal year 2000 and all decisions of the Audit
Committee for the fiscal year were relegated to the full Board of Directors.
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DIRECTOR COMPENSATION
Directors who are also our employees or employees of our subsidiaries
receive no additional compensation for their services as Directors. Directors
who are not our employees will not receive a fee for attendance at meetings of
the Board of Directors, but they will be reimbursed for their out-of-pocket
expenses in connection with their activities as Directors. Our outside Directors
have also been granted stock options as consideration for their services.
ITEM 11. EXECUTIVE COMPENSATION
The table below summarizes information concerning the total compensation
for the fiscal year ended September 30, 2000 for our Chief Executive Officers
and the four most highly compensated other executive officers or employees of
the Company or its subsidiaries (the "Named Persons").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
BONUS/ LONG-TERM
NAME AND SEVERANCE/ COMPENSATION
PRINCIPAL POSITION YEAR SALARY OTHER AWARDS
<S> <C> <C> <C> <C>
Warren Rothstein
Interim Chairman, President and
CEO from September 23, 2999 to
April 26, 2000 (1) 2000 $390,048 $ 42,483 N/A
Gerard T. Drumm
Interim President and CEO from
April 26, 2000 to August 24,
2000 (2) 2000 $108,173 $255,760 200,000
Thomas A. Settineri Acting
President from August 24, 2000
to August 31, 2000; Director
from September 23, 1999
to December 27, 2000 (3) 2000 $375,000 $ 52,829 1,500,000
Carol C. Knauff
Chairman, President and CEO from
September 1, 2000 to the present
(4) 2000 $ 12,308 $0 5,000,000
Allan M. Cohen
Vice President, General Counsel
and Director from October 1999
to August 24, 2000 (5) 2000 $127,244 $87,500 250,000
John T. Banigan
Executive Vice President and
Chief Financial Officer from
January 2000 to August 24, 2000
(6) 2000 $114,558 $153,750 250,000
G. David Rosenblum
Vice President and General
Counsel for ATM and Intrac from
March 6, 2000 to August 28, 2000
and General Counsel for the
Company from August 28, 2000 to
the present (7) 2000 $168,711 $ 50,000 500,000
Gary K. Levi
Secretary/Treasurer of the
Company from August 24, 2000 to
December 29, 2000;
President and COO of ATM and
Intrac (8) 2000 $204,167 $ 25,897 1,500,000
</TABLE>
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(1) Mr. Rothstein's compensation was paid by ATM as a management fee. The
Company also paid for certain expenses on Mr. Rothstein's behalf during fiscal
year 2000, including automobile expenses and insurance.
(2) Mr. Drumm's annual base salary for fiscal year 2000 was $225,000. In
addition, pursuant to his employment contract, Mr. Drumm received a signing
bonus in the amount of $75,000 upon the commencement of his employment in March
2000, options to purchase 200,000 shares of our common stock at $5.15 per share,
an advance against his annual performance bonus in the amount of $12,010. Upon
the termination of his employment on August 24, 2000, he received a severance
payment in the amount of $168,750 and his options were re-priced at $0.75 per
share.
(3) Mr. Settineri's annual base salary for fiscal year 2000 was $400,000, which
was paid by ATM and Intrac. On August 28, 2000, Mr. Settineri was granted
options to purchase up to 1,500,000 additional shares of our common stock at
$0.75 per share, of which the options with respect to 1,000,000 vested
immediately and the balance will vest if and when the bid price for our common
stock on the open market reaches or exceeds $3.50 per share and remains at or
above such price for a period of 30 consecutive trading days. The Company also
paid for certain expenses on Mr. Settineri's behalf during fiscal year,
including automobile expenses and insurance.
(4) Ms. Knauff's annual base salary for fiscal year 2000 was $200,000. On
August 28, 2000, Ms. Knauff was awarded options to purchase up to 5,000,000
shares of our common stock at $0.40 per share. See "Employment Agreements
and Termination of Employment and Change in Control Arrangements."
(5) Mr. Cohen's annual base salary for fiscal year 2000 was $175,000. In
addition, Mr. Cohen received a options to purchase 250,000 shares of our common
stock at $2.69 per share. Upon the termination of his employment on August 24,
2000, he received a severance payment in the amount of $87,500 and his options
were re-priced at $0.75 per share. We retained Mr. Cohen as a consultant to the
Company for two months following the termination of his employment and paid him
a consulting fee of $16,667 per month.
(6) Mr. Banigan's annual base salary for fiscal year 2000 was $185,000. In
addition, upon the commencement of his employment in February 2000, Mr. Banigan
received a signing bonus in the amount of $15,000 and options to purchase
250,000 shares of our common stock at $5.65 per share. Upon the termination of
his employment on August 24, 2000, he received a severance payment in the amount
of $138,750 and his options were re-priced at $0.75 per share.
(7) Mr. Rosenblum's annual base salary for fiscal year 2000 was $225,000. On
August 28, 2000, Mr. Rosenblum was awarded options to purchase up to 500,000
shares of our common stock at $0.75 per share. See "Employment Agreements and
Termination of Employment and Change in Control Arrangements." Mr. Rosenblum's
compensation also included an automobile allowance and reimbursement and/or an
allowance for overnight lodging and/or housing expenses in Tarrytown, New York,
during the period from March 2000 through November 2000.
(8) Mr. Levi's annual base salary for fiscal year 2000, which was paid by ATM,
was $200,000. On August 28, 2000, Mr. Levi was granted options to purchase up to
1,500,000 shares of our common stock at $0.75 per share of which the options
with respect to 1,000,000 shares vested immediately and the balance will vest if
and when the bid price for our common stock on the open market reaches or
exceeds $3.50 per share and remains at or above such price for a period of 30
consecutive trading days. The Company also paid for certain expenses on Mr.
Levi's behalf during fiscal year 2000, including automobile expenses and
insurance.
STOCK OPTIONS GRANTED FOR LAST FISCAL YEAR
Set forth below is information on grants of stock options under the 1999
Equity Compensation Plan and 2000 Equity Option Plan for the fiscal year ended
September 30, 2000 to persons included in the foregoing Summary Compensation
Table.
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING TO EMPLOYEES IN PRICE PER EXPIRATION
NAME AND GRANT DATE OPTIONS GRANTED 2000 SHARE DATE
<S> <C> <C> <C> <C>
Allan Cohen 250,000 0% $2.69(1) August 26, 2009
granted August 26, 1999
Gerard T. Drumm 200,000 2% $5.15(1) March 20, 2010
granted March 20, 2000
John T. Banigan 250,000 2% $5.65(1) March 20, 2010
granted March 20, 2000
Carol C. Knauff 5,000,000 47% $0.40 October 10, 2010
granted October 10, 2000
Thomas Settineri 1,500,000 14% $0.75 October 10, 2010
granted October 10, 2000
Gary Levi 1,500,000 14% $0.75 October 10, 2010
granted October 10, 2000
G. David Rosenblum 500,000 5% $0.75 October 10, 2010
granted October 10, 2000
</TABLE>
(1) These options were re-priced at $0.75 per share on August 24, 2000 in
connection with the termination of each optionee's employment. See "Summary
of Executive Compensation."
Option Exercises
No options were exercised during fiscal year 2000.
Pension and Retirement Plans
We do not have any pension or retirement plans for the benefit of our employees
and no benefits are payable upon retirement to any of our employees.
401K PLAN
We have a defined contribution plan that covers all of our employees.
Participants may contribute 1% to 15% of pre-tax compensation. We may make
discretionary contributions to the plan but have never done so.
1999 EQUITY COMPENSATION PLAN
Our Board of Directors adopted our 1999 Equity Compensation Plan on August
12, 1999, subject to the approval of our stockholders. However, the adoption of
the 1999 Plan has not yet been submitted to our stockholders for approval. The
purpose of our 1999 Equity Compensation Plan was to reward, attract and retain
the best available personnel for positions of substantial responsibility, to
provide an additional incentive to our employees, directors and consultants and
to promote the success of our business. The 1999 Equity Compensation Plan
provided for the issuance to our employees, non-employee directors and advisors
and consultants of shares of common stock pursuant to the grant of incentive
stock options, non-qualified stock options and restricted stock.
A total of 3,860,000 shares have been reserved under our 1999 Equity
Compensation Plan. A total of 2,330,000 options were granted by our Board of
Directors under the 1999 Plan. However, as of September 30, 2000, only 1,240,000
of the options granted under the 1999 Plan remained outstanding, with the
remainder having terminated under the terms of the 1999 Plan. The 1999 Plan will
be submitted to our stockholders for approval at the next annual stockholders
meeting or by consent of stockholders in lieu of a
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<PAGE>
meeting. Because the 1999 Plan was not approved by the stockholders within 12
months following its adoption, if the Plan is approved by the stockholders, all
of the options that were granted under the 1999 Plan and remain outstanding will
be deemed to be non-qualified stock options. No additional stock options or
restricted shares will be issued under the 1999 Equity Compensation Plan. The
major features of the 1999 Plan are summarized below. The description provided
below is qualified in its entirety by reference to the actual 1999 Plan, a copy
of which was filed as an Exhibit to the Amended Registration Statement on Form
10 filed with the SEC on June 12, 2000.
The 1999 Plan contains customary provisions with respect to adjustments
for stock splits and similar transactions. If any stock option granted under the
1999 Plan terminates, expires unexercised, or is cancelled, the shares of Common
Stock that would otherwise have been issuable pursuant thereto will be available
for issuance pursuant to the grant of new stock options.
Options have maximum terms of ten years from the grant date. Options are
not assignable or transferable other than by will or by the laws of inheritance.
Options may be exercised only by the optionee. The optionee has no rights with
respect to shares of Common Stock underlying the options until the options are
exercised and the option price is paid for the purchased shares. The Board of
Directors is authorized to cancel outstanding options in return for the grant of
new options, stock or cash. The Common Stock issuable to an optionee pursuant to
the 1999 Plan are, prior to an initial public offering, subject to a right of
first refusal by the Company and then to the shareholders of the Company. The
1999 Plan terminates on August 12, 2009. If the Company is acquired by merger,
consolidation or asset sale, or there is a hostile change in control, each
option granted under the plan may be accelerated, and all unvested shares issued
thereunder become immediately vested.
2000 EQUITY OPTION PLAN
Our Board of Directors adopted our 2000 Incentive Stock Plan on October
10, 2000. The purpose of our 2000 Incentive Stock Plan, which provides for the
grant of incentive stock options, non-qualified stock options and restricted
stock to our employees, non-employee directors and advisors and consultants, is
to reward, attract and retain the best available personnel for positions of
substantial responsibility, to provide an additional incentive to our employees,
directors and consultants and to promote the success of our business.
A total of 12,912,400 shares have been reserved under our 2000 Incentive
Stock Plan. To date, 9,475,000 options have been granted under the Plan. The
Plan will be submitted to the stockholders for approval at the next annual
meeting of the stockholders or by consent of stockholders in lieu of a meeting.
If the Plan is not approved by the stockholders within twelve months from the
date of its adoption, all of the options that were granted under the 2000 Plan
will be deemed to be non-qualified stock options.
To date, our 2000 Incentive Stock Plan has been administered by our Board
of Directors. However, the Board of Directors intends to appoint one or more
members to its compensation committee to administer the 2000 Plan in the future.
Subject to the provisions of the 2000 Plan, the Board of Directors or the
compensation committee has the authority to determine to whom stock options and
restricted stock awards will be granted and the terms of any such grant,
including the number of shares subject to, the exercise price and vesting
provisions of the award. The option price per share of the common stock under
the 2000 Plan will be determined by the Board of Directors or the compensation
committee at the time of each grant, provided, however, that the exercise price
per share of any incentive stock option may not be less than the fair market
value of our common stock at the time of the grant of such option. In addition,
if any person possessing more than 10% of the voting power of all classes of our
outstanding capital stock is granted incentive stock options, the exercise price
per share must equal at least 110% of the fair market value of our common stock
on the grant date and the term of the option may not exceed five years. The
major features of the 2000 Plan are summarized below. The description provided
below is qualified in its entirety by reference to the actual 2000 Plan, a copy
of which is attached hereto as Exhibit No. 10.73.
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Options have maximum terms of ten years from the grant date. Options are
not assignable or transferable other than by will or by the laws of inheritance.
Options may be exercised only by the optionee. The optionee has no rights with
respect to shares of Common Stock underlying the options until the options are
exercised and the option price is paid for the purchased shares. The Board of
Directors is authorized to cancel outstanding options in return for the grant of
new options, stock or cash. The 2000 Plan terminates on October 10, 2010.
Payment for the exercise of an option may be made by cash, check or any
other instrument as the compensation committee may accept, including, at the
discretion of the Board of Directors or the compensation committee, unrestricted
shares of our common stock.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
On December 31, 1998, we entered into a Shareholders Agreement with ATM
Services, Ltd. and Warren Rothstein in connection with the formation of ATM,
which was amended by the parties on July 7, 1999. The December 1, 1998
Shareholders Agreement was terminated as of September 30, 2000 in connection
with Mr. Rothstein's resignation as the Chairman of ATM and Intrac and the
relinquishment of his equity interest in ATM. We entered into a new Shareholders
Agreement, effective as of September 30, 2000, with ATM and Thomas Settineri and
Gary Levi, who are currently the only other shareholders of ATM. See "ATM
Shareholders Agreement."
In August 2000, we entered into a three-year employment agreement with
Carol C. Knauff, whereby she agreed to serve as our Chairman, President and
Chief Executive Officer, commencing September 1, 2000. Ms. Knauff's compensation
includes an annual base salary of $200,000, an annual bonus to be determined by
our Board of Directors and an option to purchase up to 5 million shares our
common stock at an exercise price of $0.40 per share. The option vests as
follows: 500,000 shares immediately, 1,000,000 shares at the end of the first 12
months of employment, and the balance at the end of 5 years of employment, or
sooner, based upon the price of our common stock on the open market, in
accordance with the following schedule:
BID PRICE NUMBER OF OPTION SHARES
--------- -----------------------
$1.50 1,000,000
$2.25 1,000,000
$3.00 1,000,000
$4.50 500,000
Ms. Knauff has agreed not to compete with us during her employment and for
one year after her termination or the expiration of the employment agreement.
In November 2000, we entered into a three-year employment agreement with
R. Bruce Richardson, effective as October 1, 2000, whereby he agreed serve as
our Chief Financial Officer. Mr. Richardson's compensation includes an annual
base salary of $150,000, an annual bonus to be determined by the Board of
Directors and options to purchase 500,000 shares of our common stock at an
exercise price of $0.75 per share, which was greater than the closing price of
our common stock on the date of the grant. One-half of the option vested
immediately and the balance will vest at the end of one year of employment.
In February 2000, we entered into a five-year employment agreement with G.
David Rosenblum, whereby he agreed to serve as Vice President and General
Counsel for ATM and Intrac and to perform such other duties and responsibilities
as were assigned to him by our Chairman and President, commencing March 6, 2000.
Mr. Rosenblum's employment contract was terminated by the Company on May 4,
2000, however, Mr. Rosenblum's employment as Vice President and General Counsel
for ATM and Intrac continued from that date until August 28, 2000. On August 28,
2000, we reinstated our employment contract with Mr. Rosenblum in full,
retroactive to May 4, 2000, and appointed Mr. Rosenblum as our General Counsel.
Mr. Rosenblum's compensation under his employment agreement includes a signing
bonus of $50,000, an annual base salary of $225,000, which increased to $250,000
effective as of January
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1, 2001, an annual bonus of not less than $35,000. On August 28, 2000, the Board
of Directors determined to award Mr. Rosenblum an option to purchase 500,000
shares of our common stock at an exercise price of $0.75 per share, which was
greater than the closing price of our common stock on the date of the grant.
All of Mr. Rosenblum's options vested immediately upon the date of the grant.
Mr. Rosenblum has agreed not to compete with us during his employment and for
one year after his termination or the expiration of his employment agreement.
In July 1999, ATM Service, Ltd. and The Intrac Group, Ltd. each entered
into a ten-year employment agreement with Thomas A. Settineri. Under these
employment agreements, ATM and Intrac, each agreed to employ Mr. Settineri as
its President and Chief Executive Officer and to jointly pay him an annual
salary of $400,000. Mr. Settineri may not compete with us or our subsidiaries
while employed by us. In addition, if Mr. Settineri's employment is
terminated before July 23, 2004 by Mr. Settineri with cause, or by ATM or
Intrac without cause, or without cause but with a mutually agreed upon
severance package, Mr. Settineri is restricted from competing in any way with
us or our subsidiaries until July 23, 2004.
In July 1999, ATM Service, Ltd. and The Intrac Group, Ltd. also each
entered into a ten-year employment agreement with Gary K. Levi. Under these
employment agreements, ATM and Intrac, each agreed to employ Mr. Levi as its
Chief Operating Officer and to jointly pay him an annual salary of $200,000.
Mr. Levi may not compete with us or our subsidiaries while employed by us. In
addition, if Mr. Levi's employment is terminated before July 23, 2004 by Mr.
