<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 15, 1997
REGISTRATION NO. 33-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DYNAMICWEB ENTERPRISES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C> <C>
NEW JERSEY 7372 22-2267658
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
DYNAMICWEB ENTERPRISES, INC.
271 ROUTE 46 WEST
BUILDING F, SUITE 209
FAIRFIELD, NEW JERSEY 07004
(973) 244-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEVEN L. VANECHANOS, JR.
CHIEF EXECUTIVE OFFICER
DYNAMICWEB ENTERPRISES, INC.
271 ROUTE 46 WEST
BUILDING F, SUITE 209
FAIRFIELD, NEW JERSEY 07004
(973) 244-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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STEPHEN F. RITNER, ESQUIRE JAMES M. JENKINS, ESQUIRE
SCOTT H. SPENCER, ESQUIRE CRAIG S. WITTLIN, ESQUIRE
STEVENS & LEE HARTER, SECREST & EMERY
ONE GLENHARDIE CORPORATE CENTER 700 MIDTOWN TOWER
1275 DRUMMERS LANE ROCHESTER, NEW YORK 14604-2070
P.O. BOX 236 (716) 232-6500
WAYNE, PENNSYLVANIA 19087
(610) 964-1480
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective registration statement filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
please check the following box. [X]
CALCULATION OF REGISTRATION FEE
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==================================================================================================================
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(2) PER UNIT(2) PRICE(2) FEE
- ------------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par value........ 2,012,500 shares(1) $4.00 per share(2) $8,050,000(2) $2,439.40
- ------------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par value........ 175,000 shares(3) $4.80 per share(2) $840,000(2) $254.55
- ------------------------------------------------------------------------------------------------------------------
Warrant to Purchase Common Stock,
$.0001
par value per share................. One Warrant(4) $10 per warrant $10 --
==================================================================================================================
</TABLE>
(1) Based upon the maximum number of shares of the Registrant's Common Stock
that may be issued under this Registration Statement, including 262,500
shares of Common Stock that may be issued to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(a) solely for purposes of calculating the
Registration Fee.
(3) Reflects the shares issuable to H.J. Meyers & Co. Inc., the Representative
of the Underwriters, pursuant to the Representative's Warrant. See
"UNDERWRITING."
(4) To be issued to H.J. Meyers & Co., Inc., the Representative of the
Underwriters.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
<PAGE> 2
CROSS REFERENCE TABLE
LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY PART I OF FORM SB-2
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<CAPTION>
ITEM NO. CAPTION LOCATION IN PROSPECTUS
- -------- -------------------------------------------- -----------------------------------------
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1 Front of the Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
2 Inside Front and Outside Back Cover Pages of Inside Front Cover Page and Outside Back
Prospectus Cover Pages, Additional Information
3 Summary Information and Risk Factors Prospectus Summary, The Company, Risk
Factors
4 Use of Proceeds Use of Proceeds
5 Determination of Offering Price Underwriting
6 Dilution Dilution
7 Selling Security Holders Not Applicable
8 Plan of Distribution Underwriting
9 Legal Proceedings Business
10 Directors, Executive Officers, Promoters and Management
Control Persons
11 Security Ownership of Certain Beneficial Principal Stockholders
Owners and Management
12 Description of Securities Description of Securities
13 Interests of Named Experts and Counsel Not Applicable
14 Disclosure of Commission Position on Management
Indemnification for Securities Act
Liabilities
15 Organization Within Last Five Years Not Applicable
16 Description of Business Business
17 Management's Discussion and Analysis or Plan Management's Discussion and Analysis of
of Operation Financial Condition and Results of
Operations
18 Description of Property Business
19 Certain Relationships and Related Certain Transactions
Transactions
20 Market for Common Equity and Related Market for Common Stock and Related
Transactions Stockholder Matters, Dividend Policy,
Description of Capital Stock
21 Executive Compensation Management
22 Financial Statements Index to Consolidated Financial
Statements
23 Changes in and Disagreements with Not Applicable
Accountants on Accounting and Financial
Disclosure
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 15, 1997
PRELIMINARY PROSPECTUS
[LOGO GOES HERE]
DYNAMICWEB ENTERPRISES, INC.
1,750,000 SHARES OF COMMON STOCK
$ PER SHARE
DynamicWeb Enterprises, Inc., a New Jersey corporation (the "Company" or
"DynamicWeb"), hereby offers 1,750,000 shares (the "Shares") of common stock,
$.0001 par value per share (the "Common Stock"). See "DESCRIPTION OF
SECURITIES."
Prior to this Offering, there has been a limited public market for the
Common Stock, and no assurance can be given that a public market will develop
or, if developed, that it will be sustained. The Company intends to apply for
listing of the shares of Common Stock offered hereby on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ") SmallCap Market and
on the Pacific Stock Exchange under the symbol "DWEB."
It is currently estimated that the initial public offering price for the
Common Stock will be $4.00 per share. The offering price of the Common Stock
will be determined by negotiation between the Company and H.J. Meyers & Co.,
Inc., the representative (the "Representative") of the several underwriters (the
"Underwriters") and is not related to the Company's asset value or any other
established criterion of value. For the method of determining the public
offering price of the Common Stock, see "RISK FACTORS" and "UNDERWRITING."
------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A SUBSTANTIAL
DEGREE OF RISK. PERSONS WHO PURCHASE THESE SECURITIES WILL INCUR IMMEDIATE
SUBSTANTIAL DILUTION. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FACTORS SET FORTH UNDER "RISK FACTORS."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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=========================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------------
Per Share..................... $ $ $
- ---------------------------------------------------------------------------------------------------------
Total Share(3)................ $ $ $
=========================================================================================================
</TABLE>
(1) Does not reflect additional compensation to be received in the form of (a) a
non-accountable expense allowance of $ (or $ if the
Underwriters' over-allotment option described in Footnote (3) is exercised
in full) and other compensation payable to the Representatives, and (b)
warrants (the "Representative's Warrant") to purchase up to 175,000 shares
of Common Stock for a purchase price of $ per share (that being 120% of
the initial public offering price). In addition, the Company has agreed to
indemnify the Underwriters against certain civil liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"UNDERWRITING."
(2) Before deducting additional expenses of the Offering payable by the Company,
estimated at $718,000, excluding the Representative's non-accountable
expense allowance.
(3) The Company has granted the Underwriters an option, exercisable within 45
days, to purchase up to an additional 262,500 shares of Common Stock on the
same terms and conditions set forth above, solely to cover overallotments,
if any. If the overallotment option is exercised in full, the total "Price
to Public," "Underwriting Discount," and "Proceeds to Company" will be
$ , $ , and $ , respectively. See "UNDERWRITING."
The Shares are being offered on a "firm commitment basis" by the
Underwriters, when, as, and if delivered to and accepted by the Underwriters and
subject to prior sale, withdrawal or cancellation of the offer without notice.
It is expected that delivery of certificates representing the Securities will be
made at the offices of H. J. Meyers & Co., Inc., New York, New York, on or about
, 1997.
H. J. MEYERS & CO., INC.
The date of this Prospectus is , 1997.
<PAGE> 4
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED THROUGH THE NATIONAL ASSOCIATION OF SECURITIES
DEALERS AUTOMATED QUOTATION SYSTEM SMALL CAP MARKET, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. (FOR A DESCRIPTION,
SEE "UNDERWRITING.")
<PAGE> 5
PROSPECTUS SUMMARY
The following information does not purport to be complete and is qualified
in its entirety by and should be read in conjunction with the more detailed
information and Financial Statements, including the notes thereto, appearing
elsewhere in this Prospectus. Prospective investors should consider carefully
the factors discussed below under "Risk Factors." Unless otherwise indicated,
the information in this Prospectus does not give effect to the issuance of (i)
up to 297,367 shares of Common Stock which may be issuable to a certain
shareholder as a result of the acquisition by the Company of all of the stock of
Software Associates, Inc. in the event certain conditions are met (See "CERTAIN
TRANSACTIONS"); (ii) up to 175,000 shares of Common Stock which are issuable
upon the exercise of warrants granted to the Representatives in connection with
this Offering (See "UNDERWRITING"); (iii) up to 262,500 shares of Common Stock
issuable in this Offering to cover over-allotments, if any (See "UNDERWRITING");
(iv) up to 234,764 shares issuable to employees under the Company's 1997
Employee Stock Option Plan (See "MANAGEMENT -- Stock Option Plans"); or (v) up
to 78,254 shares issuable to non-employee directors under the Company's 1997
Stock Option Plan for Outside Directors (See "MANAGEMENT -- Stock Option
Plans").
Except for the description of historical facts contained herein, this
Prospectus and the Exhibits attached hereto contain certain forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. Reference is made in particular to the
descriptions of the Company's plans and objectives for future operations,
assumptions underlying such plans and objectives and other forward-looking
statements included in this Prospectus under "Use of Proceeds," "Business" and
"Risk Factors." Such statements are based on management's current expectations
and are subject to a number of factors and uncertainties which could cause
actual results to differ materially from those described in such forward-looking
statements. Factors which could cause such results to differ materially from
those described in the forward-looking statements include those set forth under
"RISK FACTORS" below.
THE COMPANY
The Company is engaged in the business of developing, marketing and
supporting software products and services that enable businesses to engage in
electronic commerce utilizing the Internet and traditional Electronic Data
Interchange ("EDI") technologies.
Electronic commerce ("EC") involves the automation of business transactions
using telecommunications and computers to exchange and process commercial
information and transactional documents. As broadly defined, electronic commerce
is generally considered by information technology industry analysts to represent
a growing, potentially multi-billion dollar market. EDI, a form of EC, is the
application-to-application transmission of business documents such as purchase
orders and invoices using industry-standard formats. Businesses utilizing
electronic commerce have found EDI to be a vital component of their enterprises.
EDI differs from more elementary forms of communication because it provides for
truly integrated information flow. For example, manufacturers of goods can
create electronic catalogues of their products and prices such that their
customers will have the ability to electronically enter purchase orders and
complete the purchase, payment and other documentation of a purchase
transaction. The Internet is a worldwide communications system that allows users
to transmit and receive messages and information over telephone and other
communications lines using terminals and computers.
Electronic commerce has traditionally involved the use of a third-party or
private value-added computer network ("VAN") to perform EDI, e-mail, and
electronic funds transfers and to provide services related to electronic forms,
bulletin board and electronic catalogues. Users of private or third-party VANs
may also have access through the VAN to directories or on-line information
services. A VAN is, in effect, an electronic post office which electronically
receives and delivers mail, in this case commercial documents, to the intended
recipient. The major operators of VANs include Harbinger Corporation, GEIS,
Sterling Commerce, IBM/Advantis, MCI, AT&T and Kleinschmidt. The Company's
products and services work with all major VAN providers.
1
<PAGE> 6
EDI can create commercial advantages for its users, including one-time data
entry, reduced clerical workload and the elimination of paper records. EDI also
allows for the rapid, accurate and secure exchange of business data, and reduced
operating and inventory carrying costs. EDI facilitates uniform communications
with different trading partners, including customers, suppliers, common
carriers, and banks or other financial institutions.
The Company's present business strategy is to focus upon the following
types of markets and customers:
- EDI-enabled suppliers of goods, such as manufacturers, that want to
engage in electronic commerce with customers which are not EDI-enabled.
- EDI-enabled purchasers, such as retailers or distributors of goods, that
want to engage in electronic commerce with suppliers which are not
EDI-enabled.
- Any businesses that want to engage outside service providers to manage or
to assist in the management of their EDI function ("EDI outsourcing").
- Businesses or groups of businesses that want to create "electronic
storefronts" for goods and services on the "World Wide Web." The World
Wide Web or "Web" is a series of computers called servers, which allow
individuals, groups and businesses to publish and exchange information
over the Internet to the general public.
The Company has five principal software and service packages for the
markets and customers described above:
EDIBRIDGENET SERVICE(SM) -- EDIbridgeNET is the Company's electronic
commerce service bureau. EDIbridgeNET is a service provided by the Company
that allows for the transfer of information between trading partners. The
service includes EDI mapping and the translation and routing of business
documents between third party EDI (VAN) networks, the Internet and the
private computer networks maintained by the parties to the business
transaction. Generally referred to as "EDI outsourcing," this service
offers businesses cost-effective alternatives to investing in an in-house
EDI System.
NETCAT(TM) -- NetCat is the Company's software program which allows a
seller of goods to create an electronic catalogue on the World Wide Web to
offer and sell products electronically. NetCat allows a customer to browse
through the catalogue, to place an order, and to be billed for, or to pay
for, the order (through the use of Cybercash, a third-party credit card
verification software licensed to the Company). This process is sometimes
referred to as "order facilitation." It is expected to be utilized
predominantly in a business-to-business context, and to increase
transaction fees from the EDIbridgeNET Service. NetCat is used as part of
the Company's EDIxchange Program.
EDIXCHANGE PROGRAM(SM) -- The Company's EDIxchange Program is a combination
of EDIbridgeNET service and NetCat software. The EDIxchange Program
provides a seamless and cost effective way for EDI-enabled suppliers or
retailers to conduct electronic commerce with their non-EDI trading
partners. EDIxchange bridges the Internet with traditional EDI networks
such as VANs by using the Company's service bureau, EDIbridgeNET. Combined
with NetCat, the Company's order management software described above, this
product allows businesses which do not have in-house EDI capability to
communicate electronically with EDI-enabled business partners, using only
Internet access and a standard Web browser. A Web browser, such as Netscape
or Internet Explorer, allows Internet users to access various Web Sites on
the Internet.
SHIPTRAC(TM) -- ShipTrac is the Company's Windows-based software
application designed for manufacturers and suppliers of goods. It
electronically creates a shipping manifest or list of products that are
being shipped to a particular customer or distribution center. The ShipTrac
software receives an electronic purchase order into a database, and the
shipper then can print bar-coded shipping compliance labels. ShipTrac
generates EDI standard advanced shipping notice documents (the manifest)
which are sent electronically to a supplier's customers. When the goods are
received, the bar codes on the products can be verified against the
advanced shipping notice which has been electronically forwarded by
ShipTrac.
2
<PAGE> 7
ECINTEGRATOR(TM) -- The Company has developed application interface modules
for two third party mid-range accounting software systems, RealWorld and
Synchronics. Designed for businesses using those systems, EC Integrator
allows a business to import and export business documents electronically
from those software applications. Generally, the Company sells this product
through distributors of Real World and Synchronics software.
As of September 1, 1997, the Company's EDIxchange customers include Linens
N' Things (an EDI-enabled purchaser), and Great American Knitting Mills, makers
of Goldtoe socks, and ICXpress (both EDI-enabled sellers). Customers using the
Company's EDIbridgeNET Service include Church & Dwight, manufacturers of Arm &
Hammer baking soda, Royal Dalton, makers of fine china, and Kings Supermarket, a
regional supermarket chain.
The Company was initially incorporated in the State of New Jersey on July
26, 1979 under the name Seahawk Oil International, Inc. The Company's executive
offices are located at 271 Route 46 West, Building F, Suite 209, Fairfield, New
Jersey 07004 and its telephone number is (973) 244-1000.
The discussion of the Company in this Prospectus relates to the combined
operations of the Company's present subsidiaries: DynamicWeb Transaction
Systems, Inc. ("DWTS") and Megascore, Inc. ("Megascore"), for all periods
presented, and Software Associates, Inc. ("Software Associates") (which was
acquired by the Company on November 30, 1996) from December 1, 1996. See
"BUSINESS -- Background of the Company."
THE OFFERING
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Securities Offered by the Company......... 1,750,000 shares of Common Stock.
Shares of Common Stock Presently
Outstanding............................. 2,112,438 shares (1)
Shares of Common Stock to be Outstanding
After Offering.......................... 3,862,438 shares (1)
Use of Proceeds........................... The net proceeds of the Offering will be used for
selling and marketing; the support of its
technical operations; purchase or lease of
capital equipment; repayment of indebtedness; and
working capital and general corporate purposes.
See "USE OF PROCEEDS."
Proposed NASDAQ Small Cap Market Symbol
and Pacific Stock Exchange Symbol....... DWEB
</TABLE>
- ---------------
(1) Excludes (a) up to 297,367 shares of Common Stock which may be issuable to a
certain shareholder as a result of the acquisition by the Company of
Software Associates, Inc. (See "CERTAIN TRANSACTIONS"); (b) up to 175,000
shares of Common Stock which are issuable upon the exercise of warrants
granted to the Representatives in connection with this Offering (See
"UNDERWRITING"); (c) up to 262,500 shares of Common Stock issuable in this
Offering to cover over-allotments, if any (See "UNDERWRITING"); (d) up to
234,764 shares issuable to employees under the Company's 1997 Employee Stock
Option Plan (See "MANAGEMENT -- Stock Option Plans"); or (e) up to 78,254
shares issuable to non-employee directors under the Company's 1997 Stock
Option Plan for Outside Directors (See "MANAGEMENT -- Stock Option Plans").
Includes an additional 112,488 shares of Common Stock issuable in respect of
the April 1997 Financing and 100,000 shares of Common Stock issuable in
respect of the August 1997 Financing and also reflects 100,000 shares
contributed to the Company and held as Treasury Stock. See "INTERIM
FINANCINGS."
3
<PAGE> 8
RECENT DEVELOPMENTS
INTERIM FINANCINGS
On April 30, 1997, the Company completed a $600,000 private placement in
which H.J. Meyers & Co., the Representative, acted as the Company's placement
agent on a "best efforts" basis (the "April 1997 Financing"). That private
placement involved the sale of 24 units, each consisting of a subordinated
unsecured 8% promissory note of the Company having a principal amount of $25,000
and 4,687 shares of Common Stock. Also, on August 27, 1997, the Company
completed a $500,000 private placement in which H.J. Meyers & Co. acted as
placement agent on a "best efforts" basis (the "August 1997 Financing"). That
private placement involved the sale of 20 units, each consisting of a
subordinated unsecured promissory note of the Company with a principal amount of
$25,000 and 5,000 shares of Common Stock. See "INTERIM FINANCINGS."
AMENDMENT TO THE CERTIFICATE OF INCORPORATION -- REVERSE STOCK SPLIT
At the Company's Annual Meeting held on June 12, 1997, the Company's
shareholders approved an amendment and restatement of the Company's Certificate
of Incorporation (the "Amendment and Restatement") which, among other things,
effected a 0.2608491-for-one reverse stock split of the Company's Common Stock
(the "Reverse Stock Split"). The Amendment and Restatement will have been filed
with the New Jersey Secretary of State concurrently with the effectiveness of
the Registration Statement of which this Prospectus is a part. Pursuant to the
Reverse Stock Split, each share of Common Stock outstanding on the filing date
was converted into 0.2608491 of one share, except that no fractional shares were
issued and shareholders who would otherwise have received a fractional share as
a result of the Reverse Stock Split received cash in lieu thereof. Unless
otherwise noted, all references to the Company's Common Stock contained in this
Prospectus give effect to the Reverse Stock Split.
The effect of the Reverse Stock Split on the aggregate number of shares of
the Common Stock as of the effective date of the reverse split is set forth in
the table below.
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PRIOR TO AFTER
REVERSE SPLIT REVERSE SPLIT
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Number of Shares of Common Stock Authorized...................... 50,000,000 50,000,000
Issued and Outstanding......................................... 8,098,522 2,112,438(1)
Available for issuance......................................... 41,901,478 47,887,562
Par value per share............................................ $0.0001 $0.0001
</TABLE>
- ---------------
(1) Includes an additional 112,488 shares of Common Stock issuable in respect of
the April 1997 Financing and 100,000 shares of Common Stock issuable in
respect of the August 1997 Financing, and also reflects 100,000 shares
contributed to the Company and held as Treasury Stock. See "INTERIM
FINANCINGS."
Effect on the Market for the Common Stock. At the time of the Reverse Stock
Split, the Common Stock was quoted on the National Association of Securities
Dealers ("NASD") Over-The-Counter ("OTC") Bulletin Board Service. The bid price
of the Common Stock on , 1997, immediately prior to the
Reverse Stock Split, was $ ; and the bid price of the Common Stock on
, 1997, the date after the Reverse Stock Split, was
$ . See "MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS."
4
<PAGE> 9
SUMMARY FINANCIAL INFORMATION
The following table sets forth selected consolidated financial data of the
Company. The Statement of Operations Data for the two year period ended
September 30, 1996, have been derived from the Company's Financial Statements,
which have been audited by Richard A. Eisner & Company, LLP, independent
auditors, whose report thereon is included elsewhere in this Prospectus.
The selected consolidated financial data for the nine months ended June 30,
1997, and June 30, 1996, and the Balance Sheet Data as of June 30, 1997, are
derived from the unaudited Consolidated Financial Statements of the Company
included elsewhere in this Prospectus. In the opinion of management, the
unaudited Consolidated Financial Statements have been prepared on the same basis
as the audited Consolidated Financial Statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for such nine
month period. Results for the nine months ended June 30, 1997, are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1997.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
------------------------- --------------------------
1996 1995 1997 1996
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues............................... $ 460,067 $ 639,743 $ 498,095 $ 348,417
Cost of sales and services............. 152,399 243,138 160,630 118,234
Other expenses......................... 748,433 376,684 1,170,270 475,860
Purchased research and development..... -- -- 713,710 --
Net (loss)............................. (455,230) (289) (1,731,610) (255,133)
Net (loss) per share(1)................ (.27) (.00) (.88) (.15)
Weighted average number of common
shares outstanding(1)............... 1,667,202 1,620,804 1,962,778 1,649,687
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
----------- ------------ --------------
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BALANCE SHEET DATA
Working capital (deficit)........................ $ (259,527) $ 67,973 5,425,271
Total assets..................................... 873,419 1,553,917 5,686,717
Short-term debt.................................. 332,870 613,710 8,370
Long-term debt................................... 188,084 188,084 188,084
Total liabilities................................ 783,677 1,064,177 459,177
Accumulated deficit.............................. (2,146,796) (2,146,796) (2,991,296)
Stockholders' equity............................. 89,742 489,740 5,227,540
</TABLE>
- ---------------
(1) Gives retroactive effect to the .2608491-for-one Reverse Stock Split, which
will take effect concurrently with the effectiveness of the Registration
Statement of which this Prospectus is a part. See Note C to the Company's
Financial Statements, and "RECENT DEVELOPMENTS," above.
(2) Reflects (a) $500,000 of short-term debt (less $72,500 of deferred financing
fees) from the August 1997 Financing, see "INTERIM FINANCINGS," (b) $115,000
in officers' loans, and (c) $65,500 of short-term borrowings from the
Company's lines of credit, see "CERTAIN TRANSACTIONS -- Officer Loans." That
indebtedness was borrowed subsequent to the June 30, 1997 balance sheet
date, and is expected to be repaid from the proceeds of this Offering (see
"USE OF PROCEEDS"), and therefore is not reflected in the Balance Sheet Data
under the "As Adjusted" Column.
(3) Gives effect to the sale of the Common Stock offered hereby, including the
anticipated application of the estimated net proceeds and the repayment of
certain indebtedness. See "USE OF PROCEEDS."
5
<PAGE> 10
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk and should not be made by persons who cannot afford the loss of their
entire investment. Prospective investors, prior to making an investment
decision, should consider carefully, in addition to the other information
contained in this Prospectus (including the financial statements and notes
thereto), the following factors. This Prospectus contains, in addition to
historical information, forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed below, as well as those discussed elsewhere in this
Prospectus.