Levi with cause, or by ATM or Intrac without cause, or without cause but with
a mutually agreed upon severance package, Mr. Levi is restricted from
competing in any way with us or our subsidiaries until July 23, 2004.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Robert Kohn, our former Chairman, Chief Executive Officer and President,
served as the sole member of the compensation committee from August 12, 1999
until his resignation from all his positions on September 23, 1999. Mr. Kohn
served as the sole director and Chief Executive Officer of Entrade, one of our
subsidiaries, from February 1999 to September 23, 1999, when Entrade was sold.
Prior to the appointment of Mr. Kohn to the compensation committee, the Board of
Directors set the compensation of our officers including those executive
officers on the Board. During our fiscal year ended September 30, 1999, our
Board of Directors consisted, for the first half of the year, of only two
Directors, Robert Kohn and Bjorn Koritz. Mr. Koritz served as a Director and our
Secretary and General Counsel until he resigned all his positions on June 23,
1999. Allan Cohen and Michael Norton were appointed to the Board of Directors on
June 23, 1999 and served until August 24, 2000. Currently there are no persons
appointed to the compensation committee and its functions are being carried out
by the full board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table sets forth information known to us with respect to
beneficial ownership of our common stock as of December 29, 2000 for:
- each person known by us to beneficially own 5% or more of our
outstanding common stock;
- each of our directors and executive officers;
- each executive officer and employee named in the summary
compensation table; and
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- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
SEC. In computing the number of shares beneficially owned by a person and the
approximate percentage ownership of that person, shares of common stock
subject to options or warrants held by that person that are currently
exercisable or exercisable within 60 days of December 29, 2000 are deemed
outstanding. Percentage of beneficial ownership is based upon 38,915,583
shares of common stock outstanding at December 29, 2000 and shares subject to
options or warrants that are currently exercisable or exercisable within 60
days of December 29, 2000. To our knowledge, except as set forth in the
footnotes to this table, each person named in the table has sole voting and
investment power with respect to the shares set forth opposite such person's
name.
NUMBER OF SHARES PERCENT BENEFICIALLY
BENEFICIALLY OWNED OWNED
OFFICERS AND DIRECTORS
Carol C. Knauff 500,000(1) 1%
R. Bruce Richardson 250,000(1) (7)
Nahum G. Shar 300,000(1) (7)
Thomas A. Settineri 1,750,000(2) 4%
Gary K. Levi 1,250,000(3) 3%
EMPLOYEES
G. David Rosenblum 500,000(1) 1%
ALL DIRECTORS AND EXECUTIVE 4,050,000(4) 8%
OFFICERS AS A GROUP (PERSON)
FIVE PERCENT
STOCKHOLDERS
D.H. Blair Investment 7,264,967(5) 16%
Banking Corp.
44 Wall Street, 2nd Floor
New York, NY 10005
JenCom Digital Technologies LLC
18 W. 18th Street, #1000 3,094,927(6) 7%
New York, NY 10011
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(1) c/o WorldWide Web NetworX Corporation, 521 Fellowship Road, Mt. Laurel, NJ
08054. Consists entirely of immediately exercisable options for shares of common
stock.
(2) c/o ATM Service, Ltd., 424 Madison Avenue, NY 10017. Includes 750,000 shares
of common stock held by Mr. Settineri and immediately exercisable options for
1,000,000 shares of common stock.
(3) c/o ATM Service, Ltd., 424 Madison Avenue, NY 10017. Includes 250,000 shares
of common stock held by Mr. Levi and immediately exercisable options for
1,000,000 shares of common stock.
(4) Includes 1,000,000 shares of common stock held by Thomas Settineri and Gary
Levi and immediately exercisable options for 3,050,000 shares of common stock
held by Thomas Settineri, Gary Levi, Carol C. Knauff, R. Bruce Richardson and
Nahum Shar.
(5) Includes 2,000,000 shares of common stock held by D.H. Blair Investment
Banking Corp. ("D.H. Blair"); immediately exercisable warrants for 214,967
shares of common stock held by D.H. Blair; immediately exercisable warrants for
250,000 shares of common stock held by VentureTek L.P., a related party; and an
immediately convertible note for 4,800,000 shares held by Blair Ventures-Fund I,
Inc., a related party. Does not include warrants for 150,000 shares of common
stock held by Engex, Inc., a closed-end mutual fund whose investment advisor is
an affiliate of D.H. Blair; warrants exercisable for 255,000 shares of common
stock held by officers and employees of D.H. Blair; or shares to which D.H.
Blair claims entitlement as a result of our failure to file a registration
statement covering the 2,000,000 shares of common stock purchased by D.H. Blair
in March 1999.
(6) Includes 2,403,302 shares of common stock held by Jencom Digital
Technologies Inc. ("Jencom Digital"), 265,550 shares of common stock held by
Henry Kauftheil, the President of Jencom Digital and 426,075 shares of common
stock held by The TechDepartment.com Inc., an affiliate of ICES. Does not
include the 905,073 shares of our common stock that were transferred by
JenCom Digital to other shareholders of JenCom Digital in May 2000.
(7) Less than 1%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ROBERT KOHN RELATED-PARTY TRANSACTIONS. This section describes a number
of transactions in which WorldWide Web NetworX Corporation or one of its
subsidiaries was a party and in which Robert Kohn, our former Chairman,
President and Chief Executive Officer, had a direct or indirect material
interest.
ROBERT KOHN'S POSITIONS
Robert Kohn held the following positions, relationships and ownership
interests during the periods indicated:
- Director of WorldWide Web NetworX Corporation from May 8, 1998 to
September 23, 1999 and President and Chief Executive Officer of
WorldWide Web NetworX Corporation from May 18, 1998 to September 23,
1999;
- The holder of more than 5% of the common stock of WorldWide Web NetworX
Corporation from May 1998 to the present;
- A strategic planner of business development for marketing and sales of
PECO Energy Company from February 1996 to March 1, 1999;
- The President of BarterOne, LLC, from its formation to its dissolution;
- The owner of an option to acquire a 4.5% membership interest in
BarterOne, LLC which was granted to Mr. Kohn by PECO Energy Company
in exchange for salary and other compensation concessions;
- A 33-1/3% owner of Positive Asset Remarketing, Inc. with a right to
receive 50% of its interest in AssetTRADE.com, Inc.;
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- An employee of Artra Group Incorporated from February 23, 1999 to
September 23 1999, at which time his employment agreement was
assigned to Entrade Inc;
- A holder of options exercisable for 1,000,000 shares of Entrade Inc.
common stock at a price of $2.75 per share;
- President and Chief Executive Officer of AssetTRADE.com, Inc. from
December 1998 to May 2000; and brother to Marlene Goss, a principal
of EduNEXT.
OTHER PARTIES
The other parties involved in the transactions described in this section
include the following entities:
- PECO Energy Company: an electric and natural gas service provider in
southeastern Pennsylvania;
- Energy Trading Company: a wholly owned subsidiary of PECO Energy;
- BarterOne, LLC: a limited liability company which was incorporated
in Delaware in 1997 as a joint venture between Energy Trading
Company and Global Trade Group to serve as PECO Energy's Internet
development unit. BarterOne did business as entrade.com and was
dissolved in 1999;
- Positive Asset Remarketing, Inc.: a company providing asset recovery
services to global customers;
- entrade.com, Inc.: a subsidiary of Entrade, which we sold to Artra
Group Incorporated in a transaction which closed on September 23, 1999;
- AssetTRADE.com, Inc.: a provider of traditional off-line asset
recovery, disposal and marketing with Internet-based asset recovery,
inventory management and on-line auctions for large industrial and
commercial organizations.
TRANSACTIONS BEFORE THE SALE OF ENTRADE
WORLDWIDE WEB NETWORX CORPORATION PURCHASED 51% OF BARTERONE FROM ENERGY TRADING
COMPANY
In December 1998, we acquired from Energy Trading Company, its 51%
membership interest in BarterOne, LLC for consideration of $480,000 and 416,666
shares of our common stock. As a result of the September 23, 1999 closing of our
sale of Entrade to Artra, and pursuant to the acquisition agreement, PECO Energy
Company returned its certificate representing 416,666 of our shares and we
issued to PECO a certificate representing 73,450 of our shares valued at $1.00
per share or $73,450 in the aggregate. To enable us to acquire the 51%
membership interest of Energy Trading Company in BarterOne, Mr. Kohn returned
his option to purchase 4.5% of BarterOne. As consideration for the return of
this option, we agreed to issue to Mr. Kohn 475,000 shares of our common stock
valued at $1.00 per share or $475,000 in the aggregate.
WORLDWIDE WEB NETWORX CORPORATION PURCHASED ORBIT SYSTEM AND ASSETTRADE.COM
INTEREST FROM POSITIVE ASSET REMARKETING
In January 1999, we purchased, for 3,500,000 shares of our common stock
valued at $1.00 per share or $3,500,000 in the aggregate, assets from Positive
Asset Remarketing including all the rights of
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Positive Asset Remarketing under a license from BarterOne to the ORBIT System
Software and 25% of AssetTRADE.com, Inc.'s common stock.
WORLDWIDE WEB NETWORX CORPORATION PURCHASED ATM SOFTWARE/METHODOLOGIES FROM
POSITIVE ASSET REMARKETING.
In February 1999, we purchased, for 3,500,000 shares of our common stock,
valued at $1.50 per share or $5,250,000 in the aggregate, and the sum of
$750,000 cash, all of Positive Asset Remarketing's rights to the ATM System
which included proprietary banking and trade operations that establish on-line
electronic trading and commerce functions.
WORLDWIDE WEB NETWORX CORPORATION SALE OF ENTRADE INC. TO ARTRA GROUP
Incorporated
In February 1999, we entered into a merger agreement with Artra for the
sale of our Entrade Inc. subsidiary. Our Entrade subsidiary contained the
following assets:
- our 25% interest in the Class A voting shares of AssetTRADE.com,
Inc.;
- our 100% membership interest in BarterOne, LLC;
- a non-customized version of the ORBIT System;
- a new entrade.com transaction software that was developed by
entrade.com; and
- other assets of our subsidiary Entrade
In connection with this transaction, we received the following
consideration:
- $800,000 in cash;
- a $500,000 promissory note which has since been paid;
- 1,800,000 shares of the outstanding equity securities of
Entrade; and
- $1,302,000 in funding of Entrade's operations from the date of
the merger agreement through its consummation.
In connection with the sale of our Entrade subsidiary to Artra, on
February 23, 1999, the following person entered into agreements with Artra or an
entity affiliated with Artra:
- Robert D. Kohn entered into a three-year employment agreement with
Artra, at an annual salary of $165,000. He also received an option
to purchase 1,000,000 shares of Artra stock at an exercise price of
$2.75 per share. Mr. Kohn also agreed during the term of the
employment agreement and for an additional period of one year after
termination or expiration, unless terminated because of a change in
business purpose, that neither he nor any corporation or entity in
which he may be interested will at anytime engage in any competitive
business or solicit, hire or contract for services or employ any of
the executives of Artra.
- Robert D. Kohn entered into a non-competition agreement with the new
Entrade or its successor for a four-year term after the closing of
the sale of Entrade to Artra.
- Robert D. Kohn entered into a non-qualified stock option agreement
whereby Artra granted Mr. Kohn an option to purchase any part or all
of 1,000,000 shares of Artra's common stock at an
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exercise price of $2.75 per share subject to vesting as follows:
one-third on December 1, 1999, one-third on February 18, 2000 and
one-third on February 18, 2001.
TRANSACTIONS AFTER THE SALE OF ENTRADE
entrade.com Software License
In September 1999, our subsidiary, ATM Service, Ltd. licensed from
entrade.com, Inc., pursuant to the non-exclusive software license agreement,
dated September 23, 1999, the entrade.com software which we sold in connection
with our sale of our Entrade subsidiary. ATM Service, Ltd. paid a one-time
licensing fee consisting of $1,500,000 in trade credits to entrade.com. Pursuant
to the license agreement, entrade.com also agreed to host ATM's web sites and to
maintain and support the software, however, entrade.com no longer provides these
services. We have copies of the source code and the object code for this
software, and we have made other arrangements for hosting the ATMcenter.com
websites in December 2000 and intend to make other arrangements for maintenance
and support as well.
EDUNEXT
We entered into an agreement with Marlene A. Goss and Fern Entrekin dated
as of June 13, 1998. Ms. Goss is the sister of Robert Kohn. Ms. Goss and Ms.
Entrekin developed an educational program to provide solutions to schools to
build learning communities. The agreement contemplated the formation of a
subsidiary of the Company, to be named EduNEXT, and the development of related
web sites.
We agreed to acquire the educational program in exchange for the
following:
- $50,000 of our stock, at $2.50 per share, to be paid as follows:
10,000 shares to be delivered upon the execution of the agreement
and an additional 10,000 shares to be delivered one year from the
execution of the agreement; and
- $53,500 in working capital with $15,000 to be paid immediately upon
execution of the agreement and weekly payments totaling $38,500 for
the remainder of the $53,500.
We issued 20,000 shares, valued at $20,000 or $1.00 per share, and paid
$31,500 to Ms. Goss pursuant to this agreement. The parties subsequently
determined not to proceed with this transaction.
VISION TECHNOLOGIES
In April and August 1999, we invested $850,000 directly and $350,000
through WWWX-Jencom, LLC in Vision Technologies, Inc. At the time of the
investments, Mr. Bjorn Koritz, our then Vice President, General Counsel,
Secretary and a Director, was a Director of Vision, its General Counsel and a
holder of 10% of Vision's common stock.
D.H. BLAIR AND JENCOM
As a condition to a stock purchase agreement with D.H. Blair Investment
Banking Corp., dated March 4, 1999, to purchase 2,000,000 shares of our common
stock, D.H. Blair required that we invest in and execute a definitive agreement
with JenCom Digital Technologies, LLC to acquire a 50% interest in technology
assets of JenCom, described in "Item 1. Business--WWWX-Jencom, LLC and
InterCommerce China, LLC--JenCom Products," which resulted in our current
ownership interest in WWWX-Jencom, LLC. Affiliates of D.H. Blair own interests
in International Commerce Exchange Systems, Inc., an indirect parent of JenCom
Digital Technologies, LLC, and a member of InterCommerce China, LLC.
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INTERCOMMERCE CHINA, LLC
Pursuant to the operating agreement of InterCommerce China, LLC, eight
individuals, including Warren Rothstein and Allan M. Cohen, each have the option
to purchase a 0.625% interest in InterCommerce China. The option becomes
exercisable upon the public issuance of any class of securities of InterCommerce
China, at an exercise price equal to 30% of the fair market value of the option
interest as of the date of the operating agreement.
RELATIONSHIPS WITH AND AMONG ENTRADE, ENTRADE.COM, ATM SERVICE, LTD. AND THE
INTRAC GROUP LTD.
entrade.com provided technical consulting services totaling $83,000 to
ATM for fiscal 2000. At September 30, 2000, $62,000 was due to entrade.com from
ATM.
Entrade provided various services to us during fiscal 2000 totaling
$27,641. At September 30, 2000, we owed Entrade the sum of $11,969 for these
services, subject to various offsets.
In addition to the $3,943,000 that we loaned to ATM, of which $10,000 was
repaid in August 2000, we have provided services and made payments on behalf of
ATM totaling $371,000 during the period from July 23, 1999 through December 31,
2000.
ATM and Intrac made payments on behalf of the other during fiscal 2000. At
September 30, 2000, The net amount due from Intrac to ATM was $879,000 and
$1,058,000 at September 30, 2000 and 1999, respectively. These advances are
eliminated in our consolidated financial statements.
The following of our officers and directors have or have had the following
management positions with, and economic interests in, ATM and Intrac:
Thomas Settineri, who was a director of the Company during the period from
September 23, 2000 to December 27, 2000, has also been a director and President
and Chief Executive Officer of each of ATM and Intrac since July 1999 and the
Chairman and Chief Executive Officer of ATM and Intrac since October 2000. Since
July 1999, Mr. Settineri has beneficially owned from 18% to approximately 24% of
the outstanding equity of ATM.
Gary Levi, who was Secretary and Treasurer of the Company during the
period from August 28, 2000 to December 29, 2000, has also been a director and
Chief Operating Officer of each of ATM and Intrac since July 1999 and the
President and Chief Operating Officer of ATM and Intrac since October 2000.
Since July 1999, Mr. Levi has beneficially owned from 6% to approximately 8% of
the outstanding equity of ATM.
NAI DIRECT, INC.
GUARANTEE OF NAI DIRECT EQUIPMENT LEASE
In March 2000, we guaranteed the obligations of NAI Direct under a lease
of computer equipment and network software which requires monthly payments
totaling $100,000 over a two-year term with an option to purchase at lease end.
In December 2000, we were notified of NAI Direct's default under this lease and
a demand for payment was made pursuant to our guarantee. NAI Direct has given us
their assurances that it will satisfy its obligations under the equipment lease.
NEW AMERICA NETWORK, INC. AND GERALD C. FINN, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER OF NEW AMERICA NETWORK, INC.
- New America Network, Inc. ("NAI") has provided various services to
NAI Direct, Inc. ("NAI Direct"), including rental space and shared
personnel, and has payments on behalf of NAI Direct, totaling
$588,000 for the period from acquisition through September 27, 2000,
at which time $239,000 remained due from NAI Direct to NAI.
- NAI Direct sold its $50,000 investment in Sidewalk Associates, LLC
to Gerald C. Finn
RELATIONSHIP BETWEEN WARREN ROTHSTEIN, D&W ENTERPRISES, INC AND ATM SERVICE,
LTD.
For the period from July 23, 1999 to October 19, 2000, we used the
services of D&W Enterprises, Inc. ("D&W") to manage our ATM Service, Ltd.
operations. D&W is 100%-owned by Deborah and Warren Rothstein, our former
interim Chairman, President and Chief Executive Officer and former Chairman
of ATM Service, Ltd. and The Intrac Group, Ltd. During the fiscal years ended
September 30, 2000 and 1999, ATM paid $925,000 and $183,000, respectively,
for the services rendered which represented the full cost incurred by D&W for
the services rendered. ATM Ltd. also paid commissions totaling $138,000 and
$0, respectively, to D&W during the years ended September 30, 2000 and 1999.
ATM Ltd. reimbursed D&W for expenses paid by D&W on behalf of ATM Ltd.
totaling $60,000 and $0, respectively, during the years ended September 30,
2000 and 1999. D&W assigned its rental lease for office space at 220 White
Plains Road, Tarrytown, New York to ATM Ltd. at which time, ATM reimbursed
D&W $22,000 for the lease security deposit. D&W is subleasing office space
from ATM Ltd. for $4,000 per month for the period January 1, 2001 to June 30,
2001.
RELATIONSHIP BETWEEN ALLAN COHEN AND EVELYN COHEN
Evelyn Cohen, our Director of Financial Reporting and Control since
March 6, 2000, is the sister of Allan Cohen, who was one of our directors and
our Vice President and General Counsel from June 1999 until August 2000. Ms.
Cohen received compensation of $208,000 for the period from March 6, 2000 to
December 31, 2000 and immediately exercisable options to purchase 250,000
shares of our common stock at an exercise price of $0.75 per share.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements as listed on Page F-1.
2. Financial statement schedules have been omitted because
they either are not required, not applicable, or the
information has otherwise been included in the financial
statements.
(b) REPORTS ON FORM 8-K.
On September 29, 2000, the Registrant filed Form 8-K to report a
$3.6 million loan to the Company by Blair Ventures-Fund I, Inc. and
a change in control.
On October 2, 2000, the Registrant filed Form 8-K to report the
re-structuring of its relationships with Real Quest, Inc., New
America Network, Inc. and NAI Direct, Inc.
(c) EXHIBITS.
The following exhibits are being filed as part of the Form 10 Annual
Report.
Exhibit
No. Description
------- -----------
2.1 Agreement and Plan of Reorganization, dated as of May 20, 1998,
between Instra Corp., Keiretsu Corporation and the stockholder of
Keiretsu Corporation (which is incorporated by reference to Exhibit
10.1 to the Company's Form 10 Registration No. 000-29479).
2.2 Agreement and Plan of Merger, dated as of February 23, 1999,
among Artra Group Incorporated, WorldWide Web NetworX
Corporation, NA Acquisition Corp., and WWWX Merger Subsidiary,
Inc. (which is incorporated by reference to Exhibit 10.8 to the
Company's Form 10 Registration No. 000-29479).
2.3 Acquisition Agreement, dated as of February 25, 1999, between JenCom
Digital Technologies, LLC and WorldWide Web NetworX (which is
incorporated by reference to Exhibit 10.11 to the Company's Form 10
Registration No. 000-29479).
2.4 Stock Purchase Agreement, dated March 4, 1999, between D.H. Blair
Investment Banking Corp. and WorldWide Web NetworX Corporation
(which is incorporated by reference to Exhibit 10.12 to the
Company's Form 10 Registration No. 000-29479).
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2.5 Amendment, dated as of April 28, 1999, to the Acquisition Agreement
between JenCom Digital Technologies, LLC, and WorldWide Web NetworX
Corporation (which is incorporated by reference to Exhibit 10.17 to
the Company's Form 10 Registration No. 000-29479).
2.6 Amendment to Agreement and Plan of Merger, dated as of April 30,
1999, among Artra Group Incorporated, WorldWide Web NetworX
Corporation, NA Acquisition Corp., and WWWX Merger Subsidiary,
Inc. (which is incorporated by reference to Exhibit 10.18 to the
Company's Form 10 Registration No. 000-29479).
2.7 Agreement and Plan of Merger, dated as of July 9, 1999, among
WorldWide Web NetworX Corporation, Intrac Acquisition Corporation,
and The Intrac Group (which is incorporated by reference to Exhibit
10.22 to the Company's Form 10 Registration No. 000-29479).
2.8 Share Exchange Agreement, dated as of September 23, 1999, between
New America Network, Inc. and WorldWide Web NetworX Corporation
(which is incorporated by reference to Exhibit 10.31 to the
Company's Form 10 Registration No. 000-29479).
*2.9 Warrant, dated September 1, 2000, to purchase 1,500,000 shares of
common stock of WorldWide Web NetworX Corporation, issued to Elminor
Portfolio Corp.
3.1 Certificate of Incorporation, as amended (which is incorporated
by reference to Exhibit 3.1 to the Company's Form 10 Registration
No. 000-29479).
3.2 Bylaws (which is incorporated by reference to Exhibit 3.2 to the
Company's Form 10 Registration No. 000-29479).
4.1 Specimen Common Stock Certificate (which is incorporated by
reference to Exhibit 4.1 to the Company's Form 10 Registration
No. 000-29479).
4.2 Form of 6% Cumulative Convertible Debenture of WorldWide Web
NetworX Corporation (which is incorporated by reference to
Exhibit 4.2 to the Company's Form 10 Registration No. 000-29479).
4.3 Warrant to Purchase 100,000 shares of common stock of WorldWide Web
NetworX Corporation, dated April 2, 1999, issued to Ralph H. Isham
(which is incorporated by reference to Exhibit 4.3 to the Company's
Form 10 Registration No. 000-29479).
4.4 Warrant to Purchase 100,000 shares of common stock of WorldWide Web
NetworX Corporation, dated April 2, 1999, issued to Arnold P. Kling
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(which is incorporated by reference to Exhibit 4.4 to the Company's
Form 10 Registration No. 000-29479).
4.5 Form of Warrant to Purchase Common Stock of WorldWide Web NetworX
Corporation issued to D.H. Blair Banking Corporation (which is
incorporated by reference to Exhibit 4.5 to the Company's Form 10
Registration No. 000-29479).
4.6 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. (which is incorporated by
reference to Exhibit 4.6 to the Company's Form 10 Registration
No. 000-29479).
10.1 Agency Agreement, dated November 24, 1998, between Alexander,
Wescott & Co., Inc. and WorldWide Web NetworX Corporation (which
is incorporated by reference to Exhibit 10.2 to the Company's
Form 10 Registration No. 000-29479).
10.2 Stock Issuance Agreement, dated as of December 1, 1998, between
Warren Rothstein and WorldWide Web NetworX Corporation (which is
incorporated by reference to Exhibit 10.3 to the Company's Form 10
Registration No. 000-29479).
10.3 BarterOne Membership Interest Sale Agreement, dated as of December
16, 1998, between Energy Trading Company and WorldWide Web NetworX
Corporation (which is incorporated by reference to Exhibit 10.4 to
the Company's Form 10 Registration No. 000-29479).
10.4 Acquisition Agreement, dated as of January 29, 1999, between
Global Trade Group, Ltd., and WorldWide Web NetworX Corporation
(which is incorporated by reference to Exhibit 10.5 to the
Company's Form 10 Registration No. 000-29479).
10.5 Acquisition Agreement, dated as of January 29, 1999, between
Positive Asset Remarketing, Inc., and WorldWide Web NetworX
Corporation (which is incorporated by reference to Exhibit 10.6
to the Company's Form 10 Registration No. 000-29479).
10.6 Agreement, dated as of February 16, 1999, among Energy Trading
Company, WorldWide Web NetworX Corporation, and NA Acquisition Corp
(which is incorporated by reference to Exhibit 10.7 to the Company's
Form 10 Registration No. 000-29479).
10.7 Acquisition Agreement, dated as of February 24, 1999 between
Positive Asset Remarketing, Inc. and WorldWide Web NetworX
Corporation
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(which is incorporated by reference to Exhibit 10.9 to the Company's
Form 10 Registration No. 000-29479).
10.8 Form of Subscription Agreement between WorldWide Web NetworX
Corporation and Subscribers of 6% Cumulative Convertible Debenture
of WorldWide Web NetworX Corporation (which is incorporated by
reference to Exhibit 10.10 to the Company's Form 10 Registration No.
000-29479).
10.9 Consulting Agreement, dated as of April 2, 1999, between Ralph H.
Isham and WorldWide Web NetworX Corporation (which is
incorporated by reference to Exhibit 10.13 to the Company's Form
10 Registration No. 000-29479).
10.10 Consulting Agreement, dated as of April 2, 1999, between Arnold
P. Kling and WorldWide Web NetworX Corporation (which is
incorporated by reference to Exhibit 10.14 to the Company's Form
10 Registration No. 000-29479).
10.11 Acquisition Agreement, dated as of April 7, 1999, between Admiral
Asset Group, Inc., and WorldWide Web NetworX Corporation (which
is incorporated by reference to Exhibit 10.15 to the Company's
Form 10 Registration No. 000-29479).
10.12 Agreement, dated April 16, 1999, between Alexander, Wescott &
Co., Inc., and WorldWide Web NetworX Corporation (which is
incorporated by reference to Exhibit 10.16 to the Company's Form
10 Registration No. 000-29479).
10.13 Agency Agreement, dated as of May 26, 1999, between D.H. Blair
Investment Banking Corp. and WorldWide Web NetworX Corporation
(which is incorporated by reference to Exhibit 10.19 to the
Company's Form 10 Registration No. 000-29479).
10.14 Form of Subscription Agreement between WorldWide Web NetworX
Corporation and Subscribers of a private placement of WWWX common
stock (which is incorporated by reference to Exhibit 10.20 to the
Company's Form 10 Registration No. 000-29479).
10.15 First Amendment to Stock Issuance Agreement, dated as of July 9,
1999, between Warren Rothstein and WorldWide Web NetworX Corporation
(which is incorporated by reference to Exhibit 10.21 to the
Company's Form 10 Registration No. 000-29479).
55
<PAGE>
10.16 Employment Agreement, dated July 23, 1999, between ATM Service,
Ltd. and Thomas Settineri (which is incorporated by reference to
Exhibit 10.23 to the Company's Form 10 Registration No.
000-29479).
10.17 Employment Agreement, dated July 23, 1999, between Intrac
Acquisition Corporation and Thomas Settineri (which is incorporated
by reference to Exhibit 10.24 to the Company's Form 10 Registration
No. 000-29479).
10.18 Employment Agreement, dated July 23, 1999, between ATM Service,
Ltd. and Gary Levi (which is incorporated by reference to Exhibit
10.25 to the Company's Form 10 Registration No. 000-29479).
10.19 Employment Agreement, dated July 23, 1999, between Intrac
Acquisition Corporation and Gary Levi (which is incorporated by
reference to Exhibit 10.26 to the Company's Form 10 Registration No.
000-29479).
10.20 Management Services Agreement, dated as of July 23, 1999, between
ATM Service, Ltd. and Warren Rothstein.
10.21 Management Services Agreement, dated as of July 23, 1999, between
Intrac Acquisition Corp. and Warren Rothstein.
10.22 Post-Closing Agreement, dated July 23, 1999, among WorldWide Web
NetworX Corporation, Intrac Acquisition Corporation, The Intrac
Group, Thomas Settineri, and Gary Levi (which is incorporated by
reference to Exhibit 10.27 to the Company's Form 10 Registration No.
000-29479).
10.23 Merger and Acquisition Agreement letter, dated as of July 23,
1999, between WorldWide Web NetworX Corporation and D.H. Blair
Investment Banking Corp. (which is incorporated by reference to
Exhibit 10.28 to the Company's Form 10 Registration No.
000-29479).
10.24 1999 Equity Compensation Plan (which is incorporated by reference
to Exhibit 10.29 to the Company's Form 10 Registration No.
000-29479).
10.25 Software License Agreement between ATM Service, Ltd. and
entrade.com, Inc. dated September 1999 (which is incorporated by
reference to Exhibit 10.30 to the Company's Form 10 Registration
No. 000-29479).
10.26 NAI Direct, Inc. Shareholders' Agreement, dated September 23,
1999, between Real Quest, Inc., Gerald C. Finn, Jeffrey Finn and
NAI Direct, Inc. (which is incorporated by reference to Exhibit
10.32 to the Company's Form 10 Registration No. 000-29479).
10.27 Real Quest, Inc. Shareholders' Agreement, dated September 23,
1999, between WorldWide Web NetworX Corporation and New America
Network, Inc. (which is incorporated by reference to Exhibit
10.33 to the Company's Form 10 Registration No. 000-29479).
56
<PAGE>
10.28 Employment Agreement, dated September 23, 1999, between NAI
Direct, Inc. and Jeffrey Finn (which is incorporated by reference
to Exhibit 10.34 to the Company's Form 10 Registration No.
000-29479).
10.29 Employment Agreement, dated September 23, 1999, between NAI
Direct, Inc. and Gerald C. Finn (which is incorporated by
reference to Exhibit 10.35 to the Company's Form 10 Registration
No. 000-29479).
10.30 Escrow Agreement, dated September 23, 1999, between WorldWide Web
NetworX Corporation, New America Network, Inc. and Weinstein,
Goss, Schleifer, Eisenberg, Winkler, Rothweiler & Ostroff (which
is incorporated by reference to Exhibit 10.36 to the Company's
Form 10 Registration No. 000-29479).
10.31 Agreement dated December 22, 1999, among WorldWide Web NetworX
Corporation, International Commerce Exchange Systems, Inc.,
JenCom Digital Technologies, Ltd. and Henry Kauftheil (which is
incorporated by reference to Exhibit 10.37 to the Company's Form
10 Registration No. 000-29479).
10.32 Amended and Restated Operating Agreement of WWWX-JenCom, LLC, dated
as of January 7, 2000, between WorldWide Web NetworX Corporation and
JenCom Digital Technologies, LLC (which is incorporated by reference
to Exhibit 10.38 to the Company's Form 10 Registration No.
000-29479).
10.33 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 (which is
incorporated by reference to Exhibit 10.39 to the Company's Form 10
Registration No. 000-29479).
10.34 Distribution and Operating Agreement, dated as of January 7,
2000, between ATM Service, Ltd., and InterCommerce China, LLC
(which is incorporated by reference to Exhibit 10.40 to the
Company's Form 10 Registration No. 000-29479).
10.35 Employment Agreement, dated as of January 14, 2000, between
WorldWide Web NetworX Corporation and John T. Banigan (which is
incorporated by reference to Exhibit 10.41 to the Company's Form
10 Registration No. 000-29479).
10.36 Employment Agreement, dated as of February 14, 2000, between
WorldWide Web NetworX Corporation and Gerard T. Drumm (which is
57
<PAGE>
incorporated by reference to Exhibit 10.42 to the Company's Form
10 Registration No. 000-29479).
10.37 Employment Agreement, dated as of March 20, 2000, between
WorldWide Web NetworX Corporation and Allan M. Cohen (which is
incorporated by reference to Exhibit 10.43 to the Company's Form
10 Registration No. 000-29479).
10.38 Agreement and Protocol dated as of April 22, 1999, among
Fundacion Primero Mexico, A.C., The Intrac Group, Ltd., ATM
Service, Ltd., and Fideicomiso De Bital (which is incorporated by
reference to Exhibit 10.44 to the Company's Form 10 Registration
No. 000-29479).
10.39 Letter of Agreement dated July 7, 1999, between Warren Rothstein and
WorldWide Web NetworX Corporation (which is incorporated by
reference to Exhibit 10.45 to the Company's Form 10 Registration No.
000-29479).
10.40 Agreement dated September 30, 1999, between ATM Service, Ltd.,
and Korean Ginseng Products Company, Ltd., as amended October 8,
1999 (which is incorporated by reference to Exhibit 10.46 to the
Company's Form 10 Registration No. 000-29479).
10.41 Israel In-Country Representative Agreement dated March 2, 2000,
between ATM Service, Ltd., and MG Capital, Ltd. (which is
incorporated by reference to Exhibit 10.48 to the Company's Form
10 Registration No. 000-29479).
10.42 ATM Contribution Agreement (Textron) (which is incorporated by
reference to Exhibit 10.49 to the Company's Form 10 Registration
No. 000-29479).
10.43 Stock Purchase Agreement, dated September 25, 2000, by and among
NAI Direct, Inc., Real Quest, Inc., WorldWide Web NetworX
Corporation, New America Network, Inc., Gerald C. Finn and
Jeffrey Finn. (which is incorporated by reference to Exhibit 4.1
of the Company's Form 8-K filed on October 2, 2000).