Limited Operating History; No Assurance of Successful Operations. The
Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company has incurred continuous and
substantial net losses. No assurance can be made that the Company will become
profitable in the near future, if at all. The Company's prospects are subject to
all of the risks encountered by a company in an early stage of development,
particularly in light of the uncertainties relating to the new and evolving
markets in which the Company intends to operate. To address these risks, the
Company must, among other things: further develop or acquire rights to
supporting software from third parties; commercially offer its services;
successfully implement its marketing strategy; respond to competitive
developments; attract, retain and motivate qualified personnel; and develop,
upgrade, and protect its technology. No assurance can be given that the Company
will succeed in addressing any or all of these issues; and the failure to do so
would have a material adverse effect on the Company's business, prospects,
financial condition and operating results. The auditors' opinion on the
Company's financial statements as of September 30, 1996, a copy of which is
attached to this Prospectus, calls attention to substantial doubts as to the
ability of the Company to continue as a going concern as of the date of those
financial statements.
Anticipated Operating Losses. The Company anticipates realizing only
limited revenue for the foreseeable future. The Company's ability to generate
meaningful revenue thereafter is subject to substantial uncertainty. The Company
anticipates that its operating expenses will increase substantially in the
foreseeable future as it hires a substantial number of additional employees and
makes other significant expenditures to further develop its technology, increase
its marketing activities, create and expand the distribution channels for its
products and services, and broaden its customer support capabilities.
Accordingly, the Company expects to incur losses for the foreseeable future. No
assurance can be given that the Company's products and services will be
developed, marketed, expanded, or rendered successfully or on a timely basis, if
at all, or that the Company will be successful in obtaining market acceptance of
its products and services. No assurance can be given that the Company will ever
be able to achieve or sustain operating profitability.
Early Stage of Market Development; Unproven Acceptance of the Company's
Products and Services. The Company's products and services are designed to
facilitate electronic commerce. A major focus of the Company's products and
services is the Internet, which is a worldwide communications system that allows
users to transmit and receive messages and information over telephone and other
communications lines using terminals or computers. See "Dependence on the
Internet and on Internet Infrastructure Development" below. The market for the
Company's products and services is at an early stage of development, is evolving
rapidly, and is characterized by an increasing number of market entrants who
have introduced or are developing competing products and services. As is typical
for a new and rapidly evolving industry, demand and market acceptance for
recently introduced products and services are subject to a high level of
uncertainty. Market acceptance will depend, in large part, upon the ability of
the Company to demonstrate the advantages and cost effectiveness of its products
and services over existing products and services. There can be no assurance that
the Company will be able to market its products and services successfully or
that its current or future products and services will be accepted in the
marketplace. As a result of the Company's recent introduction of its products
and services into the market and their limited use to date, there can be no
assurance that the Company's products and services will achieve market
acceptance or will produce substantial revenues.
Dependence on the Internet and on Internet Infrastructure Development. The
use of the Company's products and services is dependent upon the continued
development of an industry and infrastructure for
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providing Internet access and carrying Internet traffic. The commercial market
for products and services for use with the Internet and the World Wide Web has
only recently begun to develop. The Internet may not prove to be a viable
commercial marketplace or communications network because of many factors,
including inadequate development of the necessary capacity, problems with
reliability, lack of acceptable levels of security, or lack of timely
development of complementary products, such as high speed modems. The Internet
suffers from many problems related to performance, reliability, congestion and
delay. Customers may experience frustration waiting for transactions to be
processed. Consequently, they may forego using the Company's products and
services.
Further, there can be no assurance that the Internet will retain its
current pricing structure, which is generally flat-rate, independent of volume,
and independent of the time of day. Federal regulation of access fees to the
Internet may cause an increase in costs to the businesses utilizing the
Company's products and services.
The adoption of the Internet for commerce and as a means of communication,
particularly by those individuals and enterprises that historically have relied
upon traditional means of commerce and communication, will require a broad
acceptance of new methods of conducting business and exchanging information.
Enterprises that already have invested substantial resources in other methods of
conducting business may be reluctant or slow to adopt a new strategy that may
limit or compete with their existing business. Individuals with established
patterns of purchasing goods and services and effecting payments may be
reluctant to alter those patterns.
Thus far, significant commercial use of the Internet has not developed, in
part, because of the lack of security and verification processes. Although the
Company's products and services are compatible with existing and apparently
emerging security and verification products, there can be no assurance that
widespread commercial use of the Internet for electronic commerce will develop,
or that even if such use does develop, that the Company's products and services
will achieve market acceptance. If the Company's market fails to develop or
develops more slowly than expected, or if the infrastructure for the Internet is
not adequately developed, or if the Company's products and services do not
achieve market acceptance by a significant number of individuals and businesses,
the Company's business, financial condition, prospects and operating results
will be materially and adversely affected. See "BUSINESS -- Electronic Commerce
and Electronic Data Interchange" and "Risks Associated with Encryption
Technology."
Ability to Respond to Rapid Change. The Company's future success will
depend significantly on its ability to enhance its current products and services
and develop or acquire and market new products and services which keep pace with
technological developments and evolving industry standards as well as respond to
changes in customer needs. The market for EDI products and Internet software
products is characterized by rapidly changing technology, evolving industry
standards and customer demands, and frequent new product introductions and
enhancements. The Company will be required to manage effectively its strategic
position in a rapidly changing environment. There can be no assurance that the
Company will be successful in developing or acquiring product or service
enhancements or new products or services to address changing technologies and
customer requirements adequately, that it will introduce such products or
services on a timely basis, or that any such product or service enhancements
will be successful in the marketplace. The Company's delay or failure to develop
or acquire technological improvements or to adapt its products or services to
technological change would have a material adverse effect on the Company's
business, results of operations and financial condition. The failure of the
Company's management team to respond effectively to and manage rapidly changing
technological and business conditions as well as the growth of its own business,
should it occur, could have material adverse impact on the Company's business,
results of operations and prospects. See "Reliance on Limited Number of
Products."
Need for Substantial Additional Capital. The Company presently believes
that the net proceeds of this Offering should be sufficient to permit the
Company to execute its present business plan. Whether the Company will generate
earnings and cash flows from its operations before these proceeds have been used
is uncertain. The Company may have a need to raise substantial additional
capital. In particular, some of the Company's major competitors have raised
significant amounts of capital, and, even if the Company achieves
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profitability, the Company may need, or want, to raise substantial additional
capital in order to be competitive. Without additional capital, the Company may
be forced to cease to operate. If any additional capital is raised in equity
offerings, the interests of investors who purchase the Common Stock in this
Offering may be diluted.
Control by Existing Management. As of September 1, 1997, the existing
management of the Company controls approximately 55% of the shares of Common
Stock eligible to vote and is therefore able to elect all of the members of the
Board of Directors and control the outcome of any issues which may be subject to
a vote of the Company's stockholders. After giving effect to this Offering,
existing management will control approximately 30% of the shares of Common Stock
eligible to vote.
Uncertain Public Market for Company's Common Stock. Upon completion of this
Offering, the Company intends to apply to list the Common Stock on the NASDAQ
Small Cap Market System. There can be no assurance that such listing will be
approved, or that a market for the Common Stock will develop or be sustained.
The investment community could show little or no interest in the Company in the
future. As a result, purchasers of the Company's securities may have difficulty
in selling such securities should they desire to do so. The Company's Common
Stock is currently traded on the NASD's OTC Bulletin Board Service. It is
substantially more difficult for investors to dispose of securities or to obtain
accurate quotations as to securities in the OTC Bulletin Board Service. In the
event the Company's Common Stock is not approved for listing on the NASDAQ Small
Cap Market System, the Company's Common Stock would continue to trade on the OTC
Bulletin Board Service.
Common Stock Eligible for Resale. Of the 3,862,438 shares of Common Stock
to be outstanding after the consummation of this Offering, over 1,807,000 shares
are "restricted securities" and under certain circumstances may be sold in
compliance with Rule 144 adopted under the Securities Act. Future sales of such
shares are likely to depress the market price of the Company's Common Stock.
Reliance on Limited Number of Products and Services. The Company expects
that substantially all of its revenues will be derived from its EDIxchange
product and service, its EDIbridgeNet service, and (to a lesser extent) its
ECIntegrator and NetCat products. If these products and services are not
successful, whether as a result of technological change, competition or any
other factors, the Company's business, financial condition, prospects and
operating results would be adversely affected. Although the Company is
continuing to develop its existing products, it presently has no plans to
develop or produce additional products and services in the foreseeable future.
See "BUSINESS -- Introduction."
Technological Change. The market for the Company's proposed services is
characterized by rapidly changing technology and evolving industry standards.
The Company will likely be required to design, develop, test, introduce and
support new services and enhancements on a timely basis that meet changing
customer needs and respond to technological developments and emerging industry
standards. The Company's proposed services are now designed around certain
technical standards. While the Company intends to provide compatibility with the
standards promulgated by leading industry participants and groups, widespread
adoption of a proprietary or closed standard could preclude the Company from
effectively marketing or developing its products or services. No assurance can
be given that the Company will be able to respond to technological changes or
evolving industry standards in a timely manner, if at all; or that the standards
upon which the Company's services are or will be based will be accepted by the
industry. In addition, no assurance can be given that services or technologies
developed by others will not render the Company's services noncompetitive or
obsolete. In the event that services or technologies developed by others render
the services of the Company impracticable, noncompetitive or obsolete, or the
industry in which the Company hopes to compete develops and adopts a proprietary
standard to which the Company does not have access, or the Company is not able
to respond to technological developments or emerging industry standards, there
could be a material adverse effect on the Company's business, financial
condition, prospects and operating results.
Risks of Defects and Development Delays. The Company has not sold a
material amount of its services or products. Products and services based on
sophisticated software and computing systems often encounter development delays
and the underlying software most often contains undetected errors, bugs, or
failures when introduced or when the volume of services provided increases. The
Company may experience delays in the
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development of the software and computing systems underlying the Company's
proposed products and services. In addition, there can be no assurance that,
despite testing by the Company and potential customers, errors will not be found
in the underlying software, or that the Company will not experience development
delays, which could result in delays in the market acceptance of its products
and services and could have a material adverse effect on the Company's business,
financial condition, prospects and operating results. See "BUSINESS -- Product
Development."
Competition. The EC and EDI markets are intensely competitive and subject
to rapid technological change and evolving industry standards. The Company does
and will compete with many companies that have substantially greater financial,
marketing, technical and human resources than the Company. Among the principal
competitors in EDI and specifically in the delivery of EDI over the Internet
are, at present, Harbinger Corporation, Sterling Commerce, GEIS, Netscape, Actra
(which is a joint venture of GEIS and Netscape), Open Market, Premenos, Icat,
Interworld Technology Ventures, Elcom International, Broadvision, Connect, IBM,
Microsoft, EDS, and MCI, each of which has announced plans to design and develop
software products and to provide services that facilitate electronic commerce
over the Internet. Some of those competitors operate VANs. Several of these
companies utilize the same encryption technology from RSA that the Company
incorporates in its products. Virtually all of the Company's current and
potential competitors have longer operating histories, greater name recognition,
larger installed customer bases and significantly greater financial, technical
and marketing resources than the Company. Such competitors may be able to
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to potential customers. In addition,
many of the Company's current or potential competitors, such as Netscape,
Microsoft and AT&T, have broad distribution channels that may be used to bundle
competing products directly to end-users or purchasers. If such competitors were
to bundle products that compete with the Company for sale to their customers,
any demand the Company is able to create for its products and services may be
substantially reduced, and the ability of the Company to broaden the utilization
of its products and services would be substantially diminished. No assurance can
be given that the Company will be able to compete effectively with current or
future competitors or that such competition will not have a material adverse
effect on the Company's business, financial condition, prospects and operating
results. See "BUSINESS -- Competition."
New Market Entrants. In addition to existing competitors, there are many
companies that may enter the market in the future with new technologies,
products and services that may be competitive with services offered or to be
offered by the Company. Because there are many potential entrants to the field,
many of which are likely to have substantially greater resources than the
Company, it is extremely difficult to assess which companies are likely to offer
competitive products and services in the future, and in some cases it is
difficult to discern whether an existing product or service is competitive with
the Company's services. The Company expects competition to persist and intensify
in the future. It should be noted that companies that historically have produced
text, audio, video, graphics, art and animation ("multimedia" companies), and
companies that historically have owned various forms of communication media such
as cable, broadcasting, and telecommunications ("cross-media" companies) are
encroaching upon and entering into each other's historic businesses. This may
signal a further expansion by those integrated companies into the EDI field. If
the market becomes congested with competition, the Company may not be able to
compete effectively in its intended marketplace.
Dependence on Third-Party Intellectual Property Rights. The Company
currently licenses certain proprietary and patented technology from third
parties. Most of the Company's planned services incorporating data encryption
and authentication is based on proprietary software of RSA Data Security
("RSA"). The RSA software is incorporated in certain other software licensed to
the Company from Community Connexion related to the Web server utilized by the
Company. The RSA software is available on a non-exclusive basis. No assurance
can be given that the encryption software presently available to the Company
will continue to be available to the Company on commercially reasonable terms,
or at all. Additionally, there is no assurance that if a new encryption
technology develops, that it will be available to the Company on commercially
acceptable terms, if at all.
The Company also licenses Cybercash software, which is credit card
verification software, on a non-exclusive basis. No assurance can be given that
Cybercash will continue to be available to the Company
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on commercially reasonable terms, or at all. The lack of availability of credit
card verification software could have a material adverse effect on the Company's
business, financial condition, prospects, and operating results.
No assurance can be given that the Company's third party licenses will
continue to be available to the Company on commercially reasonable terms, or at
all. The Company bears the risk that all third party technology supplied to the
Company is actually owned by the party supplying the technology and does not
infringe upon the rights of others. Any threat of infringement or
misappropriation against these third parties may in turn cause substantial
interference with the Company's right to utilize that technology. The loss of or
inability to maintain any of those software licenses could result in delays in
introduction of the Company's products and services until equivalent software,
if available, is identified, licensed and integrated into the Company's planned
services, which could have a material adverse effect on the Company's business,
financial condition, prospects and operating results. See
"BUSINESS -- Intellectual Property Rights."
Because certain of the Company's products incorporate software developed
and maintained by third parties, the Company is dependent upon such third
parties' ability to enhance their current products, to develop new products on a
timely and cost-effective basis and to respond to emerging industry standards
and other technological changes. There can be no assurance that the Company
would be able to replace the functionality provided by the third party software
currently offered in conjunction with the Company's products in the event that
such software becomes obsolete or incompatible with future versions of the
Company's products or is otherwise not adequately maintained or updated. The
absence of or any significant delay in the replacement of that functionality
could have a material adverse effect on the Company's sales and operating
results. See "BUSINESS -- Competitive Strategy."
Reliance on PERL. The Company's proprietary software is written in
Practical Extraction and Reporting Language ("PERL"), which is the computer
programming language utilized for Internet applications. Because the Internet is
not controlled or supervised by any one person or group, the evolution and
continued utilization of PERL cannot be controlled or predicted. Changes in or
the elimination of PERL could cause the Company to have to assume responsibility
for support and development of that software, which could have a material
adverse effect on the Company's business, financial condition, prospects, and
operating results.
Dependence on Distribution and Marketing Relationships. The Company has few
sales and marketing employees and does not have established distribution
channels for its services. In order to generate substantial revenue, the Company
must achieve broad distribution of its services to businesses and individuals
and secure general adoption of its services and technology. A key element of the
Company's current business and its future business strategy is to maintain and
develop relationships with leading companies that market software products and
EDI-related services.
The Company has entered into value added-reseller ("VAR"), distribution,
co-marketing and other agreements with a number of companies. See "BUSINESS --
Strategic Relationships." Many of these agreements are nonexclusive, and many of
the companies with which the Company has agreements also have similar agreements
with the Company's competitors or potential competitors. The Company believes
that its success in penetrating markets for its EDI products and services
depends in large part on its ability to maintain these relationships, to add the
Company's EDIxchange products and services to such arrangements, to cultivate
additional relationships and to cultivate alternative relationships if
distribution channels change. There can be no assurance that the Company's VAR
partners, distributors or co-marketers will not develop and market products in
competition with the Company in the future, discontinue their relationships with
the Company or form additional competing arrangements with the Company's
competitors, all of which could have a material adverse effect on the Company's
ability to successfully compete. See "BUSINESS -- Marketing and Distribution."
Dependence on Intellectual Property Rights; Risk of Infringement. The
Company's success and ability to compete are dependent in part upon its
proprietary technology relating to its NetCat software. The Company has applied
for a patent with the United States Patent and Trademark Office covering that
software, but to date no patent has been granted. There can be no assurance that
the applied-for patent will be granted, or, if granted, will be effective to
protect the Company's rights in its NetCat technology. The Company's patent, if
issued by the United States Patent and Trademark Office, would offer no
protection outside of the United
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States. The Company's patent, if issued, may be subsequently challenged. If the
patent is challenged the counsel and other fees in defending the patent,
together with loss of management's time, could be substantial. Those adverse
consequences also could occur with respect to the trademarks, trade secrets, or
other intellectual property rights of the Company.
In addition, the software and electronic commerce industries are
characterized by the existence of a large number of patents, and litigation
based on allegations of patent infringement is not uncommon. From time to time,
third parties may assert exclusive patent, copyright, trademark and other
intellectual property rights to technologies that are important to the Company.
Although the Company believes that it is not infringing on the rights of any
third parties, there can be no assurance that third parties will not assert
infringement claims against the Company, that any such assertion of infringement
will not result in litigation or that the Company would prevail in such
litigation or be able to license any valid and infringed patents of third
parties on commercially reasonable terms. See "BUSINESS -- Proprietary
Information."
Risks Associated with Encryption Technology. A significant barrier to
Internet commerce are the problems and risks associated with exchanging
financial information securely over public networks. The Company relies on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary to effect the secure exchange of
financial information over the Internet, including public key cryptography
technology licensed from RSA. No assurance can be given that advances in
computer capabilities, new discoveries in the field of cryptography or other
events or developments will not result in a compromise or breach of the RSA or
other algorithms used by the Company to protect customer transaction data. If
any such compromise of the Company's security were to occur, it could have a
material adverse effect on the Company's business, financial condition,
prospects and operating results. In addition, no assurance can be given that
existing security systems of others will not be penetrated or breached, which
could have a material adverse effect on the market acceptance of Internet
security services, which in turn could have a material and adverse effect on the
Company's business, financial condition, prospects and operating results.
Liability and Availability of Insurance. The Company is responsible for the
electronic transmission of commercial transaction data for its customers,
including, but not limited to, purchase orders, payments, invoices, and advance
ship notices. If the Company were unable to fulfill its contractual obligations
to its customers, whether due to failure of its software, to failure of the
Internet, EDI or telecommunications services to function properly, to failure of
its employees, contractors, agents or representatives, or for any other reason,
the Company could be subject to claims for the value of the lost business to its
customers. The liability could be substantial. If the Company incurs substantial
liability to its customers due to its breach, it may materially and adversely
affect the Company's ability to complete its plan of operation. The Company has
no insurance to cover those types of liability and does not know whether such
insurance is available on commercially-reasonable terms.
Fluctuating Results; Cyclical Business. The Company's future revenues and
operating results may fluctuate materially as a result of, among other things,
the timing of the introduction of, or enhancements to, the Company's products
and services, demand for the Company's products and services, the timing of
introduction of products or services by the Company's competitors, market
acceptance of Internet commerce, the timing and rate at which the Company
increases its expenses to support projected growth, the budgeting and purchasing
practices of its customers, the length of the customer product evaluation
process for the Company's products, the size and timing of customer orders,
competitive conditions in the industry, and other factors inherent in a new,
developing business. Fluctuations in revenues and operating results may cause
volatility in the Company's stock price. See "Possible Volatility of Stock
Price."
Dependence Upon Key Personnel. The Company's success will depend in part
upon the retention of
key senior management and technical personnel, particularly Steven L.
Vanechanos, Jr., co-founder of
the Company and Chairman of the Board, James D. Conners, President of the
Company, and Kenneth R. Konikowski, Executive Vice President of the Company. The
loss of the services of any of the Company's key personnel could have a material
adverse effect on the Company's business, prospects, financial condition and
operating results. The Company has a policy that all of the Company's employees
must sign confidentiality agreements, and that certain of its employees also
sign non-competition agreements. The Company presently
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maintains key man life insurance on Steven L. Vanechanos, Jr. in the amount of
$3,000,000. There can be no assurance that the Company will be able or willing
to continue to maintain such insurance at present coverage levels.
Ability to Attract Qualified Personnel. The Company believes that its
future success also depends upon its ability to attract and retain additional
highly skilled technical, professional services, management and sales and
marketing personnel. The market for skilled programmers and other technically
skilled employees is highly competitive and other companies with greater
resources can provide higher salaries and greater benefits. To attract quality
personnel, the Company may be required to offer Common Stock or stock options,
which will dilute investors' interests. The market for these individuals has
historically been, and the Company expects that it will continue to be,
intensely competitive. The Company's inability to attract and retain qualified
employees could have a material adverse effect on the Company's business,
financial condition, prospects, and operating results.
Management of Growth. If the Company experiences a period of rapid growth,
a significant strain may be placed on the Company's financial, management and
other resources. The Company's future performance will depend in part on its
ability to manage change in its operations and will require the Company to hire
additional management and technical personnel, particularly in areas of
marketing and customer support. In addition, the Company's ability to manage its
growth effectively will require it to continue to improve its operational and
financial control systems and infrastructure and management information systems,
and to attract, train, motivate, manage and retain key employees. If the
Company's management were unable to manage growth effectively, there could be a
material adverse effect on the Company's business, financial condition,
prospects, and operating results.
Ability to Issue Blank Check Preferred Stock; New Jersey Anti-Takeover
Provisions. Under the Company's Certificate of Incorporation the Board of
Directors has the authority to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences and privileges of those shares
without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of shares of preferred stock, while potentially providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present intention to issue shares of preferred
stock. In addition, the Company has, pursuant to the Underwriting Agreement,
agreed with the Representative that the Company will not sell or otherwise issue
any shares of preferred stock for two years following this Offering, without the
Representative's prior written consent.
In addition, the Company is subject to the anti-takeover provisions of the
New Jersey Shareholder Protection Act, which, among other things, will prohibit
it from engaging in a "business combination" with an "interested stockholder"
for a period of five years after the date of the transaction in which the person
became an interested stockholder (the "Stock Acquisition Date"), unless the
business combination is approved by the Company's Board of Directors prior to
the Stock Acquisition Date. The application of such Act also could have the
effect of delaying or preventing a change in control of the Company.
Furthermore, certain provisions of the Certificate of Incorporation and the
Company's Bylaws, including provisions that provide for the Board of Directors
to be divided into three classes to serve for staggered three-year terms, as
well as certain contractual provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Common Stock
and may have the effect of delaying or preventing a change in control of the
Company. These provisions may also reduce the likelihood of an acquisition of
the Company at a premium price by another person or entity.
Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct regulation by any federal or state governmental agency, other
than regulations applicable to businesses generally. The laws generally
applicable to business will also be applicable to doing business over the
Internet. Laws relating to advertising, buying and selling goods and services,
contracts, payments, privacy, obscenity, defamation, taxation, export controls,
unfair competition and deceptive trade practices, among other things, will
likely apply to online activities as well, and numerous criminal statutes may
apply. There are currently few
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laws or regulations directly applicable to access to, or commerce on, the
Internet. If the Internet becomes more generally accepted, it is possible that a
number of laws and regulations may be adopted with respect to the Internet. Such
laws may address user privacy, pricing and characteristics and quality of
products and services, among other things. The adoption of any laws or
regulations governing commerce on the Internet may result in decreased growth of
the Internet, which could have an adverse effect on the Company's business,
financial condition, prospects and operating results. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, libel and personal privacy is uncertain.