10.44 Convertible Promissory Note, dated September 25, 2000, in the
principal amount of $250,000, executed and delivered by NAI Direct,
Inc. to WorldWide Web NetworX Corporation (which is incorporated by
reference to Exhibit 4.2 of the Company's Form 8-K filed on October
2, 2000).
10.45 Unlimited Surety Agreement, dated September 25, 2000, executed and
delivered by New America Network, Inc. to WorldWide Web NetworX
58
<PAGE>
Corporation (which is incorporated by reference to Exhibit 4.3 of
the Company's Form 8-K filed on October 2, 2000).
10.46 Commitment Letter, dated August 21, 2000, from D.H. Blair
Investment Banking Corp. (which is incorporated by reference to
Exhibit 4.1 of the Company's Form 8-K filed on August 31, 2000).
10.47 Convertible Promissory Note, dated August 24, 2000, in the principal
amount of $3,600,000, executed and delivered by WorldWide Web
NetworX Corporation to Blair Ventures-Fund I, Inc. (including a Form
of Warrant Agreement, Registration Rights Agreement, dated August
22, 2000 and Form of Warrant) (which is incorporated by reference to
Exhibit 4.2 of the Company's Form 8-K filed on August 31, 2000).
10.48 Security Agreement, dated August 22, 2000, between WorldWide Web
NetworX Corporation and Blair Ventures-Fund I, Inc. (which is
incorporated by reference to Exhibit 4.3 of the Company's Form 8-K
filed on August 31, 2000)
10.49 Stock Pledge Agreement, dated August 22, 2000, between WorldWide Web
NetworX Corporation and Blair Ventures-Fund I, Inc. (which is
incorporated by reference to Exhibit 4.4 of the Company's Form 8-K
filed on August 31, 2000)
10.50 Escrow Agreement, dated August 22, 2000, between WorldWide Web
NetworX Corporation and Blair Ventures-Fund I, Inc. (which is
incorporated by reference to Exhibit 4.5 of the Company's Form 8-K
filed on August 31, 2000)
10.51 Separation and Release Agreement with John T. Banigan, dated August
24, 2000 (which is incorporated by reference to Exhibit 99.1 of the
Company's Form 8-K filed on August 31, 2000).
10.52 Consulting and Release Agreement with Allan M. Cohen, dated August
22, 2000 (which is incorporated by reference to Exhibit 99.2 of the
Company's Form 8-K filed on August 31, 2000).
10.53 Confirmation of Employment with Evelyn Cohen, dated August 22, 2000
(including Non-Qualified Stock Option Grant, dated August 22, 2000)
(which is incorporated by reference to Exhibit 99.3 of the Company's
Form 8-K filed on August 31, 2000).
10.54 Mutual Release with Evelyn Cohen, dated August 22, 2000 (which is
incorporated by reference to Exhibit 99.4 of the Company's Form 8-K
filed on August 31, 2000).
59
<PAGE>
10.55 Separation and Release Agreement with Gerard T. Drumm, dated August
24, 2000 (which is incorporated by reference to Exhibit 99.5 of the
Company's Form 8-K filed on August 31, 2000).
10.56 Separation and Release Agreement with Michael F. Metzger, dated
August 22, 2000 (which is incorporated by reference to Exhibit 99.6
of the Company's Form 8-K filed on August 31, 2000).
10.57 Separation and Release Agreement with Michael Norton, dated August
22, 2000 (which is incorporated by reference to Exhibit 99.7 of the
Company's Form 8-K filed on August 31, 2000).
10.58 Mutual Release and Indemnification Agreement with Warren Rothstein,
dated August 22, 2000 (which is incorporated by reference to Exhibit
99.8 of the Company's Form 8-K filed on August 31, 2000).
10.59 Mutual Release and Indemnification Agreement with William Weld,
dated August 22, 2000 (which is incorporated by reference to Exhibit
99.9 of the Company's Form 8-K filed on August 31, 2000).
10.60 Mutual Release and Indemnification Agreement with Gary K. Levi,
dated August 22, 2000 (which is incorporated by reference to Exhibit
99.10 of the Company's Form 8-K filed on August 31, 2000).
10.61 Mutual Release and Indemnification Agreement with Thomas A.
Settineri, dated August 22, 2000 (which is incorporated by
reference to Exhibit 99.11 of the Company's Form 8-K filed on
August 31, 2000)
*10.62 Employment Contract, dated February 14, 2000, between WorldWide
Web NetworX Corporation and G. David Rosenblum
*10.63 Funding Agreement, dated June 16, 2000, between WorldWide Web
NetworX Corporation, ATM Service, Ltd., Thomas Settineri and Gary
Levi
*10.64 Promissory Note, dated June 16, 2000, in the principal amount of
$141,000, payable by ATM Service, Ltd. to WorldWide Web NetworX
Corporation
*10.65 Joint Venture Agreement, dated July 2000, between ATM Service,
Ltd. t/a ATMcenter.com and Juan Torrents & Assoc.
*10.66 Employment Contract, dated August 29, 2000, between WorldWide Web
NetworX Corporation and Carol C. Knauff
60
<PAGE>
*10.67 Promissory Note, dated August 24, 2000, payable by ATM Service,
Ltd. to WorldWide Web NetworX Corporation in the principal
amount of $360,000
*10.68 Consulting Agreement, dated September 1, 2000, between WorldWide Web
NetworX Corporation and Elminor Portfolio Corp.
*10.69 Stock Pledge Agreement, dated September 27, 2000, between WorldWide
Web NetworX Corporation and Blair Ventures-Fund I, Inc.
*10.70 Amendment to Stock Pledge Agreement, dated September 27, 2000,
between WorldWide Web NetworX Corporation and Blair Ventures-Fund I,
Inc.
*10.71 Agreement, dated as of September 30, 2000, between ATM Service,
Ltd. and Warren Rothstein
*10.72 ATM Shareholders Agreement, dated as of September 30, 2000, by and
among WorldWide Web NetworX Corporation, Thomas Settineri, Gary Levi
and ATM Service, Ltd.
*10.73 2000 Incentive Stock Plan, dated October 10, 2000
*10.74 Promissory Note, dated October 26, 2000, payable by ATM Service,
Inc. to Marvel Worldwide, Ltd., in the principal amount of
$200,000
*10.75 Employment Contract, dated November 2000, between WorldWide Web
NetworX Corporation and R. Bruce Richardson
*10.76 Stock Pledge Agreement, dated November 13, 2000, between WorldWide
Web NetworX Corporation and ATM Service, Ltd.
16.1 Letter regarding change in certifying accountant from Richard A.
Eisner & Company LLP. (which is incorporated by reference to
Exhibit 16 to the Company's Form 10 Registration No. 000-29479).
21.1 Subsidiaries of the Registrant (which is incorporated by
reference to Exhibit 21.1 to the Company's Form 10 Registration
No. 000-29479).
*23.1 Consent of Independent Auditors
*27.1 Financial Data Schedule
* filed herewith
61
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Worldwide Web Network Corporation has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized
on the 15th day of January, 2001.
WORLDWIDE WEB NETWORX CORPORATION
(Registrant)
By: /s/ CAROL C. KNAUFF
-------------------------------------------
Carol C. Knauff
Chairman, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated on
the 15th day of January, 2001.
SIGNATURE TITLE
--------- -----
/S/ CAROL C. KNAUFF Chairman, President, Chief Executive
------------------------------
Officer and Director
Carol C. Knauff
/S/ R. BRUCE RICHARDSON Chief Financial Officer
------------------------------
R. Bruce Richardson
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WorldWide Web NetworX Corporation
Reports of Independent Auditors......................................F-2
Consolidated Balance Sheets..........................................F-4
Consolidated Statements of Operations................................F-5
Consolidated Statements of Stockholders' Equity......................F-6
Consolidated Statements of Cash Flows................................F-7
Notes to Consolidated Financial Statements....................F-8 - F-35
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
WorldWide Web NetworX Corporation
We have audited the accompanying consolidated balance sheets of WorldWide Web
NetworX Corporation as of September 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 consolidated financial position of WorldWide Web
NetworX Corporation as of September 30, 2000 and 1999, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that WorldWide
Web NetworX Corporation will continue as a going concern. As more fully
described in Note 2, the Company has incurred recurring operating losses and has
a working capital deficiency. In addition, the Company currently does not
anticipate having the ability to meet its working capital needs or to satisfy
its convertible promissory note upon maturity with a cash payment during the
fiscal year ending September 30, 2001. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.
The 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.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 15, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
WorldWide Web NetworX Corporation
Cherry Hill, New Jersey
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity, and cash flows of WorldWide Web NetworX Corporation and
subsidiary for the year ended September 30, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated results of operations and cash flows of
WorldWide Web NetworX Corporation and subsidiary for the year ended September
30, 1998, in conformity with generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
New York, New York
April 13, 1999
F-3
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30
2000 1999
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 2,271 $7,234
Investments................................... 6,005 29,475
Accounts receivable (net of allowance for
doubtful accounts of $0 and $19, respectively) 1,587 858
Inventory..................................... 644 -
Prepaid expenses.............................. 700 143
---------- ----------
Total current assets............................ 11,207 37,710
Property and equipment, net..................... 319 295
Investments in and advances to Affiliated 3,319 2,744
Companies.....................................
Intangible assets (net of accumulated
amortization of $0 and $109, respectively).... - 4,884
Deferred financing costs (net of accumulated
amortization of $17 and $155, respectively)... 183 139
Other assets.................................... 679 49
Deferred income taxes........................... - 1,690
---------- ----------
Total assets.................................... $15,707 $47,511
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses.............................. $ 629 $ 1,157
Accounts payable.............................. 3,505 1,530
Convertible promissory note................... 3,600 -
Deferred revenue.............................. 3,117 470
Current portion of capital lease obligation... 39 37
Convertible debentures ....................... 125 990
Deferred income taxes......................... - 8,813
---------- ----------
Total current liabilities....................... 11,015 12,997
Capital lease obligation, net of current portion - 39
Stockholders' equity:
Preferred stock-authorized 10,000,000 shares,
$.01 par value, none issued.................. - -
Common stock-authorized 100,000,000 shares,
$.001 par value; 41,515,583, and 38,455,569
shares issued and outstanding, respectively.. 42 39
Additional paid-in capital.................... 42,938 36,443
Retained (deficit) earnings................... (35,688) 1,393
Unearned stock compensation................... (2,600) (3,400)
---------- ----------
Total stockholders' equity...................... 4,692 34,475
---------- ----------
Total liabilities and stockholders' equity...... $15,707 $47,511
========== ==========
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30
2000 1999 1998
----------- ----------- ----------
Revenues:
Media sales........................ $ 4,063 $ 465 $ -
Cost recovery...................... 2,304 30 -
Asset management................... 198 82 -
Consulting......................... 116 762 50
Management services................ 91 - -
----------- ----------- ----------
Total revenues....................... 6,772 1,339 50
Operating expenses:
Cost of revenues:
Media............................. 4,202 442 -
Cost recovery..................... 1,902 30 -
Consulting........................ 65 320 36
Management services............... 60 - -
----------- ----------- ----------
Total cost of revenues............... 6,229 792 36
----------- ----------- ----------
Gross profit......................... 543 547 14
Selling, general and administrative.. 14,254 5,280 140
Impairment of intangible asset....... 3,901 5,583 -
Depreciation and amortization........ 1,479 597 13
Write-off of purchased research and
development........................ - 3,036 -
----------- ----------- ----------
Loss from operations................. (19,091) (13,949) (139)
Other (expenses) income:
Impairment of investments.......... (19,786) - -
Impairment of investment in and
advances to Affiliated Companies.. (2,350) (1,106) -
Loss on sale of investments........ (2,328) - -
Equity loss........................ (364) (1,578) -
Amortization of debt issuance costs (156) (155) (80)
Interest expense................... (67) (219) (10)
Interest income.................... 198 56 10
Gain on sale of subsidiary......... - 25,426 -
----------- ----------- ----------
Total other (expenses) income........ (24,853) 22,424 (80)
(Loss) income before income taxes (43,944) 8,475 (219)
Income tax (benefit) expense......... (6,863) 6,863 -
----------- ----------- ----------
Net (loss) income.................... $(37,081) $ 1,612 $ (219)
=========== =========== ==========
Net (loss) income per share:
Basic.............................. $ (0.97) $ 0.07 $ (0.03)
Diluted............................ $ (0.97) $ 0.07 $ (0.03)
=========== =========== ==========
Weighted average shares outstanding:
Basic.............................. 38,368,672 21,906,553 8,602,000
Diluted............................ 38,368,672 22,418,294 8,602,000
=========== =========== ==========
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED UNEARNED TOTAL
COMMON STOCK PAID-IN (DEFICIT) SUBSCRIPTION STOCK STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE COMPENSATION EQUITY
---------- --------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1997 6,000,000 $ 6 $ 54 $ - $ (5) $ - $ 55
Issuance of common stock
for:
Recapitalization with 2,100,000 2 (2) - - - -
Instra
Sale of convertible notes 502,500 1 250 - - - 251
Conversion of debt 502,500 - 342 - - - 342
Cash, net of issuance 1,381,000 2 472 - - - 474
costs of $16
Services rendered 132,500 - 20 - - - 20
Net loss - - - (219) - - (219)
---------- --------- ---------- --------- ---------- ----------- -----------
Balance at September 30, 10,618,500 11 1,136 (219) (5) - 923
1998
Issuance of common stock
for:
Services rendered 4,408,950 4 4,609 - - (4,000) 613
Acquisition of ownership -
interests in Affiliated 10,523,450 11 12,762 - - 12,773
Companies
Purchase of technology 3,500,000 4 5,246 - - - 5,250
Cash, net of issuance costs 9,404,669 9 12,234 - - - 12,243
of $1,864
Warrants issued in
connection with services - - 256 - - - 256
rendered
Stock compensation - - 200 - - 600 800
Receipt of subscription - - - - 5 - 5
receivable
Net income - - - 1,612 - - 1,612
---------- --------- ---------- --------- ---------- ----------- -----------
Balance at September 30, 38,455,569 39 36,443 1,393 - (3,400) 34,475
1999
Issuance of common stock for:
Services rendered 55,000 - 83 - - - 83
Acquisition of ownership -
interests in Affiliated 2,250,000 2 2,810 - - 2,812
Companies
Conversion of debt 705,014 1 1,058 - - - 1,059
Lease agreement 50,000 - 75 - - - 75
Warrants and options issued -
in connection with - - 2,219 - - 2,219
services rendered or to
be rendered
Stock compensation - - 250 - - 800 1,050
Net loss - - - (37,081) - - (37,081)
---------- --------- ---------- --------- ---------- ----------- -----------
Balance as of September 30, 41,515,583 $ 42 $42,938 $(35,688) $ - $(2,600) $4,692
2000
========== ========= ========== ========= ========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED SEPTEMBER 30
2000 1999 1998
----------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(37,081) $ 1,612 $ (219)
Adjustments to reconcile net (loss)
income to net cash used in operating
activities:
Impairment of 19,786 - -
investments
Deferred income taxes (6,863) 6,863 -
Impairment of advances to 2,350 1,106 -
Affiliated Companies
Impairment of intangible asset 3,901 - -
Loss on sale of 2,328 - -
investments
Stock compensation 1,789 1,216 20
Amortization 1,355 583 10
Equity loss 364 1,578 -
Amortization of debt issuance costs 156 155 -
Depreciation 124 14 3
Gain on sale of subsidiary - (25,426) -
Impairment of intangible asset - 5,583 -
Purchased research and development - 3,036 -
Amortization of debt discount - - 80
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable (759) 1,008 (49)
Inventory (644) - -
Prepaid expenses (45) (143) -
Accounts payable 2,557 (600) 20
Accrued expenses 102 (419) 40
Deferred revenue 1,247 470 -
----------- ----------- ----------
Net cash used in operating activities (9,333) (3,364) (95)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of short-term 1,356 - -
investments
Advances to Affiliated Companies - (1,850) -
Purchase of property and equipment (314) (206) (30)
Acquisitions of ownership interests in - (2,985) -
Affiliated Companies, net of cash
acquired
Proceeds from sale of subsidiary - 2,602 -
Acquisition of technology - (750) -
(Increase) decrease in other assets (35) 70 (115)
----------- ----------- ----------
Net cash provided by (used in)
investing activities 1,007 (3,119) (145)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible 3,600 990 503
debt
Debt issuance costs incurred (200) (129) -
Payment of capital lease obligation (37) - -
Payments on line of credit - (179) -
Net proceeds from issuance of common - 12,243 484
stock
----------- ----------- ----------
Net cash provided by financing 3,363 12,925 987
activities
----------- ----------- ----------
Net (decrease) increase in cash and (4,963) 6,442 747
cash equivalents
Cash and cash equivalents at beginning 7,234 792 45
of year
----------- ----------- ----------
Cash and cash equivalents at end of $ 2,271 $ 7,234 $ 792
year
=========== =========== ==========
NONCASH TRANSACTIONS
Capital lease obligation incurred $ - $ 76 $ -
Exchange of convertible notes and 1,059 - 342
interest for common stock
Receipt of stock for sale of subsidiary - 29,475 -
Exchange of consolidated investment for
cost basis investment 227 - -
Recognition of acquired Intrac
liabilities 1,400 - -
ISSUANCE OF COMMON STOCK FOR:
Acquisition of ownership interests in 2,812 12,773 -
Affiliated Companies
Acquisition of technology - 5,250 -
Lease agreement 75 - -
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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 September 30, 2000, the Company owned
interests in eleven 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.
In May 1998, Instra Corp. ("Instra"), a publicly traded Delaware corporation
with minimal business operations, exchanged 6,000,000 shares of Instra common
stock for all the outstanding shares of Keiretsu Corporation ("Keiretsu").
Keiretsu was incorporated in Nevada on September 26, 1997 and did not commence
operations until after the share exchange. Instra had 25,219,990 shares of
common stock outstanding prior to the share exchange. As a condition of the
share exchange, 14,719,990 shares of Instra common stock were canceled and the
remaining outstanding shares were reduced to 2,100,000 at the rate of one share
for each five shares outstanding as a result of a reverse stock split. As a
result of the transaction, Keiretsu became a wholly owned subsidiary of Instra
and the former Keiretsu stockholders became the owners of 74.1% of the
outstanding Instra common stock. The transaction was treated as a
recapitalization to which retroactive effect has been given in the accompanying
financial statements. In conjunction with the merger, Instra changed its name to
WorldWide Web NetworX Corporation.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred recurring
operating losses and has a working capital deficiency. In addition, without
additional funding, the Company does not anticipate having the ability to
meet its working capital needs for fiscal 2001 or to satisfy its convertible
promissory note upon maturity with a cash payment during the fiscal year
ending September 30, 2001. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans
implemented thus far, as well as actions initiated that will continue into
fiscal 2001, include restructuring its investment in NAI Direct, Inc.
resulting in a release of its $2.7 million obligation to fund the operations
of NAI Direct, Inc., and reducing expenses of the Company and its
consolidated subsidiaries, ATM Service, Ltd. and The Intrac Group, Ltd.
Management is negotiating the extension of the maturity date of the
convertible promissory note, however, there is no assurance that it will be
done. Management is seeking additional sources of debt and equity financing
to fund its future working capital needs. However, there can be no assurance
that the Company will be successful in obtaining the necessary funding. The
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
F-8
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 subsidiary, ATM Service, Ltd. Additionally, the details of the
results of operations of Real Quest, Inc. have been included in the consolidated
financial statements through September 27, 2000, at which time the Company
restructured its investment and began accounting for the investment under the
cost method (Note 5). 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.
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 loss" in the statement of operations.
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.
F-9
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (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 Statement of Financial Accounting Standards No. 114, ACCOUNTING
BY CREDITORS FOR IMPAIRMENT OF A LOAN ("SFAS 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.
REVENUE RECOGNITION
The Company principally derives its revenue by providing inventory liquidation
and asset recovery services and from the purchase and resale of advertising
media, merchandise or business services through its consolidated Affiliated
Companies, ATM Service, Ltd. ("ATM Ltd.") and The Intrac Group, Ltd. ("Intrac").
For the year ended September 30, 2000, the Company derived approximately 89% of
its revenue from customers in the United States. Approximately 11% of total of
revenues were derived from foreign customers located primarily in Israel and
Mexico. All revenues were transacted in U.S. dollars. The Company plans to
expand its operations throughout the world. For the year ended September 30,
2000, 4 customers for whom the Company provided these services each accounted
for 10% or more of the Company's total revenues. These 4 customers combined
provided 65% of the Company's total revenues for the year ended September 30,
2000. For the year ended September 30, 1999, no customer for whom the Company
provided these services represented 10% or more of the Company's total revenues.
The Company will contract with a customer to sell for the customer large blocks
of assets or inventory under asset management, liquidation, or cost recovery
agreements. In an asset management agreement, the Company acts as an agent and
sells the assets for cash receiving a commission based on a percentage of the
proceeds of the sale. The Company records the commission received as revenue
when the asset is shipped.
Under both liquidation and cost-recovery agreements, the Company takes title to
the assets and assumes the risk of loss. The Company is not required, by either
type of agreement, to make any cash payments to the customer for the assets
purchased until such time as the Company sells the assets. These payments
pertain to the portion of assets actually sold. The ultimate cost to the Company
is a contracted percent of the amount the Company sells the inventory for, which
is uncertain until a sale occurs. Accordingly, the Company generally does not
record inventory for any assets purchased under these agreements. When the
Company can determine the cost of the inventory acquired, an estimate of the
selling price for the goods, and that the sale of the assets is reasonably
assured, inventory is recorded. Shipping, handling, and warehousing costs are
included in costs of revenues in the statement of operations.
F-10
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues associated with asset management and cost recovery services are equal
to the gross cash received from the sale, because the Company assumes the risk
of loss, and are recognized when the inventory sold is shipped. However, if the
transactions involve the issuance of trade credits, the Company will defer a
portion of the revenues and expenses attributable to cash received and paid
under asset management and cost-recovery agreements to reflect the outstanding
commitment applicable to the future redemption of the trade credits as discussed
below.
The transactions conducted under asset management and cost recovery agreements
can also be settled, in part, in credits to purchase advertising media,
merchandise, or business services ("trade credits"). Trade credits issued to
customers represent the difference between the contracted value of the inventory
as negotiated with the customer and the cash paid to the customer upon the sale
of the inventory. Trade credits are not redeemable by customers for cash. The
contracted value of the inventory is mutually agreed upon by the Company and the
customer at the time an agreement is reached and is usually in excess of the
cash liquidation value. Generally, the Company is not required to remit cash or
any other form of payment other than trade credits for the difference between
the contracted value and the cash paid for the inventory. Certain liquidation
and cost recovery agreements are transacted exclusively in trade credits.
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 the goods
and services in both cash and the redemption of trade credits. The ratio of cash
to combination trade credits that make up the total purchase price to be used in
purchases from the Company is determined on a transaction-by-transaction basis.
To redeem combination trade credits, a customer must contact the Company and
request that the Company provide advertising media, merchandise or business
services. The Company will attempt to purchase the requested products for cash
or with a combination of cash and trade credits. The Company has no liability or
obligation to the customer if it is unable to obtain any of the items requested
that are not already within the Company's inventory of services or that it
cannot reasonably obtain. The Company's inventory of services is minimal at any
given time. The Company relies on its ability to readily obtain these services
from its vendors to satisfy its obligations. The obligation to redeem
combination trade credits represents a best efforts obligation of the Company.
The face value of combination trade credits have neither any recordable
obligation nor do they represent a fixed and determinable liability. However, as
noted above, the Company defers a portion of its revenues and expenses
attributed to the cash received and paid under the asset management and cost
recovery agreements to reflect the Company's cost to redeem the trade credits.
When the Company redeems combination trade credits, it recognizes revenue equal
to the cash received from the customer for the goods and services plus, if
applicable, the pro rata portion of the deferred revenues and expenses relating
to the liquidation of the assets that gave rise to the trade credits.
The Company may also issue straight trade credits to its customers. These
credits are issued as an additional incentive to its customers to enter into
asset management and cost recovery agreements. Straight trade credits are
typically issued in conjunction with combination trade credits and similar to
combination trade credits are issued for the purchase of advertising media,
merchandise or business services. However, unlike combination trade credits,
straight trade credits allow the customer to acquire goods and services without
the use of cash. Additionally, the customer and the Company pre-negotiate the
types of media, merchandise or business services for which the straight trade
credits will be redeemed. When the customer redeems straight trade credits, the
Company recognizes revenue equal to the pro rata portion of the deferred revenue
relating to the liquidation of the assets that gave rise to the trade credits.
Cost of revenue is recognized for the cash paid by the Company for the goods and
services purchased on behalf of the customer.
F-11
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred revenue from asset management, liquidation, cost-recovery, and media
buying services was $3,117,000 and $470,000 at September 30, 2000 and 1999,
respectively.
Unredeemed trade credits totaled $11,708,000 at September 30, 2000. Trade
credits are generally redeemable within periods ranging from 2 to 5 years.
However, in certain transactions there are no specified expiration dates
established for the trade credits. Trade credits redeemable for the next four
years are as follows: $137,000 in 2000, $1,337,000 in 2001, $1,545,000 in 2002,
and $4,514,000 in 2003. Trade credits totaling $4,175,000 have no specified
expiration date.
The Company also generated revenue by providing consulting services throughout
North America during the years ended September 30, 2000 and 1999. Less than 1%
of consulting revenues were derived from foreign customers, outside of the
United States, located principally in Canada. Consulting revenues are recognized
in the period in which the consulting services are performed. The Company
derived 36% of its total revenues for the year ended September 30, 1999 from one
customer to whom it provided consulting services. Of the total consulting
revenues for the year ended September 30, 1999, $529,000 was attributable to
Entrade which was sold in September 1999 (Note 10). For the year ended September
30, 2000, 1.7% of total revenues were derived from consulting services.
CASH EQUIVALENTS
The Company considers as cash equivalents all highly liquid investments with a
maturity of three months or less when purchased.
INVESTMENTS
The Company classifies its investment in Entrade Inc. as available for sale.
Such investments are recorded at fair value based on quoted market prices,
with unrealized gains and losses, if considered to be temporary, recorded as
other comprehensive income or loss until realized. The cost of investments
sold is based on the average cost method.
INVENTORY
Inventories are valued at the lower of cost or market using the first in - first
out (FIFO) costing method. Inventory consists of merchandise received in
exchange for media trade credits and is held for resale to third parties.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets
which average from three to five years. Depreciation of equipment under
capital leases is included in depreciation expense for all periods presented.
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 Standards No. 86, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED ("SFAS
86"). Capitalization ceases when the product is available for general release to
customers.
F-12
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 (Note 5).
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. As of
September 30, 2000, the Company does not have any capitalized software costs.
INTERNAL USE SOFTWARE
Effective for fiscal years beginning after December 15, 1998, the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
98-1 ("SOP 98-1"), ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE." SOP 98-1 requires all costs related to the
development or purchase of internal use software, other than those incurred
during the application development stage, to be expensed as incurred. Costs
incurred during the application development stage are required to be capitalized
and amortized over the estimated useful life of the software. The Company
adopted SOP 98-1 on October 1, 1998 and capitalized $6,000,000 of software
obtained for internal use (Note 5). Capitalized software costs are amortized on
a straight-line basis over three years. Amortization related to the capitalized
software was $417,000 for the year ended September 30, 1999. In September 1999,
the Company determined that it would not use the software it capitalized and
there was no identified market for its sale to others. Accordingly, the
unamortized balance of this software of $5,583,000 was written off at September
30, 1999. Historically, the Company expensed all costs incurred for web-site
development and no such costs have been incurred during the year ended September
30, 2000.
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. Goodwill was
amortized using the straight-line method over their expected useful lives of 3
to 5 years.
LONG-LIVED ASSETS
The Company evaluates impairment of its intangible and other long-lived assets,
including goodwill, in accordance with Statement of Financial Accounting
Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. ("SFAS 121") In making such determination,
management compares the estimated future cash flows, on an undiscounted basis,
of the underlying operations or assets with their carrying value to determine if
any impairment exists. If an impairment exists, any adjustment is determined by
comparing the carrying amount to the fair value of the impaired asset. The
Company considers all impaired assets "to be held and used" until such time as
management commits to a plan to dispose of the impaired asset. At that time, the
impaired asset is classified as "to be disposed of" and is carried at its fair
value less its cost of disposal.
F-13
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs are amortized based on the interest method over the
term of the associated debt agreement.
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.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a concentration of
credit risk consist principally of accounts receivable. The Company's customer
base is mainly in the United States. The Company does not require collateral or
other security to support credit sales, but provides an allowance for bad debts
based on historical experience and specifically identified risks.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has the following financial instruments: cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, convertible
notes, and accrued expenses. The carrying value of these financial instruments
approximates their fair value.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123"). The provisions of SFAS 123
allow companies to either expense the estimated fair value of stock options or
to continue to follow the intrinsic value method set forth in APB Opinion 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") but disclose the pro forma
effects on net income or loss as if the fair value had been expensed. The
Company has elected to continue to apply APB 25 in accounting for its stock
option plan, and accordingly, recognizes compensation expense for the difference
between the fair value of the underlying common stock and the grant price of the
option at the date of grant.
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 133"), which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. Under SFAS 133, accounting for changes in fair value of a derivative
depends on its intended use and designation. The Company will adopt SFAS 133
during the first quarter of fiscal 2001. Management is currently evaluating
the impact of SFAS 133 on the financial position and results of operations of
the Company.
F-14
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
Investments at September 30, 2000 and 1999 consisted of 1,575,000 and 1,800,000
shares of common stock of Entrade Inc., respectively. The shares were received
as consideration for the sale of a subsidiary to Artra (Note 10). The shares
were restricted as to sale until September 23, 2000, however, Entrade Inc.
granted the Company a partial waiver of the sale restrictions that allowed the
Company to sell a total of 225,000 shares from May through September 2000, which
resulted in a realized loss on the sale of $2,328,000 for the year ended
September 30, 2000. The Company has pledged the shares as collateral for its
convertible promissory note (Note 7). The quoted market value of the Entrade
Inc. (a NYSE company formerly named Artra) shares held by the Company was
$6,005,000 at September 30, 2000 and $1,575,000 at December 15, 2000. During the
year ended September 30, 2000, the Company recorded unrealized gains and losses
in the value of Entrade Inc. as other comprehensive income or loss. At September
30, 2000, the Company determined that the decline in the market value of its
investment in Entrade Inc. was other than temporary and accordingly, has written
the investment down to a new cost basis. The difference between the new cost
basis of $3.8125 per share and the Company's previous cost basis of $16.375 per
share has been recorded as a realized loss in the statement of operations.
Unrealized accumulated other comprehensive loss totaling $19.8 million was
reclassified to realized loss in the statement of operations for the year ended
September 30, 2000.
Entrade Inc. is a public company subject to the reporting requirements of the
U.S. Securities and Exchange Commission. The following summarizes the audited
balance sheet and statement of operations information reported by Entrade Inc.
at December 31, 1999 and for the year then ended and the unaudited balance sheet
and statement of operations at September 30, 2000 and the nine months then
ended, respectively. (Amounts in thousands, except per share data):
SEPTEMBER DECEMBER
BALANCE SHEET 30, 2000 31, 1999
------------ ------------
Current assets..................... $ 8,686 $ 15,326
Non-current assets................. 78,346 65,432
Current liabilities................ 26,215 20,217
Non-current liabilities............ 7,786 12,721
NINE
MONTHS YEAR ENDED
ENDED DECEMBER
SEPTEMBER 31, 1999
STATEMENT OF OPERATIONS 30, 2000
------------ ------------
Net revenues....................... $ 11,969 $ 4,542
Cost of revenues, exclusive of
depreciation and amortization.... 4,943 1,759
Loss from continuing operations.... (30,594) (19,304)
Net loss........................... (30,594) (19,304)
Net loss per share:
Basic............................ $ (2.47) $ (3.65)
Diluted.......................... $ (2.47) $ (3.65)
F-15
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (amounts in thousands):
SEPTEMBER 30
BALANCE SHEET 2000 1999
------------ ------------
Office equipment.................... $ 207 $ 100
Office furniture.................... 120 117
Equipment under capital lease....... 76 76
Leasehold improvements.............. 19 19
------------ ------------
422 312
Accumulated depreciation............ (103) (17)
------------ ------------
Total property and equipment........ $319 $295
============ ============
5. ACQUISITIONS OF OWNERSHIP INTERESTS IN AFFILIATED COMPANIES
ENTRADE INC.
Between December 1998 and February 1999, the Company acquired all of the
outstanding equity interests of BarterOne, LLC ("BarterOne"), a Delaware limited
liability company. The Company issued 2,523,450 shares of its common stock and
paid cash of $1,056,000 to purchase BarterOne. The Company's CEO and principal
stockholder at the date of the transaction, Robert D. Kohn, received 475,000
shares of the Company's Common Stock for his option to acquire a 4.5% interest
in BarterOne which was granted to him by PECO Energy Company in exchange for
compensation and concessions. Energy Trading Company, a wholly owned subsidiary
of PECO Energy Company, received consideration of $480,000 and 416,666 shares of
the Company's common stock for its 51% ownership interest in BarterOne.
BarterOne held worldwide perpetual licensing rights to the ORBIT system software
(Online Reciprocal Business and Inventory Transaction System), an electronic
commerce system to be used as a transaction tool over the Internet, and was
engaged in the business of developing and marketing online asset management and
remarketing programs to major corporations. In December 1997, BarterOne was
incorporated in Delaware as a joint venture between Energy Trading Company and
Global Trade Group to serve as PECO Energy's Internet development unit.
BarterOne did business as entrade.com and was dissolved in 1999. Robert D. Kohn
was the president of BarterOne from its formation to its dissolution.