Possible Volatility of Stock Price. The market price of the Company's
Common Stock is likely to be highly volatile and could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new software or services by the
Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors, many of which are beyond the Company's
control. In addition, the stock market has experienced significant price and
volume fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
to the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In the
past, following periods of volatility in the market price for a company's
securities, securities class action litigation has often been instituted. Such
litigation could result in substantial costs and a diversion of management
attention and resources, which could have a material adverse effect on the
Company's business, financial condition, prospects or operating results.
Substantial Options Reserved. Under the Company's 1997 Employee Stock
Option Plan, the Company may issue options to purchase up to an aggregate of
234,764 shares of Common Stock to employees and officers, and, as of the date of
this Prospectus, options to purchase 203,392 shares have been granted under that
plan. Further, under the Company's Stock Option Plan for Outside Directors, the
Company may issue options to purchase up to an aggregate of 78,254 shares of
Common Stock to its outside directors, including certain mandatory grants, and,
as of the date of this Prospectus, options to purchase 15,648 shares have been
granted under that plan. Any such options may further dilute the net tangible
book value of the Common Stock and an investor's interest in the Company.
Further, the holders of such options may exercise them at a time when the
Company would otherwise be able to obtain additional equity capital on terms
more favorable to the Company.
Difficulty of Trading "Penny Stocks." The Company's securities may be
subject to rules that impose additional sales practice requirements on
broker-dealers who sell lower-priced securities to persons other than
established customers (as defined in such rules) and accredited investors
(generally, institutions and, for individuals, an investor with assets in excess
of $1,000,000 or annual income exceeding $200,000 or $300,000 together with such
investor's spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transaction prior to the
purchase. Consequently, many brokers may be unwilling to engage in transactions
in the Company's securities because of the added disclosure requirements,
thereby making it more difficult for purchasers in this Offering to resell the
Common Stock in the secondary market.
Dilution. This Offering involves immediate and substantial dilution of
$2.65 per share (or 66.3%) between the net tangible book value per share of
Common Stock after this Offering and the per share public offering price. Based
upon the public offering price, new investors in this Offering will be paying $7
million, or $4.00 per share, for approximately 45.3% of the shares of the Common
Stock to be outstanding after completion of this Offering, for a corporation
with a net tangible book value of approximately $5,204,285, or $1.35 per share,
after giving effect to this Offering. See "DILUTION." Also, the Company has a
contingent obligation to issue up to 297,367 additional shares to one of its
shareholders in connection with the Company's previous acquisition of Software
Associates. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Acquisition
of Software Associates and Megascore."
Non-Cash Charges to Earnings. The Company intends to use a portion of the
net proceeds of this Offering to repay its outstanding indebtedness from its
April 1997 Financing and its August 1997 Financing. Because those financings
involve a material amount of debt discount and deferred financing fees, the
Company
13
<PAGE> 18
has amortized and charged to operations $186,000 through June 30, 1997, and will
incur approximately $844,500 of additional non-cash expense through the date of,
and upon the repayment of, those financings. See "INTERIM FINANCINGS."
Broad Discretion in Use of Proceeds. Management of the Company has broad
discretion to utilize the proceeds of this Offering, and the
presently-anticipated uses may be materially changed, in management's
discretion. See "USE OF PROCEEDS."
Arbitrary Determination of Offering Price; Possible Volatility of Stock
Price. The initial public offering price and terms of the Common Stock have been
determined by negotiation between the Company and the Underwriter and are not
necessarily related to the Company's asset value, net worth or results of
operation. The market prices for securities of development stage companies have
historically been highly volatile. Future announcements concerning the Company
or its competitors, including the results of testing, technological innovations,
new commercial products, developments concerning proprietary rights or
litigation may have a significant impact on the market price of the Company's
securities. See "UNDERWRITING."
14
<PAGE> 19
USE OF PROCEEDS
Based upon an assumed initial public offering price of $4.00 per share, the
net proceeds to be received by the Company from the sale of the Common Stock
offered hereby, after deducting underwriting commissions and other estimated
expenses of the Offering are estimated to be approximately $5,582,000
($6,495,500 if the Underwriters' overallotment option is exercised in full). The
Company intends to use the net proceeds of the Offering approximately as
follows:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
---------- ----------
<S> <C> <C>
Selling and Marketing.................................. $1,723,000 31
Technical Operations................................... 1,343,000 24
Purchase or Lease of Equipment......................... 363,000 6
Repayment of Indebtedness.............................. 1,337,000 24
Working Capital........................................ 816,000 15
---------- ---
Totals....................................... $5,582,000 100%
========== ===
</TABLE>
In general, the Company plans to hire additional personnel in sales and in
technical operations in order to implement the Company's plan of expanding its
core EDI business. The salaries, benefits and other expenses associated with the
Company's present employees and those additional employees are expected to cause
the Company to operate at a deficit on a monthly basis for approximately 24
months, at which time the Company's management believes that the Company's sales
should increase sufficiently to cover those expenses. The Company believes that
its current and anticipated future revenue should be sufficient to pay its
expected general and administrative expenses and a portion of its other
expenses. The Company has attributed its expected operating deficits to its
activities in sales and marketing and in technical operations; and a material
amount of the net proceeds of this Offering will be used to fund such deficits,
as described below.
SELLING AND MARKETING
The Company intends to use approximately $1,723,000 of the net proceeds of
the Offering to fund selling and marketing activities. Approximately $1,050,000
of that total will be used to fund the salaries and benefits of the Company's
marketing personnel including 8 additional salespeople intended to be hired; and
the Company also intends to develop and implement an advertising program and to
attend trade shows and conventions. The Company expects to use approximately
$673,000 of the net proceeds for those costs. See "BUSINESS -- Selling and
Marketing."
TECHNICAL OPERATIONS
The Company intends to use approximately $1,343,000 of the net proceeds
from the Offering for the salaries and benefits for personnel involved in
technical operations, customer service, and research and development activities.
The Company intends to hire up to 11 new technical staff to provide ongoing
systems support and 4 new programmers to develop and enhance the Company's
software. A portion of the net proceeds attributed to technical operations will
also support the cost of the Company's existing technical staff. See
"BUSINESS -- Research and Development."
PURCHASE OR LEASE OF CAPITAL EQUIPMENT AND SOFTWARE
The Company intends to use approximately $363,000 of the net proceeds of
the Offering to purchase or lease additional equipment and software, including
work stations for new hires ($53,000), computer servers for internal and
external use ($120,000), communications equipment ($72,000), software licenses
($61,000), and facilities management equipment ($57,000).
REPAYMENT OF INDEBTEDNESS
The Company intends to use approximately $600,000 plus accrued interest of
approximately $24,000 of the proceeds from the Offering to repay the promissory
notes issued in the April 1997 Financing, and up to
15
<PAGE> 20
$500,000 plus accrued interest of approximately $8,000 of the proceeds to repay
the promissory notes issued in the August 1997 Financing. See "FINANCINGS."
Further, the Company intends to use approximately $115,000 to repay short-term
loans made by the officers of the Company, see "CERTAIN TRANSACTIONS -- Officer
Loans," and $90,000 to repay amounts borrowed under its bank lines of credit.
WORKING CAPITAL
The Company intends to use $816,000 of the net proceeds for working capital
and general corporate purposes.
The allocation of the net proceeds of this Offering set forth above
represents the Company's best estimate based upon its present plans and certain
assumptions regarding general economic and industry conditions and the Company's
future revenues and expenditures. The Company reserves the right to reallocate
the proceeds within the above-described categories or to other purposes in
response to, among other things, changes in its plans, industry conditions, and
the Company's future revenues and expenditures. It is possible that a portion of
the net proceeds may also be used, in part, to fund strategic joint ventures or
acquisitions. The Company presently has no commitments with respect to any joint
venture or acquisition.
Based on the Company's operating plan, management believes that the
proceeds from this Offering and anticipated cash flow from operations will be
sufficient to meet the Company's anticipated cash needs and finance its plans
for expansion for at least 24 months from the date of this Prospectus.
Thereafter, the Company anticipates that it may require additional financing to
meet its current or future plans for expansion. No assurance can be given that
the Company will be successful in obtaining such financing on favorable terms,
or at all. If the Company is unable to obtain additional financing, its ability
to meet its current plans for expansion could be adversely affected. See "RISK
FACTORS -- Future Capital Needs; Uncertainty of Additional Financing."
Proceeds not immediately required for the purposes described above will be
invested principally in U.S. government securities, short-term certificates of
deposit, money market funds, collateralized investment agreements with
commercial banks or investment banks, or other high-grade, short-term,
interest-bearing investments.
16
<PAGE> 21
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of the date of this Prospectus, a portion of the Company's Common Stock
which is not restricted is traded on the National Association of Securities
Dealers ("NASD") Over the Counter ("OTC") Bulletin Board Service under the
symbol "DWEB."
The range of high and low bid quotations for the Company's Common Stock for
the two most recently completed fiscal years and the current fiscal year to date
were obtained from the NASD and are provided below. The volume of trading in the
Company's Common Stock has been limited and the bid prices reported may not be
indicative of the value of the Common Stock or the existence of an active
trading market. These over-the-counter market quotations reflect interdealer
prices without retail markup, markdown or commissions and do not necessarily
represent actual transactions. Concurrently with the effectiveness of the
Registration Statement of which this Prospectus is a part, the Company
effectuated a 0.2608491-for-one Reverse Stock Split whereby each share of Common
Stock became 0.2608491 of a share. The information in the table below has not
been retroactively adjusted on account of that combination of shares.
<TABLE>
<CAPTION>
BID
-----------------
QUARTER ENDED HIGH LOW
--------------------------------------------------------- ------ ------
<S> <C> <C>
December 31, 1994........................................ $ 0.01 $0.01
March 31, 1995........................................... 0.01 0.01
June 30, 1995............................................ 0.01 0.01
September 30, 1995....................................... 0.01 0.01
December 31, 1995........................................ 0.01 0.01
March 31, 1996(1)........................................ 5 4 1/2
June 30, 1996............................................ 4 1/2 4 3/8
September 30, 1996....................................... 4 1/8 3 7/8
December 31, 1996........................................ 3 3/4 3
March 31, 1997........................................... 3 3/8 3 1/8
June 30, 1997............................................ 3 1/4 11/16
</TABLE>
- ---------------
(1) On March 5, 1996, the Company effectuated a one-for-100 reverse stock split
whereby each 100 shares of Common Stock were combined into one share of
Common Stock. The information in the above table which relates to the period
prior to March 5, 1996, was not retroactively adjusted to reflect that
combination of shares.
At September 1, 1997, there were 2,112,438 shares of the Company's common
stock outstanding (inclusive of 112,488 issuable in the April 1997 Financing and
100,000 issuable in the August 1997 Financing, and also reflecting 100,000
shares contributed to Treasury Stock (see "INTERIM FINANCINGS")) held by
approximately 3,255 holders of record.
The Company did not declare or pay cash dividends on the Common Stock
during 1995 or 1996. The Company currently intends to retain any earnings for
use in the business and does not anticipate paying any cash dividends in the
foreseeable future.