Additionally, Robert D. Kohn was a strategic planner of business development for
marketing and sales of PECO Energy Company from February 1996 to March 1, 1999.
The Company accounted for this acquisition under the purchase method of
accounting. The Company valued the shares issued at $2,523,450, resulting in a
total purchase price, including cash and other expenses, of $3,580,000, all of
which was allocated to cost in excess of assets acquired. The goodwill was being
amortized over a five-year period. Goodwill amortization of $430,000 is included
in the statement of operations for the year ended September 30, 1999.
In January 1999, the Company acquired from Positive Asset Remarketing, Inc.
("PAR") 25% of the outstanding Class A voting stock of assetTrade.com, Inc.,
("assetTrade") in exchange for 3,500,000 shares of the Company's common stock.
assetTrade was a privately held entity which entered into a software license
agreement with BarterOne and is engaged in the business of developing and
marketing online asset disposition and auction services to major corporations.
The Company's CEO and principal stockholder at the time of the transaction,
Robert D. Kohn, held a 33.33% ownership interest in PAR. In December 1998,
Robert D. Kohn became the President and Chief Executive Officer of assetTrade.
Subsequent to the acquisition, the
F-16
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS OF OWNERSHIP INTERESTS IN AFFILIATED COMPANIES (CONTINUED)
Company transferred the assets of BarterOne and the assetTrade stock to NA
Acquisition Corp. ("NAAC"), a 90%-owned subsidiary. Prior to the consummation of
the merger, NAAC changed its name to Entrade Inc. ("Entrade"). The remaining 10%
of Entrade was held by a former BarterOne shareholder, which is a wholly-owned
subsidiary of PECO Energy Company.
In September 1999, the Company consummated the sale of Entrade to another
company (Note 10).
ATM SERVICE, LTD.
In December 1998, the Company entered into an agreement with Warren Rothstein
(who from September 1999 to April 2000, served as interim President and CEO and
Chairman of the Board of Directors of the Company) to form a corporation, ATM
Service, Ltd. ("ATM Ltd."), owned equally by the Company and Warren Rothstein.
Warren Rothstein obtained his interest in the joint venture in exchange for
agreeing to manage ATM Ltd. and sourcing goods and services for ATM Ltd. to sell
through its web site. The corporation was formed to provide inventory
liquidation and other forms of asset recovery services primarily by e-commerce
over the Internet.
The Company committed to issue 5,000,000 shares (subsequently reduced to the
issuance of 4,000,000 shares) of common stock to Warren Rothstein for services
to be rendered to ATM Ltd. over a 6-year period. The agreement provided that the
shares issued would be subject to forfeiture to the extent of 200,000 shares in
each quarter that Warren Rothstein failed to provide listings of merchandise
with a retail value of $1,250,000 for sale on ATM Ltd.'s web site. The shares
had voting and dividend rights, but could not be transferred except in
accordance with the agreement. The Company recorded deferred compensation of
$5,000,000 at the date of the agreement for the shares issued, which was reduced
to $4,000,000 in July 1999, as a result of the amendment discussed below. As the
shares were earned, the Company recorded a charge to expense for the then fair
value of such shares. During the year ended September 30, 1999, the restriction
on 600,000 of these shares was released and the Company recorded a charge of
$800,000 which is included in equity loss because the Company had a 50% interest
in ATM Ltd. when the restriction on the shares was released. During the year
ended September 30, 2000, an additional 800,000 shares were released and the
Company recorded a charge of $1,050,000 which is included in selling, general
and administrative expense in its statement of operations. In November 2000,
Warren Rothstein returned the remaining 2,600,000 unearned shares to the Company
and they were retired as treasury stock. (Note 14)
In February 1999, the Company acquired from Positive Asset Remarketing ("PAR"),
the ATM Center System, a proprietary system for online electronic trading and
banking, which it contributed to ATM Ltd. The Company issued 3,500,000 shares of
its common stock valued at $5,250,000 and cash of $750,000 to PAR. In addition,
the Company agreed to fund the costs of maintaining, operating and updating the
web site until ATM Ltd. was funded to the satisfaction of Warren Rothstein and
the Company, after which the Company would be reimbursed for such costs by ATM
Ltd. The Company's then-CEO and principal stockholder, Robert D. Kohn, as a
shareholder of PAR, received 1,166,667 shares of the Company's common stock and
$250,000 of the proceeds from the sale of the system to the Company. The Company
recorded the transfer of the technology at its carrying value of $6 million and
recorded an investment in ATM Ltd. The Company was accounting for its investment
under the equity method and as such, was amortizing the amount by which its
carrying value exceeded its share of the underlying net assets of ATM Ltd. over
a three-year period. Amortization expense of $417,000 was recorded and included
in equity loss in the Company's statement of operations for the year ended
September 30, 1999, with a corresponding decrease in the investment.
F-17
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS OF OWNERSHIP INTERESTS IN AFFILIATED COMPANIES (CONTINUED)
As a condition to the acquisition of The Intrac Group in July 1999, the
agreement with Warren Rothstein was amended and the Company received 26% of
Warren Rothstein's holdings in ATM Ltd., and reduced the number of contingent
shares issuable to Warren Rothstein to 4,000,000. No value was assigned to the
26% interest in ATM Ltd. received from Warren Rothstein as the Company's basis
in ATM Ltd. did not change. The Company immediately issued 24% of its interest
in ATM Ltd. that was received from Warren Rothstein to the former shareholders
of The Intrac Group resulting in the Company increasing its ownership interest
in ATM Ltd. from 50% to 52%, Warren Rothstein owning a 24% interest and the
former shareholders of The Intrac Group owning a 24% interest. (See acquisition
of The Intrac Group below.) Based on the increase in the Company's ownership to
52%, the Company began consolidating ATM Ltd. on July 23, 1999, under the
purchase method of accounting. The purchase price has been allocated to assets
and liabilities based on estimated fair values at the date of acquisition. The
Company valued its net investment in ATM Ltd. at the carrying value of its
equity investment at the date of acquisition as there were no significant
operations of the ATM Ltd. from the date of the Company's original equity
investment through the date the Company obtained a controlling interest. The
detail of the results of operations of ATM Ltd. have been included in the
Company's statement of operations since July 23, 1999, when the Company acquired
a controlling interest.
In September 1999, the Company determined that it would not use the ATM Center
System technology and the Company licensed new technology from entrade.com, a
subsidiary of Entrade Inc. While the Company may sell or license the ATM Center
System technology to others, no customers had been identified and no marketing
efforts had commenced. In accordance with SFAS 121 and the Company's policies,
the ATM Center Systems technology was classified as an asset to be held or used
and not an asset to be disposed of since management had not committed to a plan
to dispose of the technology. There was no readily determinable market to
evaluate the fair market value of this technology. Therefore, as the Company did
not have an alternative future use, the Company determined the fair value of the
technology to be zero and recorded an impairment loss of $5,583,000 at September
30, 1999.
In July 1999, the Company loaned $3.5 million to fund ATM Ltd.'s operations with
interest payable at 6%, $1 million of which ATM Ltd. has loaned to The Intrac
Group, Ltd. The principal and interest accrued are due upon the earlier of 10
years, an initial public offering of ATM Ltd. or the receipt of $15 million in
financing for ATM Ltd. In June 2000, the Company loaned ATM Ltd. an additional
$83,000 which was due on or before September 16, 2000, of which ATM Ltd. repaid
$10,000 in August 2000. In August 2000, the Company loaned an additional
$465,000 to ATM Ltd., due within three years. ATM Ltd's. 9.5% ownership interest
in AssetControl.com, LLC serves as collateral for the Company's loans to ATM
Ltd. The loans to both ATM Ltd. and Intrac eliminate in the consolidated
financial statements.
During 1999, all of the losses incurred by ATM Ltd., including the portion
attributable to Warren Rothstein for his minority interest, were allocated to
the Company. Warren Rothstein did not make any capital contributions to ATM Ltd.
from its inception and, as a result, has no basis in ATM Ltd. Therefore, the
Company has recorded no minority interest in its balance sheet at September 30,
2000 and 1999. Additionally, Warren Rothstein is not required to make any
capital contribution to ATM Ltd. for losses incurred by ATM Ltd.
F-18
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS OF OWNERSHIP INTERESTS IN AFFILIATED COMPANIES (CONTINUED)
In March 2000, ATM Ltd. joined with Textron Financial Corporation ("Textron"),
Entrade Inc. ("Entrade") and Safeguard Scientifics, Inc. ("Safeguard") to form
AssetControl.com, LLC ("AssetControl"), a company that provides asset
disposition services for excess industrial equipment, machinery and other
assets. AssetControl is owned 47.5% by Textron, 38% by Entrade, 9.5% by ATM
Ltd., and 5% by Safeguard. ATM Ltd. and Entrade have agreed that, although ATM
Ltd. owns only 9.5% of AssetControl, ATM Ltd. will receive 50% of the aggregate
amount of any distributions paid by AssetControl. ATM is accounting for its
investment in AssetControl under the cost method of accounting. ATM Ltd.'s
carrying value for its investment is zero because ATM Ltd. did not pay for its
interest in AssetControl. ATM Ltd. pledged its ownership interest in
AssetControl to the Company as collateral for loans made to ATM Ltd.
In July 2000, ATM entered into an agreement with Juan Torrents & Assoc. ("JTA")
to form a joint venture known as FreeTradeZones.com. The purpose of the joint
venture is to use the ATM e-commerce platform to provide asset management and
disposition services, bulk and specific sales of products and services, both
off-line and on-line, auction services and other transactions, such as trade and
barter, to companies located within the Free Trade Zones. In November 2000, ATM
advanced $12,500 to the joint venture to pay for the initial travel costs and
expenses of implementation. This advance is to be repaid from the first funds
available to the joint venture. ATM has a 62% equity interest in the joint
venture and the right to receive 50% of any distributions of available cash by
the joint venture. JTA owns the remaining 38% of the joint venture and has the
right to receive the other 50% of the cash distributions from the joint venture.
As of September 30, 2000, FreeTradeZones.com had not begun operations nor did it
have any assets or liabilities.
In October 2000, Warren Rothstein resigned as Chairman of ATM Ltd. and The
Intrac Group, Ltd. In connection with the resignation, he relinquished his
entire equity interest in ATM Ltd. and an additional 2,600,000 shares of the
Company's common stock which, together with the shares previously relinquished
and shares sold by Warren Rothstein, reduced the number of shares of the
Company's common stock held by Warren Rothstein on November 15, 2000 to
1,380,000. The Company's ownership interest in ATM Ltd. increased to 68%.
THE INTRAC GROUP, LTD.
On July 23, 1999, the Company acquired all the outstanding shares of capital
stock of The Intrac Group ("Intrac") in exchange for 1,000,000 shares of the
Company's common stock, $1,500,000 in cash, a 24% interest in ATM Ltd., and the
assumption of liabilities of approximately $2,755,000, which primarily consisted
of accounts payable and accrued liabilities. No value has been assigned to the
24% interest in ATM Ltd. because ATM Ltd. had no substantive activity prior to
the Intrac acquisition and the only significant asset was written off in 1999.
The detail of the results of operations of Intrac have been included in the
Company's statement of operations since July 23, 1999.
The Company accounted for this acquisition under the purchase method of
accounting. The purchase price has been allocated to assets and liabilities
based on estimated fair values at the date of acquisition. The Company valued
the 1,000,000 shares of its common stock at $1,500,000, resulting in a total
purchase price of Intrac of $3,608,000, including the cash, transaction costs
and the net liabilities assumed. The Company assumed the operating liabilities
of Intrac of $2,755,000 at the date of acquisition. The Company has allocated
the purchase price and determined that the costs in excess of assets acquired
(goodwill) is $3,608,000. At December 31, 1999, the purchase price and goodwill
were adjusted for additional liabilities totaling $1,400,000. The goodwill was
being amortized over a five-year period. Goodwill amortization of $1,078,000 and
$109,000 is included in the statement of operations for the years ended
September 30, 2000 and 1999, respectively. At September 30, 2000, the Company
compared the estimated future cash flows from Intrac's known and consummated
transactions with the carrying value of the goodwill recorded on this investment
and determined the remaining unamortized goodwill of $3.9 million was impaired.
The Company has recorded an impairment charge of $3.9 million in the statement
of operations for the year ended September 30, 2000.
The following unaudited proforma financial information presents the combined
results of operations as if the Intrac acquisition had occured on October 1,
1998 and October 1, 1997, respectively, after giving effect to adjustments
including goodwill amortization, income taxes and employment agreements. The
unaudited proforma information does not necessarily reflect the results of
operations that would have occurred had the Company and Intrac been a single
entity during such periods.
Year ended
September 30,
---------------
1999 1998
------ ------
Revenue ..................................................... $ 8,555 $11,337
Proforma net income (loss) .................................. 392 (1,447)
Proforma diluted net income (loss) per share ................ .02 (.15)
F-19
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS OF OWNERSHIP INTERESTS IN AFFILIATED COMPANIES (CONTINUED)
REAL QUEST, INC./NAI DIRECT, INC./NEW AMERICA NETWORK, INC.
On September 23, 1999, the Company acquired 80% of the common stock of Real
Quest, Inc. ("Real Quest") from New America Network, Inc. ("NAI") in exchange
for 750,000 shares of its common stock. Real Quest's only asset is its 80%
ownership of NAI Direct, Inc. ("NAI Direct"). NAI Direct conducts its operations
through its web site that permits users to obtain commercial real estate
services on-line. There were no significant operations of NAI Direct at the date
of the acquisition. The Company also delivered an additional 750,000 shares to
an escrow agent, to be released to New America Network, Inc. if NAI Direct
attained revenues of $2 million within the 24-month period following the launch
of its web site. The Company valued the 750,000 shares of its common stock at
$1,125,000. At September 23, 1999, no value was assigned to the contingent
shares as the contingency had not yet been resolved. The Company accounted for
this acquisition under the purchase method of accounting. The purchase price has
been allocated to assets and liabilities based on estimated fair values at the
date of acquisition. The Company has determined that the costs in excess of
assets acquired (goodwill) is $1,385,000. The goodwill was being amortized over
a five-year period. Amortization expense for the year ended September 30, 2000
was $277,000.
In fiscal 2000, the Company loaned NAI Direct $2,090,000 with interest payable
at 6% to fund operations. The principal and accrued interest were due upon the
earlier of (1) 10 years, (2) an initial public offering of NAI Direct with net
proceeds exceeding $5,000,000, or (3) issuance of indebtedness or the sale of
any assets or ownership interest in NAI Direct which results in funds in excess
of $5,000,000. Additionally, the Company agreed to provide up to $2,910,000 in
working capital to NAI Direct within 18 months of September 30, 1999 in the form
of a loan or otherwise.
NAI Direct licensed a transaction management software application called
REALTrac from NAI under an agreement in which NAI Direct will pay NAI a
royalty fee equal to 5% of NAI Direct's gross revenue for each month. In
March 2000, the Company guaranteed the obligations of NAI Direct under a
lease of computer equipment and network software which requires payments
totaling $100,000 over a two-year term with an option to purchase at lease
end. In December 2000, the Company was notified of NAI Direct's default under
the lease and a demand for payment was made pursuant to the Company's
guarantee. The Company has been provided oral assurances by NAI Direct that
it will satisfy its obligation under the equipment lease.
In January 2000, NAI Direct invested $50,000 in Sidewalk Associates, LLC which
in turn acquired preferred stock of First Mile Networks, Inc., a privately held
Delaware corporation. In September 2000, NAI Direct sold its interest in
Sidewalk Associates, LLC to Gerald Finn, Chairman of NAI Direct, for $55,000. A
gain of $5,000 is reflected as other income in the statement of operations for
the year ended September 30, 2000.
NAI provided various services including rental space and shared personnel and
has made payments on behalf of NAI Direct. The total services and payments were
$588,000 for the period from acquisition through September 27, 2000 at which
time, $239,000 remained due from NAI Direct to NAI.
On September 27, 2000, the Company restructured its relationships with NAI
Direct, Real Quest, and NAI. The Company loaned an additional $250,000 to NAI
Direct, which was guaranteed by NAI. The loan is convertible into shares of
common stock of NAI at the Company's option, at a price equal to the lesser of
$5 per share or the then current market value. In addition, pursuant to a Stock
Purchase Agreement, the Company (1) acquired a 4% equity interest in NAI; (2)
was released from its obligation to provide an additional $2,660,000 in working
capital loans to NAI Direct; (3) transferred to NAI the notes evidencing the
$2,090,000 in prior loans that the Company made to NAI Direct and 79 of the
Company's 80 shares in Real Quest; and (4) agreed to cause the escrowed 750,000
shares of the Company's common stock to be released from escrow and delivered to
NAI.
F-20
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS OF OWNERSHIP INTERESTS IN AFFILIATED COMPANIES (CONTINUED)
In the year ended September 30, 2000, the details of the results of NAI Direct
are included in the statement of operations of the Company through the date of
the restructuring. Commencing on September 27, 2000, the Company is accounting
for its investments in NAI and Real Quest under the cost method of accounting.