17
<PAGE> 22
CAPITALIZATION
The table below sets forth the capitalization of the Company under three
scenarios: (i) actual as of June 30, 1997, which includes the effects of the
April 1997 Financing and reflects the additional issuance of 112,488 shares
pursuant to the April 1997 Financing, (ii) pro forma to reflect the effects of
the August 1997 Financing, including the issuance of 100,000 shares pursuant
thereto as well as the contribution to the Company by Messrs. Vanechanos Jr. and
Vanechanos Sr. of a total of 100,000 shares to be held as Treasury Stock (see
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Shareholdings of Certain
Principals" and "INTERIM FINANCINGS"), and (iii) as adjusted to reflect the sale
and issuance of the Common Stock offered hereby at an assumed initial offering
price of $4.00 per share and the receipt of the estimated net proceeds of this
Offering as set forth in "USE OF PROCEEDS." The information set forth below
should be read in conjunction with the Company's financial statements and notes
thereto.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------------------------
ACTUAL(1)(2) PRO FORMA(1)(2)(3) AS ADJUSTED(1)(2)
------------ ------------------ -----------------
<S> <C> <C> <C>
Long-term debt.................... $ 188,084 $ 188,084 $ 188,084
----------- ----------- -----------
Stockholders' equity:
Preferred stock, assignable par
value, 5,000,000 shares
authorized; no shares issued
and outstanding
Common Stock, $.0001 par value,
50,000,000 shares authorized;
2,112,438 issued and
outstanding(1); pro forma
2,212,438 issued and
outstanding(2); as adjusted
3,962,438 issued and
outstanding(3)............... 211 221 396
Additional paid in capital...... 2,236,327 3,036,315 8,618,440
Accumulated deficit............. (2,146,796) (2,146,796) (2,991,296)
----------- ----------- -----------
Total........................... 89,742 889,740 5,627,540
Treasury stock, at
cost -- 100,000 shares(3).... -- (400,000) (400,000)
----------- ----------- -----------
Total stockholders'
equity................ 89,742 489,740 5,227,540
----------- ----------- -----------
Total capitalization.............. $ 277,826 $ 677,824 $ 5,415,624
=========== =========== ===========
</TABLE>
- ---------------
(1) Gives prospective effect to the .2608491-for-one reverse stock split, which
is occurring contemporaneously with the effectiveness of the Registration
Statement of which this Prospectus is a part, and subsequent to the date of
this table.
(2) Excludes (a) up to 297,367 shares of Common Stock which may be issuable to a
certain shareholder as a result of the acquisition by the Company of
Software Associates, Inc. (See "CERTAIN TRANSACTIONS"); (b) up to 175,000
shares of Common Stock which are issuable upon the exercise of warrants
granted to the Representatives in connection with this Offering (See
"UNDERWRITING"); (c) up to 262,500 shares of Common Stock issuable in this
Offering to cover over-allotments, if any (See "UNDERWRITING"); (d) up to
234,764 shares issuable to employees under the Company's 1997 Employee Stock
Option Plan (See "MANAGEMENT -- Stock Option Plans"); or (e) up to 78,254
shares issuable to non-employee directors under the Company's 1997 Stock
Option Plan for Outside Directors (See "MANAGEMENT -- Stock Option Plans").
(3) On a pro forma basis, the number of shares issued and outstanding also
includes 100,000 shares issuable in the August 1997 Financing and 100,000
shares contributed to the Company and held as treasury stock. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS -- Shareholdings of Certain
Principals" and "INTERIM FINANCINGS." See Note J[8][b] to the Company's
financial statements.
18
<PAGE> 23
DILUTION
At June 30, 1997, the negative tangible book value of the Company was
approximately $(80,515) or $(.04) per share. On a pro forma basis, based upon
the completion of the August 1997 Financing, the tangible book value of the
Company was approximately $246,985 or $.12 per share. Net tangible book value
per share represents the Company's total tangible assets less total liabilities
divided by the total number of shares of Common Stock outstanding. Net tangible
book value dilution per share represents the difference between the amount per
share paid by the purchasers of Common Stock in this Offering and the pro forma
net tangible book value per share of Common Stock immediately after completion
of this Offering. After giving effect to the sale by the Company of the
1,750,000 shares of Common Stock offered hereby, at the assumed initial public
offering price of $4.00 per share, and receipt by the Company of the estimated
net proceeds therefrom, the pro forma net tangible book value of the Company at
June 30, 1997, would have been approximately $5,204,285, or $1.35 per share.
This represents an immediate increase in net tangible book value of $1.23 per
share to existing holders of Common Stock and an immediate dilution of $2.65 per
share to purchasers of shares of Common Stock in this Offering, as illustrated
by the following:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share(1)................... $ 4.00
Net tangible book value per share at June 30, 1997 (on a pro forma
basis reflecting the August 1997 Financing)........................ $ .12
Increase per share attributable to this Offering..................... $ 1.23
------
Pro forma net tangible book value per share after this Offering...... $ 1.35
------
Dilution per share to new investors(2)............................... $ 2.65
=====
</TABLE>
- ---------------
(1) Before deducting the estimated underwriting discounts, commissions and
expenses of this Offering.
(2) Excludes (a) up to 297,367 shares of Common Stock which may be issuable to a
certain shareholder as a result of the acquisition by the Company of
Software Associates, Inc. (See "CERTAIN TRANSACTIONS"); (b) up to 175,000
shares of Common Stock which are issuable upon the exercise of warrants
granted to the Representatives in connection with this Offering (See
"UNDERWRITING"); (c) up to 262,500 shares of Common Stock issuable in this
Offering to cover over-allotments, if any (See "UNDERWRITING"); (d) up to
234,764 shares issuable to employees under the Company's 1997 Employee Stock
Option Plan (See "MANAGEMENT -- Stock Option Plans"); or (e) up to 78,254
shares issuable to non-employee directors under the Company's 1997 Stock
Option Plan for Outside Directors (See "MANAGEMENT -- Stock Option Plans").
The above discussions and table assume no exercise of the over-allotment
option, the exercise of which in full would reduce the dilution to investors in
this Offering to $2.48 per share as the pro forma net tangible book value per
share after this Offering would increase from $1.35 to $1.52.
19
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with,
and is qualified in its entirety by, the Financial Statements and the Notes
thereto and the Selected Financial Data included in this Prospectus, and the
description of the Company's business located elsewhere in this Prospectus. This
discussion contains, in addition to historical information, forward-looking
statements that involve risks and uncertainty. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in "RISK FACTORS" as well as those discussed elsewhere in this
Prospectus. Historical operating results and percentage relationships among any
amounts included in the Financial Statements are not necessarily indicative of
trends in operating results.
The following discussion relates to the combined operations of DWTS and
Megascore for all periods presented, plus Software Associates, Inc. which was
acquired by the Company on November 30, 1996 from December 1, 1996. See
"BUSINESS -- Background of the Company."
SUMMARY
The following table summarizes the Results of Operations of the Company
that are discussed below:
RESULT OF OPERATIONS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE
NINE MONTHS MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, JUNE 30, JUNE 30,
1996 % 1995 % 1997 % 1996 %
----------------- ------ ----------------- ------ ----------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales:
Systems............. $ 147,337 32.0% $ 296,763 46.4% $ 98,254 19.7% $ 107,317 30.8%
Services............ 312,730 68.0 342,980 53.6 399,841 80.3 241,100 69.2
--------- ------ --------- ------ ----------- ------ --------- ------
Total............... 460,067 100.0 639,743 100.0 498,095 100.0 348,417 100.0
========= ====== ========= ====== =========== ====== ========= ======
Cost of Sales:
Systems............. 71,205 15.5 158,820 24.8 33,640 8.8 55,800 16.0
Services............ 81,194 17.6 84,318 13.2 126,990 25.5 62,434 17.9
--------- ------ --------- ------ ----------- ------ --------- ------
Total............... 152,399 33.1 243,138 38.0 160,630 32.2 118,234 33.9
--------- ------ --------- ------ ----------- ------ --------- ------
Expenses:
Selling, general and
administrative...... 719,443 156.4 364,684 57.0 1,006,246 202.0 460,631 132.2
Research and
development......... 28,990 6.3 12,000 1.9 164,024 32.9 15,229 4.4
--------- ------ --------- ------ ----------- ------ --------- ------
Total............... 748,433 162.7 376,686 58.9 1,170,270 234.9 475,860 136.6
--------- ------ --------- ------ ----------- ------ --------- ------
Purchased research and
development......... -- -- -- 713,710 143.3 -- --
Interest expense...... 23,271 5.1 23,350 3.6 210,585 42.3 14,950 4.3
Interest income....... (8,806) (1.9) (3,140) (0.4) (3,790) (0.8) (5,494) (1.6)
--------- ------ --------- ------ ----------- ------ --------- ------
Total expenses...... 915,237 199.0 640,032 100.0 2,251,405 452.0 603,550 173.2
====== ====== ====== ======
--------- --------- ----------- ---------
Net loss before income
taxes............... $(455,230) (98.9)% $ (289) (0.0)% $(1,753,310) (352.0)% $(255,133) (73.2)%
========= ====== ========= ====== =========== ====== ========= ======
</TABLE>
- ---------------
* Expense percentages are based upon a percentage of Total Net Sales.
20
<PAGE> 25
THE YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1995
For the fiscal year ended September 30, 1996 ("fiscal 1996"), the Company
recognized net sales of approximately $460,000 compared to net sales of
approximately $640,000 during the fiscal year ended September 30, 1995 ("fiscal
1995"), a decrease of approximately $180,000 or 28%. The decrease was
attributable to the Company's change in the focus of its core business to
electronic commerce services and products and to a change in focus in its
marketing towards its new services and products: EDIxhange Suite and
EDIbridgeNET Service.
System sales decreased to approximately $147,000 for fiscal 1996 from
approximately $297,000 in fiscal 1995, a decrease of 50%. The decrease is due to
a change in the Company's focus of its core business and a need to market its
services and products. The Company also is anticipating declining profit margins
on its hardware sales. System sales includes sales of hardware and software to
customers
Service sales decreased to approximately $313,000 for fiscal 1996 from
approximately $343,000 in fiscal 1995, a decrease of 9%. The decrease is due in
part to the shift in the Company's marketing of its services in the electronic
commerce industry from general computer consulting projects to the narrower
emerging EC market, and in part to the shift in personnel toward product
development and away from billable activities. Service sales includes customer
set-up fees, training cost, EDI charges and consulting, maintenance and support
fees, and other miscellaneous consulting fees.
Cost of system sales was approximately $71,000, for a gross profit
percentage of 52% for fiscal 1996, as compared to approximately $159,000, for a
gross profit percentage of 46% for fiscal 1995. The increase in gross profit
percentage was attributable to the Company selling more of the higher-margin
software products than the lower-margin hardware products. Cost of systems sales
includes the cost of computer hardware and sublicensed software incorporated
into the Company's systems.
Cost of services was approximately $81,000 for fiscal 1996, resulting in a
gross profit percentage of 74%, as compared to approximately $84,000, which
yielded a gross profit percentage of 75% for fiscal 1995. There was no
significant change for fiscal 1996 as compared to fiscal 1995.
Selling, general and administrative expense increased 97%, or approximately
$354,000 to approximately $719,000 in fiscal 1996, as compared to approximately
$365,000 for fiscal 1995. The increase is attributable to higher marketing
expenses, salaries and office expenses in the Company's effort to market its new
products and services.
Research and development expense was approximately $29,000 for fiscal 1996
as compared to approximately $12,000 for fiscal 1995. The 142% increase is due
to the Company's development of its NetCat order facilitation software for the
Internet.
Interest expense was approximately $23,000 for each of the fiscal years
1996 and 1995, which represents the expense of financing the Company's office
condominium and automobiles.
Interest income increased $6,000, to approximately $9,000 in fiscal 1996,
as compared to $3,000 in fiscal 1995 as a result of the Company's short-term
investments of excess cash obtained from private placements of its securities.
Net loss for fiscal 1996 was approximately $455,000 or .27 per share as
compared to nil for fiscal 1995, resulting from increased expenses and decreased
sales as a consequence of the Company directing its attention to expanding its
Internet-based EC products and services.
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1996
The Company recognized net sales of approximately $498,000 for the nine
months ended June 30, 1997, compared to approximately $348,000 for the nine
months ended June 30, 1996, an increase of 43%. The increase in sales was
attributable to sales of the Company s new EDI/Internet products and services
offered through Software Associates, which was acquired by the Company on
November 30, 1996, sales of upgrades
21
<PAGE> 26
for customized software, and a royalty payment paid to the Company for licensing
a proprietary list of internet domain names.
System sales declined to approximately $98,000 for the nine months ended
June 30, 1997, as compared to approximately $107,000 for the nine months ended
June 30, 1996. This 8% decline was attributable to ongoing efforts, before the
acquisition of Software Associates, to migrate away from some of the Company s
historical products and to focus on the Company s electronic commerce services.
Service sales increased from approximately $241,000 for the nine months
ended September 30, 1996, to approximately $399,000 for the nine months ended
June 30, 1997, an increase of 66%. The increase was due largely to revenues
derived from transaction processing through the Company's new EDI Service Bureau
from Software Associates, the rollout of EDIxchange, and a royalty payment paid
to the Company for licensing for an internet domain list.
Cost of system sales was approximately $33,000 for the nine months ended
June 30, 1997, for a gross profit percentage of approximately 66%. This compares
to cost of system sales of approximately $56,000, for gross profit percentage of
approximately 48% for the same period during 1996. The increase in gross profit
percentage is attributable to sales of higher margin customized EDI software to
facilitate transaction processing through the Company's EDI Service Bureau.
Cost of services was approximately $127,000 for the nine months ended June
30, 1997, for gross profit percentages of approximately 68%. This compares to
cost of services of approximately $62,000, for a gross profit percentage of
approximately 74%, for the same period during 1996. The decrease in profit
margins on service sales is attributable to increased costs associated with the
hiring of additional employees to increase the Company's EDI/Internet
capabilities, in anticipation of the growth in demand for the Company's
EDI/Internet services.
Selling, general and administrative expenses increased by approximately
$546,000, from $461,000 for the nine months ended June 30, 1996 to approximately
$1,006,000 for the nine months ended June 30, 1997, an increase of approximately
118%. The increase is attributable to the higher marketing expenses, salaries
and office expenses associated with the Company's increased effort to market its
EDI/Internet services and to implement an outreach program consisting of public
relations and services directed at the electronic commerce community. Management
expects the outreach program to provide the Company with access and
introductions to talent and expertise within the electronic commerce community,
with a goal of assisting the Company in its marketing, recruiting, and
operations. There is no assurance that the outreach program will be successful.
Research and development expenses increased approximately $149,000 for the
nine months ended June 30, 1997, from approximately $15,000 in 1996 to
approximately $164,000 in 1997. The increase is attributable to expanded
development of existing services, and ongoing development of new services such
as EC Integrator and ShipTrac.
Purchased research and development for the nine months ended June 30, 1997
of approximately $714,000 resulted from the allocation of a portion of the
purchase price paid by the Company to acquire Software Associates.
Interest expense increased from approximately $15,000 for the nine months
ended June 30, 1996 to approximately $211,000 for the nine months ended June 30,
1997. The increase is primarily attributable to the amortization of debt
discount and deferred financing fees of $186,000 and interest expense of $8,000.
Both are related to the April 1997 Financing.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had cash of $95,818, total current assets
of $336,066 and a working capital deficit of $259,527.
The Company had a net loss of $1,731,610 for the nine months ended June 30,
1997, and negative operating cash flow for the nine months ended June 30, 1997
of $689,283, which negative cash flow was
22
<PAGE> 27
primarily funded by a $250,000 private placement of common stock that closed in
November, 1996, and from the $600,000 April 1997 Financing.
The capital resources presently available to the Company include the
proceeds from the $500,000 August 1997 Financing. Those capital resources are
not adequate to finance the Company's activities beyond October, 1997.
IMPACT OF INFLATION
Although no assurance can be given, increases in the inflation rate are not
expected to materially adversely affect the Company's business.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standings No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
issued by the Financial Accounting Standards Board ("FASB"), is effective for
financial statements for fiscal years beginning after December 15, 1995. The new
standard establishes new guidelines regarding when impairment losses on
long-lived assets, which include plant and equipment and certain identifiable
intangible assets and goodwill, should be recognized and how impairment losses
should be measured. The Company does not expect the adoption of this standard to
have a material effect on its financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has determined that it will continue to account for
stock-based compensation for employees under Accounting Principles Board Opinion
No. 25 and elect the disclosure-only alternative under SFAS No. 123. The Company
will be required to disclose the pro forma net income or loss and per share
amounts in the notes to the financial statements using the fair-value-based
method beginning in the year ending September 30, 1997. The Company has not
determined the impact of these pro forma adjustments.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997. It will replace primary earnings per share with "basic"
earnings per share, and contains definitions of "basic" and diluted earnings per
share. SFAS No. 128 will apply to the Company's financial statements beginning
with the first fiscal quarter ending December 31, 1997. The Company does not
expect the adoption of this standard to have a material effect on its
calculation of earnings per share.
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BUSINESS
BACKGROUND OF THE COMPANY
The Company is a New Jersey corporation. It currently operates through
three separate wholly-owned subsidiaries: DynamicWeb Transaction Systems, Inc.,
a Delaware corporation ("DWTS"), Software Associates, Inc., a New Jersey
corporation ("Software Associates"), and Megascore, Inc., a Delaware corporation
("Megascore"). On March 26, 1996, the Company acquired all of the outstanding
stock of DWTS. Prior to that acquisition, the Company was named Seahawk Capital
Corporation. Seahawk Capital Corporation had, from time to time, other
operations having no relationship to the Company's present business and
management. Those prior operations were disposed of by the Company prior to its
acquisition of DWTS, and as of March 26, 1996, the Company had no operations.
The acquisition by the Company of each of Software Associates and Megascore
is described in the Company's Form 8-K dated November 30, 1996. As a result of
those transactions, the Company has combined the previously-separate operations
of DWTS, Software Associates, and Megascore into a holding company. The
description of the Company's business contained in this Prospectus relates
exclusively to the electronic commerce software and service business conducted
through DWTS, Software Associates, and Megascore.
Further, the financial information contained elsewhere in this Prospectus
represents the combined operations of DWTS and Megascore for all periods
presented and those of Software Associates (which was acquired by the Company on
November 30, 1996) from December 1, 1996. The basis for such presentation is
discussed in Note A to the Company's financial statements.
INTRODUCTION
The Company is engaged in the business of developing, marketing and
supporting software products and services that enable businesses to engage in
electronic commerce utilizing the Internet and traditional Electronic Data
Interchange ("EDI") technologies.
Electronic commerce ("EC") involves the automation of business transactions
using telecommunications and computers to exchange and process commercial
information and transactional documents. As broadly defined, electronic commerce
is generally considered by information technology analysts to represent a
growing, potentially multi-billion dollar market. EDI, a form of EC, is the
application-to-application transmission of business documents such as purchase
orders and invoices using industry-standard formats. Businesses utilizing
electronic commerce have found EDI to be a vital component of their enterprises.
EDI differs from more elementary forms of communication because it provides for
truly integrated information flow. For example, manufacturers of goods can
create electronic catalogues of their products and prices such that their
customers will have the ability to electronically enter purchase orders and
complete the purchase, payment and other documentation of a purchase
transaction. The Internet is a worldwide communications system that allows users
to transmit and receive messages and information over telephone and other
communications lines using terminals and computers.
Electronic commerce has traditionally involved the use of a third-party or
private value-added computer network ("VAN") to perform EDI, e-mail, and
electronic funds transfers and to provide services related to electronic forms,
bulletin board and electronic catalogues. Users of private or third-party VANs
may also have access through the VAN to directories or on-line information
services. A VAN is, in effect, an electronic post office which electronically
receives and delivers mail, in this case commercial documents, to the intended
recipient. The major operators of VANs include Harbinger Corporation, GEIS,
Sterling Commerce, IBM/Advantis, MCI, AT&T and Kleinschmidt. The Company's
products and services work with all major VAN providers.
EDI can create commercial advantages for its users, including one-time data
entry, reduced clerical workload and the elimination of paper records. EDI also
allows for the rapid, accurate and secure exchange of business data, and reduced
operating and inventory carrying costs. EDI facilitates uniform communications
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with different trading partners, including customers, suppliers, common
carriers, and banks or other financial institutions.
The Company's present business strategy is to focus upon the following
types of markets and customers:
- EDI-enabled suppliers of goods, such as manufacturers, that want to
engage in electronic commerce with customers which are not EDI-enabled.
- EDI-enabled purchasers, such as retailers or distributors of goods, that
want to engage in electronic commerce with suppliers which are not
EDI-enabled.
- Any businesses that want to engage outside service providers to manage
or to assist in the management of their EDI function ("EDI
outsourcing").
- Businesses or groups of businesses that want to create "electronic
storefronts" for goods and services on the "World Wide Web." The World
Wide Web or "Web" is a series of computers called servers, which allow
individuals, groups and businesses to publish and exchange information
over the Internet to the general public.
The Company has five principal software and service packages for the
markets and customers described above:
EDIBRIDGENET SERVICE(SM) -- EDIbridgeNET is the Company's electronic
commerce service bureau. EDIbridgeNET is a service provided by the Company
that allows for the transfer of information between trading partners. The
service includes EDI mapping and the translation and routing of business
documents between third party EDI (VAN) networks, the Internet and the
private computer networks maintained by the parties to the business
transaction. Generally referred to as "EDI outsourcing," this service
offers businesses cost-effective alternatives to investing in an in-house
EDI System.
NETCAT(TM) -- NetCat is the Company's software program which allows a
seller of goods to create an electronic catalogue on the World Wide Web to
offer and sell products electronically. NetCat allows a customer to browse
through the catalogue, to place an order, and to be billed for, or to pay
for, the order (through the use of Cybercash, a third-party credit card
verification software licensed to the Company). This process is sometimes
referred to as "order facilitation." It is expected to be utilized
predominantly in a business-to-business context, and to increase
transaction fees from the EDIbridgeNET Service. NetCat is used as part of
the Company's EDIxchange Program.
EDIXCHANGE PROGRAM(SM) -- The Company's EDIxchange Program is a combination
of EDIbridgeNET service and NetCat software. The EDIxchange Program
provides a seamless and cost effective way for EDI-enabled suppliers or
retailers to conduct electronic commerce with their non-EDI trading
partners. EDIxchange bridges the Internet with traditional EDI networks
such as VANs by using the Company's service bureau, EDIbridgeNET. Combined
with NetCat, the Company's order management software described above, this
product allows businesses which do not have in-house EDI capability to
communicate electronically with EDI-enabled business partners, using only
Internet access and a standard Web browser. A Web browser, such as Netscape
or Internet Explorer, allows Internet users to access various Web Sites on
the Internet.
SHIPTRAC(TM) -- ShipTrac is the Company's Windows-based software
application designed for manufacturers and suppliers of goods. It
electronically creates a shipping manifest or list of products that are
being shipped to a particular customer or distribution center. The ShipTrac
software receives an electronic purchase order into a database, and the
shipper then can print bar-coded shipping compliance labels. ShipTrac
generates EDI standard advanced shipping notice documents (the manifest)
which are sent electronically to a supplier's customers. When the goods are
received, the bar codes on the products can be verified against the
advanced shipping notice which has been electronically forwarded by
ShipTrac.
ECINTEGRATOR(TM) -- The Company has developed application interface modules
for two third party mid-range accounting software systems, RealWorld and
Synchronics. Designed for businesses using those systems, EC Integrator
allows a business to import and export business documents electronically
from those software applications. Generally, the Company sells this product
through distributors of Real World and Synchronics software.
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All of the foregoing products and services currently have somewhat limited
applications and are continuing to be developed by the Company, although there
can be no assurance that such development will be successful. See "Product
Development."