ASSETTRADE.COM
On April 7, 1999, the Company acquired from Admiral Asset Group, Inc.
("Admiral"), a privately held company, its 2% ownership interest in
AssetTRADE.com and Admiral's network of business contacts in exchange for
750,000 shares of its common stock and the assumption of accrued liabilities for
operating expense of Admiral for one year. The Company's total ownership
percentage in AssetTRADE.com was 2% after the acquisition and subsequently
diluted to less than 1% in December 2000. The Company valued the 750,000 shares
of its common stock at $1,125,000. The Company allocated the entire purchase
price of $1,605,000 to the ownership interest in AssetTRADE.com because the
other assets acquired were inconsequential, and accounted for its investment
under the cost method. Admiral provides consulting services generally paid on
commission basis in the asset management, real estate and barter business.
WWWX-JENCOM, LLC
In February 1999, the Company entered into an agreement with JenCom Digital
Technologies, LLC ("JenCom") whereby the Company acquired, for 2,000,000 shares
of common stock of the Company, four of JenCom's proprietary Internet software
technologies (the "JenCom Assets"). The 2,000,000 shares issued were valued at
$3,000,000. The Company then assigned the JenCom Assets to WWWX-Jencom, LLC
("WJC"), a limited liability company which is owned 50% by JenCom and 50% by the
Company. WJC was formed to further develop and market the Internet technology
products acquired from JenCom. The purchased products represent research and
development in process and were not technologically feasible at the acquisition
date and were written off as purchased research and development in the statement
of operations for the year ended September 30, 1999.
During 1999, the Company also loaned $900,000 to WJC. The interest free loan is
repayable upon the earliest to occur of the following: (1) 10 years from March
15, 1999, (2) a third-party investment in WJC of $10,000,000, or (3) the sale of
any asset of WJC that generates gross proceeds of $5,000,000 or more. Out of the
proceeds of the loan, $350,000 was advanced from WJC to Vision Technology, Inc.
(see below).
The Company is accounting for its investment in WJC under the equity method.
The Company has included its share of the net losses of WJC as equity loss in
the statement of operations, with a corresponding reduction of its investment
in WJC at September 30, 2000 and 1999. During the year ended September 30,
2000, the Company's investment in WJC was reduced to zero and no further
equity losses are being recognized because the Company is not required to
make any additional loans or contributions. JenCom is providing all employees
for the development of the four products and is being reimbursed at the fair
value of the costs incurred. Although the Company agreed to file a
registration statement before May 17, 2000 for the 2,000,000 shares issued to
JenCom, it has not yet done so.
VIDEONET CORP.
In July 1999, the Company advanced $100,000 to VideoNet Corp. ("VideoNet"),
evidenced by a 12%, $100,000 convertible note. In fiscal 2000, the note and the
accrued interest were converted into convertible preferred stock of VideoNet,
representing approximately 2.4% of the outstanding capital stock of VideoNet.
VideoNet is a privately held company that is developing video conferencing
services through proprietary technology. The Company is accounting for this
investment under the cost method.
F-21
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS OF OWNERSHIP INTERESTS IN AFFILIATED COMPANIES (CONTINUED)
The Company evaluated the carrying value of its ownership interest in VideoNet.
Based on its review of VideoNet's business plan and the lack of sufficient
capital at September 30, 2000, the Company recorded a valuation allowance of
$100,000, representing the total cost basis of its investment in VideoNet.
ONE WORLD NETWORKS INTEGRATED TECHNOLOGIES, INC.
In March 1999, the Company paid $675,000 for approximately 450,000 shares,
representing approximately 5% of the outstanding shares, of One World
Networks Integrated Technologies, Inc. ("One World"), a privately held
company that is an e-commerce-based virtual community of celebrity-branded
web sites and products. The Company is accounting for this investment under
the cost method. As a result of a recapitalization and funds from additional
investors, the Company's interest at September 30, 2000 is 1,661,090 shares,
representing approximately 2.6% of the outstanding shares of One World.
VISION TECHNOLOGIES, INC.
In March 1999, the Company agreed in principle to acquire Vision Technologies,
Inc. ("Vision") for cash and stock. Vision is a privately held company that is
developing high-performance digital video imaging technologies. At the time of
investment, Mr. Bjorn Koritz, the Company's then Vice President, General
Counsel, Secretary and a Director, was a Director of Vision, its General Counsel
and a holder of 10% of Vision's common stock. In July 1999, the agreement was
amended so the Company would make an investment in Vision rather than acquire
it. The Company advanced $850,000 in cash to Vision. Additionally, $350,000 was
advanced by WJC. In August 1999, the term sheet was terminated, and Vision had
the option to either return the cash to the Company within 180 days or convert
that amount into shares of Vision common stock. The Company's advances were
converted into 301,128 shares of Vision common stock, representing 3.5% of
Vision.
The Company evaluated the carrying value of its ownership interest in Vision.
Based on its review of Vision's business plan and the lack of sufficient
capital, at September 30, 1999, the Company recorded a 100% valuation allowance
of $1,025,000 representing the cash advances of $850,000 and its 50% ownership
of the advances made by WJC.
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 resulting in a total purchase price of $2,250,000. The Company
is accounting for this investment under the equity method. 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 Ltd. 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. However, ATM Ltd.
subsequently agreed to relinquish its exclusive rights under that agreement and
has not marketed any goods for ICC. Pursuant to the operating agreement of ICC,
two of the Company's former 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.
F-22
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS OF OWNERSHIP INTERESTS IN AFFILIATED COMPANIES (CONTINUED)
The Company evaluated the carrying value of its ownership interest in ICC. Based
on its review of ICC's business plan and the lack of sufficient capital or
operations, at September 30, 2000, the Company recorded a 100% valuation
allowance of $2,250,000 representing the total cost basis of its investment in
ICC.
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 September 30, 2000. Cost basis represents the Company's
original acquisition cost and advances less any impairment charges recorded by
the Company (in thousands).
TOTAL CARRYING
VALUE
------------------
VALUATION COST SEPTEMBER SEPTEMBER
INVESTMENT ADVANCES ALLOWANCE BASIS 30, 2000 30, 1999
---------- -------- --------- ------- -------- --------
Equity method:
WJC (1)........... $ - $ 900 $ (175) $ 725 $ - $ 364
ICC............... 2,250 - (2,250) - - -
-------- ------- --------- ------- -------- --------
2,250 900 (2,425) 725 - 364
Cost Method:
VideoNet.......... - 100 (100) - - 100
One World Direct, 675 - - 675 675 675
Inc,............
Vision............ - 850 (850) - - -
NAI and Real Quest 789 250 - 1,039 1,039 -
AssetTRADE.com.... 1,605 - - 1,605 1,605 1,605
Other............. 81 - (81) - - -
-------- ------- --------- ------- -------- --------
3,150 1,200 (1,031) 3,319 3,319 2,380
-------- ------- --------- ------- -------- --------
Total............. $5,400 $2,100 $(3,456) $4,044 $3,319 $2,744
======== ======= ========= ======= ======== ========
(1) The carrying value of the Company's investment in WJC has been reduced to
zero through recognition of its share of equity losses in WJC.
6. CUMULATIVE CONVERTIBLE DEBENTURES
In April 1998, Keiretsu sold $502,500 of Series A 12% Cumulative Convertible
Promissory Notes, which debt was assumed by WWWX in May 1998 when it merged with
Keiretsu, and 502,500 shares of restricted common stock for a total of $502,500.
The issuance of the Notes resulted in a debt discount of $251,000. During the
period from July through August 1998, the notes were converted into 502,500
shares of common stock of WWWX and the unamortized debt discount was included in
stockholders' equity.
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.
F-23
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CUMULATIVE CONVERTIBLE DEBENTURES (CONTINUED)
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 $150,000 have been accrued
at September 30, 1999.
On March 27, 2000, fourteen of the sixteen holders of the Debentures,
representing $865,000 in principal amount, 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 under their Debentures. The Company has included an inducement
expense totaling $90,000 in the statement of operations for the year ended
September 30, 2000. 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. There are no penalties accrued relating to
the Company's failure to file a registration statement covering the shares
issued.
At September 30, 2000, Debentures totaling $125,000 in principal remain
outstanding. At September 30, 2000, the Company has accrued $79,000 in penalties
and $11,500 in interest related to these outstanding Debentures. In December
2000, the Debenture holders asserted a demand for payment of the outstanding
principal, accrued interest, and penalties.
7. CONVERTIBLE PROMISSORY NOTE
In August 2000, the Company borrowed $3,600,000 from an affiliate of the
investment bank which, in 1999, purchased 2 million shares of the Company's
stock and raised in excess of $11 million for the Company in a private placement
offering (Note 9).
The loan must be repaid on or before September 1, 2001; however, the lender may,
at its option, extend the maturity date for up to an additional two years.
Interest is payable at a rate of 10% per year, upon maturity. The loan may be
converted, at the lender's option, at any time prior to maturity into common
stock of the Company at a rate of $.75 per share. The loan may be prepaid in
whole or in part, at any time upon at least ten days written notice to the
lender. In the event of any prepayment, however, the Company will issue to the
lender a warrant to purchase common stock in an amount equal to the prepayment
at $.75 per share, exercisable at any time prior to maturity. Any common stock
held by the lender or underlying the warrant issued is subject to anti-dilution
rights. In addition, the lender has two demand registration rights and unlimited
piggyback registration rights. The lender secured the loan with a first priority
security interest in all of the Company's assets. At September 30, 2000, the
Company has accrued interest of $36,500 on the loan.
F-24
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. 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. Significant components of
the Company's net deferred income taxes are as follows (in thousands):
2000 1999
----------- ----------
Deferred tax assets:
Loss in unconsolidated subsidiary $ 4,972 $ 2,865
Purchased research and
development and other
intangibles....................... 2,470 1,174
Other reserves...................... 1,433 548
NOL carryforward.................... 2,703 716
----------- ----------
Deferred tax assets................. 11,578 5,303
Less valuation allowance............ (11,350) (2,865)
----------- ----------
Total deferred tax assets........... 228 2,438
Deferred tax liabilities:
Deferred gain on sale of
subsidiary......................... - (8,902)
Other............................... (228) (659)
----------- ----------
Total deferred tax liabilities...... (228) (9,561)
----------- ----------
Total net deferred tax liabilities.. $ - $(7,123)
=========== ==========
At September 30, 2000, a full valuation allowance has been recorded due to the
uncertainty of the Company's ability to realize the deferred tax assets. At
September 30, 1999, a valuation allowance equal to the net deferred tax asset of
a subsidiary not consolidated for tax purposes has been recorded on the basis of
uncertainty with respect to the ultimate realization by the unconsolidated
subsidiary. At September 30, 2000, the Company has available net operating loss
carryforwards of approximately $7,591,000 which expire in the years 2012 to 2019
for federal purposes and 2004 and 2006 for state purposes. The timing and manner
in which the Company will utilize net operating loss carryforwards in any year,
or in total, may be limited by Section 382 of the Internal Revenue Code.
A reconciliation of income tax expense to amounts computed using federal
statutory rates is as follows (in thousands):
2000 1999 1998
---------- -------- --------
Income tax expense (benefit) computed
at federal statutory rate (35%)........$(15,381) $2,906 $ 82
Goodwill amortization.................... 604 19 -
State income tax (benefit) expense, net.. (1,790) 515 -
Nondeductible transaction costs.......... - 176 -
Other.................................... 1,219 464 -
Increase in valuation allowance.......... 8,485 2,783 82
-------- ------ ------
Income tax (benefit) expense.............$ (6,863) $6,863 $ -
======== ====== ======
Included in income tax expense for the year ended September 30, 1999 are
deferred federal and state income taxes of $6,070,000 and $793,000,
respectively. There are no current income taxes for the years ended September
30, 2000, 1999 and 1998.
F-25
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY
SALE OF COMMON STOCK
During 1998, the Company issued 1,513,500 shares of its common stock for cash of
$474,000, net of issuance costs, and for services rendered resulting in expense
of $20,000 for the value of the shares.
In March 1999, an investment bank purchased 2,000,000 shares of the Company's
common stock for $3,000,000. The investment bank received $390,000 in
commissions and expenses for this sale and warrants to purchase 200,000 shares
of common stock at $1.80 per share. The warrants expire on July 23, 2002.
Pursuant to a stock purchase agreement, the shares sold were to be registered
through the filing of a registration statement by October 4, 1999 or the Company
may be subject to a penalty of additional shares until a registration statement
covering such shares is declared effective. The Company estimated that, at
September 30, 2000, 2,400,000 shares of common stock will be issued under the
penalty provisions. The company has included the shares to be issued under the
penalty provision in its loss per share calculation for the year ended September
30, 2000. As of December 31, 2000, the Company will have an obligation to issue
an additional 600,000 shares under the penalty provision. However, the Company
believes that the number of the penalty shares provided for by the stock
purchase agreement is unreasonable. The Company intends to either renegotiate
the number of penalty shares to be issued or to contest the enforceability of
the provision of the stock purchase agreement that provides for the issuance of
the penalty shares.
In May 1999, the Company entered into an agreement with the same investment bank
to sell shares of the Company's common stock in a private placement. The
offering closed on September 22, 1999 and the Company issued 7,404,669 shares of
common stock for an aggregate purchase price of $11,107,003. The investment bank
received $1,470,000 in cash commissions for the placement of the stock and
warrants to purchase 740,467 shares of the Company's common stock at $1.80 per
share. The warrants expire on various dates from July 31, 2002 to September 22,
2002.
During fiscal 1999, the Company also issued 310,000 shares of common stock for
services rendered. The issuance of the shares resulted in expense of $464,000,
which is included in the statement of operations.
During fiscal 1999, the Company issued warrants to purchase 200,000 shares of
its common stock for services rendered. The warrants are exercisable at $2.25
per share and expire on April 2, 2003. The issuance of warrants resulted in
expense of $256,000, which is included in the statement of operations. The fair
value for these warrants was estimated at the date of grant using the
Black-Scholes method with the following assumptions: risk-free interest rate of
6%, dividend yield of 0%, average expected life of the warrants of 2 years and
volatility of 215%.
In December 1999, the Company issued 50,000 shares of its common stock for the
lease of office space. The stock was valued at $1.50 per share resulting in a
total lease value of $75,000. The lease is effective for a term of 60 months.
The Company is recording rent expense of $1,250 per month for the use of the
office space. At September 30, 2000, the Company has included $15,000 in prepaid
expenses and $38,750 in other assets in the balance sheet.
During fiscal 2000, the Company issued warrants to purchase 500,000 shares of
its common stock for services rendered in fiscal 1999. The warrants were
exercisable at $4.00 per share and expire on February 1, 2001. The issuance of
the warrants resulted in expense of $430,000, which was included in the
statement of operations for the year ended September 30, 1999. The fair value
for the warrants was estimated at the date of grant using the Black-Scholes
method with the following assumptions: risk-free interest rate of 6%, dividend
yield of 0%, average expected life of the warrants of 1 year and volatility of
215%.
F-26
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
During fiscal 2000, the Company also issued 55,000 shares of common stock for
services rendered. The issuance of the shares resulted in expense of $83,000,
which is included in the statement of operations.
During fiscal 2000, the Company modified the terms of previously issued warrants
to an outside consultant to purchase 500,000 shares of its common stock. The
warrants were re-priced from an exercise price of $4.00 per share to an exercise
price of $0.75 per share and the expiration date of the warrants was extended
for three years to August 31, 2003. The modification of the terms of the
warrants resulted in expense of $195,000, which is included in the statement of
operations. The fair value for the modified warrants was estimated at the date
of the modification using the Black-Scholes method with the following
assumptions: risk-free interest rate of 6%, dividend yield of 0%, average
expected life of the warrants of 3 years and volatility of 203%.
During fiscal 2000, the Company issued immediately exercisable warrants to
purchase 1,500,000 shares of its common stock for services to be rendered over
24 months from October 1, 2000 to September 30, 2002. The warrants are
exercisable at $0.75 per share and expire on September 1, 2003. The issuance of
warrants resulted in a prepaid expense of $1,050,000, which is included in the
balance sheet at September 30, 2000 in prepaid expenses and other assets. The
Company is recording consulting expenses over the 24-month period during which
the services are to be provided. The fair value for these warrants was estimated
at the date of grant using the Black-Scholes method with the following
assumptions: risk-free interest rate of 6%, dividend yield of 0%, average
expected life of the warrants of 3 years and volatility of 203%.
The weighted average fair value of warrants issued during the years ended
September 30, 2000 and 1999 was $0.84 and $1.28, respectively.
COMMON STOCK OPTIONS
The Company has two stock option plans, the 1999 Equity Compensation Plan (the
"1999 Plan") and the 2000 Equity Option Plan (the "2000 Plan") whereby the
Company may grant incentive and non-qualified stock options to purchase shares
of the Company's common stock or restricted shares of the Company's common
stock, to employees, non-employee directors, and advisors and consultants. Under
the 1999 Plan, generally, twenty-five percent of the options were 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. In August 2000, options to purchase 1,090,000 shares of the
Company's common stock were modified or issued so that they were immediately
exercisable. The Company has reserved 1,240,000 shares of its common stock to be
issued under the 1999 Plan. Under the 2000 Plan, options to purchase 3,475,000
shares of the Company's common stock were issued that were exercisable upon
issuance. The remaining stock options issued under the 2000 Plan (6,000,000
shares) become exercisable over various dates ranging from one to five years.