OVERVIEW OF ELECTRONIC COMMERCE AND ELECTRONIC DATA INTERCHANGE
Trading Communities. Groups of companies that regularly trade with each
other generate significant repetitive business transactions. These existing
trading communities are natural prospects for implementation of EDI. Certain
trading communities are defined by trading standards, protocols, rules or
procedures adopted through trade organizations. The adoption of EDI as an
accepted means of transmitting business documents and data is occurring, in
part, because many trade organizations or groups and many large companies within
a trading community increasingly recommend or require their member organizations
or trading partners to adopt and use EDI as the primary method of transmitting
business documents. Large companies within a trading community often are
described as "hubs" and their trading partners as "spokes." A hub company and
its trading partners communicate through electronic networks, generally either
third party networks or a private network owned and operated by the hub company.
Hub companies decide to implement EDI generally for one or more of the following
reasons:
- To enable a reduction in inventories by reducing the time required to
notify vendors and replenish stocks.
- To reduce the administrative handling costs of documents that they send
or receive from their suppliers or customers by requiring that
information be manually entered only once.
- To improve customer support and service levels by reducing data entry
errors by requiring that information be manually entered only once.
For the above stated reasons, a hub company often adopts as a stated
business objective that all of its trading partners use EDI as the principal
means of transferring business documents. Spoke companies, in turn, often expand
the electronic commerce community by acting as hub companies with their trading
partners, requesting or requiring that they transmit business documents using
EDI.
Typical EDI Transactions. In a typical EDI transaction, a trading partner
(the "sending partner") first creates with its computer, either manually or
electronically, the business data used for the completion of a particular set of
documents, described by EDI standards as a "transaction set." Transaction sets
include requests for quotes, quotes, purchase orders, invoices, shipping
notices, and other related documents and messages. Second, a translation
software program on the sending partner's computer converts the document or
transaction set into a standard EDI format. Third, this information is
electronically transmitted through telecommunications links from the sending
partner's computer to either the receiving partner's computer or to a central
computer system (similar to a mailbox at a post office) that serves as a
value-added network shared by many trading partners.
Value Added Networks. VANs receive documents for subsequent delivery to the
intended trading partner (the "receiving partner"), connect many types of
computer hardware and communications devices, convert multiple transaction sets
from one industry standard to another, and maintain security by reducing the
possibility of one trading partner accessing another's computer. EDI partners
use VAN services because it eases the burden of having to install and maintain
communication configurations for each trading partner. The connection to a VAN
is a single connection no matter how many trading partners the recipient has.
The VAN "normalizes" the issues of protocols, time zones, hardware and software
differences in that all participants in the EDI transaction do not need the same
software applications or hardware.
EDI Industry Standards. EDI has been further promoted through the adoption
of EDI standards within various industries and trading communities. These
standards define the content and format of business documents, such as the data
required to be included in purchase orders, invoices, shipping notices, and
other business documents. Before these standards were adopted, electronic
document transmission was based on proprietary formats agreed to by two trading
partners. However, incompatible computer systems and differing proprietary
formats limited widespread adoption of EDI.
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Existing VAN Services. The Company does not operate a VAN and does not
intend to operate a VAN. The Company's products and services are designed both
to interface with existing VAN's and also to operate without a VAN (point to
point EDI over the Internet without the need for a VAN as a midpoint), thereby
permitting EDI-enabled trading partners to conduct electronic commerce with
their non-EDI-enabled trading partners.
INTERNET STRATEGY
The Company's Internet strategy focuses on using the Internet to complement
existing VANs and proprietary EDI networks, or possibly to replace the use of
VANs and proprietary EDI networks with point to point EDI over the Internet. The
Company believes that EDI-enabled companies can reach a much wider range of
their trading partners by using an Internet-based approach, as a result of the
increasing availability and general use of the Internet and the cost advantages
of an Internet-based approach over VANs and proprietary EDI networks. The
success of that strategy will depend, among other things, upon continued and
expanded acceptance of the Internet as an accepted vehicle for electronic
commerce and communication among businesses.
The Internet is an interconnected global network of computer networks
linked together through a common protocol. Unlike other public
telecommunications networks, the Internet is not managed by a single
corporation, government agency or other entity. The market for software to
access the Internet and related services is rapidly emerging and standards and
technologies for communicating information over the Internet are constantly
evolving. Businesses can exchange documents and electronic mail, access a wide
range of commercial information, and establish a presence on the World Wide Web.
The Web is the part of the Internet where information and documents reside in a
standard format thereby enabling them to be easily displayed and linked for
access by other Internet users on the Web. By using a special programming
language called hypertext markup language (HTML), a user can establish a
presence on the Web known as a Web Page or Home Page and can link with other
users of the Web. To date, the Internet has not been accepted as a medium for
processing routine business transactions between organizations, in part due to
perceived or actual security and reliability issues.
CUSTOMERS AND MARKETS
EDI has been used since the mid-1970's. Nevertheless, the Company believes
that the electronic commerce market is still in its early stages, in that
relatively few companies engage in EC. The Company believes that a significant
barrier for businesses to join the electronic commerce network has been the cost
of maintaining standard translation software, host system modifications,
dedicated proprietary VANs, and resources required to maintain EDI. The
industry, and more importantly, EDI-enabled suppliers and retailers, have
continued to look for solutions to lower existing EDI-related costs and at the
same time spawn increased EDI utilization.
To date, the Company has had a limited number of customers using these new
EDI/Internet technologies. The types of customers on which the Company intends
to focus are discussed below.
THE EDI-ENABLED SUPPLIER. The Company believes that a significant number of
suppliers now using EDI would like to increase the utilization of EDI with their
customers. However, a significant investment in hardware and software at each
customer location is required in the proprietary equipment and software
necessary for a customer to link with the supplier either directly or through a
VAN. A smaller customer may not have the resources to make such an investment,
or the investment may not be cost-justified based upon the customer's
transaction volume with the supplier.
The Company's EDIxchange software provides a cost-effective solution for
this situation. The Company can assist the supplier to create a secure
Web-enabled Internet site with an electronic system for customer orders and
development of an electronic catalog by use of NetCat, all using the supplier's
existing EDI system and documents. The system will allow non-EDI customers to
view the supplier's product catalogs, place orders on-line, and send an
EDI-standard purchase order to the supplier. The customer will need only
Internet access and a Web browser to engage in those transactions.
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THE HUB MODEL. The Hub Model is similar to the EDI-Enabled Supplier Model,
but is targeted at the purchaser rather than the supplier. The Company believes
that a significant number of wholesalers and retailers which are now using EDI
would like to increase the utilization of EDI with their suppliers, by expanding
the number of "spoke" companies. This can be accomplished primarily by reaching
a Hub company's smaller suppliers with a cost-justified mechanism for electronic
commerce transactions.
In the Hub Model, the Company's EDIxchange Suite can be configured for a
retailer, effectively reversing the functions of the Supplier Model described
above. The Company can assist the retailer or other purchaser to create a secure
Web-enabled Internet site with NetCat, again using the purchaser's existing EDI
system and documents. The system will allow non-EDI-enabled suppliers to receive
purchase orders electronically using only a Web browser and Internet access.
THE ELECTRONIC COMMERCE SERVICE BUREAU. The Company believes that a
significant number of businesses may want to "outsource" all or a part of their
electronic commerce functions. That outsourcing is one of the services
historically provided by Software Associates and which the Company intends to
market. This market includes presently EDI-enabled businesses, as well as
businesses that do not presently conduct electronic commerce. Using Software
Associates' experience in that area, combined with the Company's software
products, the Company offers its services as an EC service bureau through its
EDIbridgeNET Program.
SUPPLIERS REQUIRED TO SEND ADVANCE SHIPPING NOTICES. ShipTrac is marketed
to EDI-capable suppliers, which become mandated by their customers to use
bar-coded shipping labels and to send EDI standard documents such as advance
shipping notices. This process is complex and cumbersome for suppliers to
integrate into their existing systems, and the Company believes ShipTrac will
reduce the complexity for implementing this requirement and complying with the
requests of such trading partners.
BUSINESSES USING REALWORLD OR SYNCHRONICS ACCOUNTING SYSTEMS. A significant
number of businesses use RealWorld or the Synchronics accounting systems
software products, but are not EDI capable. The Company will target those
businesses to use the Company's existing products to begin electronic commerce.
To date, the above target markets are undeveloped and largely untested. Due
to the limited sales by the Company to date, there can be no assurance as to the
degree, if any, that these markets and target customers will develop generally
or will be receptive to the Company's products and services.
As of September 1, 1997, the Company's EDIxchange customers include Linens
N' Things (an EDI-enabled purchaser), and Great American Knitting Mills, makers
of Goldtoe socks, and ICXpress (both EDI-enabled sellers). Customers using the
Company's EDIbridgeNET Service include Church & Dwight, manufacturers of Arm &
Hammer baking soda, Royal Dalton, makers of fine china, and Kings Supermarket, a
regional supermarket chain.
SALES AND MARKETING
The Company's goal is to establish and expand the number of trading
partners using the Company's service bureau and complimentary electronic
commerce software solutions. To reach this goal, the Company plans to market and
sell its electronic commerce business solutions to enterprises which are
EDI-capable, and whose trading partners lack EDI capability. Additionally, the
Company will focus its marketing efforts for EDI outsourcing on EDI-capable
suppliers, which the Company believes often do not have sufficient resources in
their management information system ("MIS")/EDI group to respond to customers'
requests on a sufficiently timely basis.
Certain of the Company's marketing strategies are discussed below.
IDENTIFY KEY BUSINESS PARTNERS -- The Company has introduced its Business
Partners Program to establish alliances between the Company and key business
partners who specialize in business automation and electronic commerce. Those
key business partners are expected to be VANs, EDI software companies, EC
consultant groups, Web content developers, business re-engineering consultants,
and accounting software providers. See "Strategic Relationships" below.
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The objective of the Business Partners Program is to integrate the
Company's products and services with those of its business partners and to
promote Company services along with products and services sold by its business
partners.
EXPAND MARKETING AND SALES EFFORTS NATIONALLY -- As of September 1, 1997,
the Company employs four people in sales and marketing, two of whom directly
sell the Company's software and services. Compensation of sales personnel is in
the form of a base salary and commissions. To reach a broader market, the
Company plans to expand the number of sales people it employs.
Lead generation and advertising will focus on national electronic
commerce/EDI trade shows, journal advertisements in national electronic commerce
publications, and public speaking engagements in EDI/Internet forums. The
Company will also evaluate which industry specific trade shows/journals warrant
participation. The Company has recently joined national electronic commerce/EDI
trade groups such as CommerceNet and DISA, which represent both users and
providers of EDI-related services.
Expansion of sales efforts will be implemented in stages, as market trends
indicate acceptance of the emerging electronic commerce marketplace and as the
Company's capital availability allows.
The Company is a party to several co-marketing and strategic alliances. EMJ
("EMJ"), located in Apex, North Carolina, is an Internet Web content developer
working with many large businesses in the Raleigh/Durham Research Triangle Park
area. The Company was chosen as the exclusive Internet-EDI solution provider for
EMJ Internet, a division of EMJ. Further, the Company has developed a strategic
relationship with ER Enterprises of Columbus, Ohio, an EDI consulting group that
assists retailers in implementing electronic commerce strategies; with AFTEC
Corporation of Livingston, New Jersey, a developer of a manufacturing and
distribution software package, which plans to build an electronic commerce
interface into their application and offer the Company's Service Bureau as a
turnkey EC solution for their clients; and with ID2000, of Berlin, New Jersey,
which is a management information consulting firm offering turnkey information
systems solutions to its clients.
PRODUCT DEVELOPMENT
The Company presently has several product development initiatives. One
initiative involves "point-to-point EDI." This technology would permit
electronic document interchange directly over the Internet, avoiding the use of
a VAN. The Company is working on modifications to its NetCat software and the
EDIxchange System, which would allow these products to interface with the
Templar product from Premenos Technology Corp. and permit point-to-point EDI.
Another initiative involves an upgrade of NetCat to a "