The Company has reserved 12,912,400 shares of its common stock to be issued
under the 2000 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 non-qualified stock options
may 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.
F-27
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding at
September 30, 2000 and 1999:
WEIGHTED
AVERAGE
REMAINING
WEIGHTED CONTRACTUAL
PER SHARE NUMBER OF AVERAGE PER LIFE
PRICES SHARES SHARE PRICE (YEARS)
----------- ----------- ------------- -------------
September 30, 1999 $2.69 915,000 $2.69 9.9
=========== =========== ============= =============
September 30, 2000 $0.40 -
$5.15 10,715,000 $0.62 9.9
=========== =========== ============= =============
4,827,500 and 0 options were exercisable at September 30, 2000 and 1999,
respectively.
SFAS No. 123 requires pro forma information regarding net income as if the
Company had accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was estimated at
the date of grant using the Black-Scholes method with the following
assumptions for all periods presented: risk-free interest rate of 6%,
dividend yield of 0%, an average expected life of the option of 4 years. The
volatility used in the Black-Scholes method was 203% and 215% for the years
ended September 30, 2000 and 1999, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows (in thousands except per share data):
YEAR ENDED SEPTEMBER 30
2000 1999
------------ ------------
Net income (loss):
As reported...................... $(37,081) $ 1,612
SFAS No. 123 pro forma........... (37,199) 1,566
Diluted net income (loss) per share:
As reported...................... $ (0.97) $ 0.07
SFAS No. 123 pro forma........... $ (0.97) $ 0.07
The weighted average fair value of options granted during the year ended
September 30, 2000 for which the estimated fair value of the stock equaled
the exercise price ranged from $0.53 to $4.95 per share and averaged $0.74.
The weighted average fair value of options granted during the year ended
September 30, 1999 for which the estimated fair value of the stock equaled
the exercise price was $3.26 per share.
F-28
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION ACTIVITY
A summary of stock option activity follows:
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- --------- ---------- ---------
Outstanding at beginning
of period 915,000 $ 2.69 - $ -
Options granted 10,595,000 0.69 1,210,000 2.69
Options cancelled or
expired (795,000) - (295,000) -
---------- --------- ---------- ---------
Outstanding at end of
period 10,715,000 $ $0.62 915,000 $ 2.69
========== ========= ========== =========
During fiscal 2000, the Company issued options to purchase 300,000 shares of its
common stock to a non-employee for consulting services rendered. The options are
exercisable at $0.75 per share and expire in 2010. The issuance of the options
resulted in expense of $84,000, which is included in the statement of
operations. The fair value for these options was estimated at the date of grant
using the Black-Scholes method with the following assumptions: risk-free
interest rate of 6%, dividend yield of 0%, average expected life of the options
of 10 years and volatility of 203%.
In fiscal 2000, in connection with the termination of certain officers,
directors and employees of the Company, the terms of previously issued options
to purchase 865,000 shares of its common stock were modified. The options were
re-priced from exercise prices ranging from $2.69 per share to $5.65 per share
to an exercise price of $0.75 per share and the options became immediately
exercisable. The modification of the terms of the options resulted in expense of
$460,000, which is included in the statement of operations. The fair value for
the modified options was estimated at the date of the modification using the
Black-Scholes method with the following assumptions: risk-free interest rate of
6%, dividend yield of 0%, average expected life of the warrants of 3 years and
volatility of 203%.
During the years ended September 30, 2000 and 1999, the Company issued 0 and
45,000 shares of restricted stock, respectively.
SHARES RESERVED FOR FUTURE ISSUANCE
At September 30, 2000, the Company has reserved the following shares of common
stock for issuance:
SEPTEMBER
30, 2000
------------
Convertible debt........................ 5,390,000
Common stock options outstanding........ 10,715,000
Common stock options available for grant 3,437,400
Common stock warrants................... 3,140,467
Registration penalty.................... 2,400,000
------------
25,082,867
============
F-29
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SALE OF AFFILIATED COMPANY
In February 1999, the Company agreed to sell to Artra Group Incorporated
("Artra"), a publicly traded company, its 90%-owned Entrade subsidiary whose
assets the Company acquired in December 1998 (Note 5). Concurrently, Entrade and
Artra entered into a loan agreement whereby Artra agreed to lend up to
$2,000,000 to Entrade. The shareholders of Artra approved the acquisition on
September 23, 1999 and completed a reverse merger of Artra into a wholly owned
subsidiary of Entrade. In the merger, Artra shareholders exchanged their Artra
shares for Entrade common shares. As consideration for the sale of Entrade, the
Company received 1,800,000 shares of Artra's common stock, trading now as
Entrade as a result of the merger, and $1,300,000 in cash. Additionally, the
Company received $1,302,000 of funding from Artra for the operations of Entrade
from February 23, 1999 through September 23, 1999. The sale of Entrade resulted
in a gain of $25,426,000, which is included in the statement of operations. The
1,800,000 shares of Entrade Inc. stock represented 15% of the combined company
at the date of the transaction and have been recorded as short-term investments
(Note 3).
As part of the Artra agreement, the Company's then Chairman, President, and CEO,
Robert D. Kohn, entered into an employment agreement with entrade.com effective
February 23, 1999 for a period of three years and as a result was required to
resign all positions with the Company on September 23, 1999. He also received an
option to purchase 1,000,000 shares of Artra stock at an exercise price of $2.75
per share.
The operations of Entrade have been included in the consolidated operations of
the Company from December 1998 through September 23, 1999.
11. COMMITMENTS AND CONTINGENCIES
The Company has operating leases covering office space and office equipment. At
September 30, 2000, future minimum lease payments on these noncancelable
operating leases having initial or remaining terms of more than one year are
$502,000 for 2001, $509,000 for 2002, $386,000 for 2003, and $327,000 for 2004.
Rent expense under the operating leases was $482,000, $83,000, and $6,000, for
the years ended September 30, 2000, 1999 and 1998, respectively.
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the amount of the ultimate liability with respect to those actions
will not materially affect the financial position, results of operations or cash
flows of the Company and its subsidiaries.
The Company also leases equipment under capital leases. Future minimum lease
payments on capital leases, net of imputed interest of $2,600, are $39,000 for
2001.
In September 1999, ATM Ltd., licensed from entrade.com, Inc., a subsidiary of
Entrade Inc., software which the Company sold in connection with its sale of
Entrade. ATM Ltd. agreed to pay a one-time license fee to entrade.com by the
issuance of $1,500,000 in combination trade credits. ATM Ltd. ascribed no value
to this transaction as combination trade credits represent a best efforts
obligation and have neither any recordable value nor represent any fixed or
determinable liability. ATM Ltd. also agreed to pay continuing royalty payments
equal to a percentage of all revenues from transactions generated by the use of
the licensed software. The royalty payment percentage varies from 10% to 50%
depending on the type of transaction.
F-30
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands except per share data):
YEAR ENDED SEPTEMBER 30
2000 1999 1998
----------- ---------- ----------
Net income (loss).................... $ (37,081) $ 1,612 $ (219)
Effect of dilutive securities:
Convertible debentures............. - 32 -
----------- ---------- ----------
Adjusted net income (loss)........... (37,081) 1,644 (219)
=========== ========== ==========
Weighted average number of common
shares............................. 38,368,672 21,906,553 8,602,000
Effect of dilutive securities:
Stock options...................... - 27,736 -
Convertible debentures............. - 359,836 -
Warrants........................... - 124,169 -
----------- ---------- ----------
Adjusted weighted average shares and
assumed conversions 38,368,672 22,418,294 8,602,000
=========== ========== ==========
Earnings (loss) per share:
Basic............................... $ (0.97) $ 0.07 $ $(0.03)
Diluted............................. $ (0.97) $ 0.07 $ (0.03)
Due to their anti-dilutive effect, dilutive securities were excluded from the
computation of diluted net income (loss) per share for the years ended September
30, 2000 and 1998.
The 750,000 contingently issuable shares related to the Real Quest investment
and 3,400,000 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 September 30, 1999. At September 30, 2000,
the 2,600,000 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.
13. RELATED PARTY TRANSACTIONS
In addition to the related party transactions described in Notes 5, 10, and 11,
the Company has entered into the following related party transactions.
The Company provides or has provided various services including rental space and
bookkeeping for Affiliated Companies and for Entrade. Total services provided to
Affiliated Companies including Entrade during the years ended September 30, 2000
and 1999 were $103,000 and $184,000, respectively. The total due from Affiliated
Companies and Entrade was $204,000 at September 30, 2000. Entrade provided
technical consulting services to ATM Ltd. totaling $83,000 and $49,000 for the
years ended September 30, 2000 and 1999, respectively, of which $62,000 has not
been paid at September 30, 2000.
ATM Ltd. and Intrac each have made payments on behalf of the other entity. The
net amount due from Intrac to ATM Ltd. was $879,000 and $1,058,000 at September
30, 2000 and 1999, respectively. These advances are eliminated in the
consolidated financial statements.
F-31
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company used the services of D&W Enterprises ("D&W") to manage its ATM Ltd.
operations. D&W is 100%-owned by Deborah and Warren Rothstein, the Company's
former CEO and Chairman. During the years ended September 30, 2000 and 1999, the
Company paid $925,000 and $183,000, respectively, for the services rendered
which represented the full cost incurred by D&W for the services rendered. ATM
Ltd. also paid commissions totaling $138,000 and $0, respectively, to D&W during
the years ended September 30, 2000 and 1999. ATM Ltd. reimbursed D&W for
expenses paid by D&W on behalf of ATM Ltd. totaling $60,000 and $0,
respectively, during the years ended September 30, 2000 and 1999. D&W assigned
its rental lease for office space to ATM Ltd.at which time, ATM reimbursed D&W
$22,000 for the lease security deposit. D&W is subleasing office space from ATM
Ltd. for $4,000 per month for the period January 1, 2001 to June 30, 2001.
In June 1998, the Company entered into an agreement with Marlene A. Goss and
Fern Entrekin. Ms. Goss is the sister of Robert D. Kohn, the Company's then CEO
and primary stockholder. Ms. Goss and Ms. Entrekin developed an educational
program to provide solutions to schools to build learning communities. The
agreement contemplated the formation of a subsidiary of WorldWide Web NetworX
Corporation, to be named EduNEXT, and the development of related web sites. The
Company agreed to acquire the educational program in exchange for $50,000 of
Company stock, at an agreed-upon value of $2.50 per share, to be paid as
follows: 10,000 shares to be delivered upon the execution of the agreement and
an additional 10,000 shares to be delivered one year from the execution of the
agreement; and $53,500 in working capital with $15,000 to be paid immediately
upon execution of the agreement and weekly payments totaling $38,500 for the
remainder of the $53,500. As of December 31, 1999, the Company had issued 20,000
shares under this agreement and paid $31,500 to Ms. Goss. The parties
subsequently determined not to proceed with this transaction.
In December 1998, the Company entered into an oral license agreement with
BarterOne, LLC, in which the Company granted an exclusive, perpetual and
royalty-free license for the use of the MARS System computer software, an
Internet based e-commerce application, to BarterOne. The agreement memorializing
the license was executed in May 1999 with entrade.com, which received all of
BarterOne's rights under the license. The Company's then CEO, Robert D. Kohn,
was also the President of BarterOne. The Company transferred all of the assets
of BarterOne, including the license for the MARS System, to Entrade Inc. as part
of the Company's sale of Entrade Inc. to Artra Group Incorporated in September
1999 (Note 9).
As discussed in Note 9, in March 1999, the Company entered into a stock purchase
agreement with an investment bank that required the Company to invest in and
execute a definitive agreement with JenCom to acquire a 50% interest in certain
assets of JenCom which resulted in the Company's current ownership interest in
WWWX-Jencom (Note 5). Affiliates of the investment bank own interests in
International Commerce Exchange Systems, Inc., an indirect parent of JenCom and
a member of InterCommerce China, LLC (Note 5).
In October 1999, the Company entered into a one-year agreement with the
Company's former President, CEO and Chairman, Robert D. Kohn, under which he
acted as a finder and/or financial consultant. The agreement provided for an
annual fee of $60,000 for his consulting services as a non-refundable draw
against future finder's fees for any introductions that result in a transaction
that is consummated. The finder's fee was to be equal to a percentage of the
consideration paid in the facilitated transaction, ranging from 5% for the first
$1,000,000 to 1% of any consideration in excess of $7,000,000. There were no
transactions consummated and no finder's fee paid in connection with the
agreement.
The Company used McDermott, Will & Emery as outside legal counsel. During the
years ended September 30, 2000 and 1999 the Company paid $192,000 and $58,500,
respectively, for professional legal services. One of the Company's former
directors was the partner in charge of the New York office of McDermott, Will &
Emery.
F-32
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan that covers all of its employees.
Participants may contribute 1% to 15% of pre-tax compensation. The Company may
make discretionary contributions to the plan but has never done so.
15. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth selected quarterly financial information for the
years ended September 30, 2000, and 1999. The operating results for any given
quarter are not necessarily indicative of results for any future period.
(in thousands, except per share data)
Fiscal 2000 Quarter Ended
Dec. 31 Mar. 31 Jun. 30 Sep. 30
-------- ------- ------- --------
Revenues $ 1,041 $ 498 $ 1,210 $ 4,023
Cost of revenues 931 373 1,037 3,888
Selling, general and
administrative 2,673 3,710 3,521 4,350
Depreciation and
amortization 374 390 352 363
Other operating costs - - - 3,901
------- ------- ------- --------
Loss from operations (2,937) (3,975) (3,700) (8,479)
Other (expenses)
income, net (258) (234) (1,734) (22,758)
Interest expense (21) (14) (4) (28)
Interest income 83 56 27 32
------- ------- ------- --------
Loss before income taxes (3,133) (4,167) (5,411) (31,233)
Income tax (benefit)
expense (517) (733) 225 (5,838)
------- ------- ------- --------
Net loss $(2,616) $(3,434) $(5,636) $ (25,395)
======= ======== ======== =========
Net loss per share:
Basic $ (0.07) $ (0.09) $ (0.14) $ (0.67)
Diluted (0.07) (0.09) (0.14) (0.67)
------- ------- ------- ---------
F-33
<PAGE>
WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
Fiscal 1999 Quarter Ended
Dec. 31 Mar. 31 Jun. 30 Sep. 30
------- ------- ------- -------
Revenues $ 163 $ 164 $ 166 $ 846
Cost of revenues 109 106 60 517
Selling, general and
administrative 78 455 1,648 3,099
Depreciation and amortization - 75 319 203
Other operating costs - 3,036 - 5,583
------- ------- ------- -------
Loss from operations (24) (3,508) (1,861) (8,556)
Other (expenses) income, net (71) (340) (675) 23,673
Interest expense - - (99) (120)
Interest income - 6 10 40
------- ------- ------- -------
(Loss) income before income
taxes (95) (3,842) (2,625) 15,037
Income tax (benefit) expense - - - 6,863
------- ------- ------- -------
Net (loss) income $ (95) $(3,842) $(2,625) $ 8,174
======= ======= ======= =======
Net loss per share:
Basic $ (0.01) $ (0.22) $ (0.10) $ 0.40
Diluted (0.01) (0.22) (0.10) 0.40
======= ======= ======= =======
The selected quarterly financial information includes the accounts of the
Company, its wholly owned subsidiary, Intrac, and its majority owned
subsidiaries, ATM Ltd., and Real Quest, for each of the quarters in the year
ended September 30, 2000. The selected quarterly information includes the
accounts of the Company, its majority owned subsidiary, Entrade, for each of the
quarters in the year ended September 30, 1999 and Intrac for the quarter ended
September 30, 1999 from the date of acquisition and ATM Ltd. accounted for under
the equity method for the quarters ended March 31, 1999, June 30, 1999 and ATM
Ltd. consolidated for the quarter ended September 30, 1999 from the date the
Company's ownership interest exceeded 50%.
F-34
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WORLDWIDE WEB NETWORX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS
In October 2000, Warren Rothstein resigned as Chairman of ATM Ltd. and The
Intrac Group, Ltd. In connection with the resignation, he relinquished his
entire equity interest in ATM Ltd. and an additional 2,600,000 shares of the
Company's common stock which, together with the shares previously relinquished
and shares sold by Warren Rothstein, reduced the number of shares of the
Company's common stock held by Warren Rothstein on November 15, 2000 to
1,380,000. The Company's ownership interest in ATM Ltd. increased to 68%.
In October 2000, ATM Ltd. obtained a loan for $200,000 with interest payable
monthly at the annual rate of 45%. The loan is due on January 31, 2001 and is
collateralized by ATM Ltd.'s accounts receivable resulting from the sale of
inventory.
F-35
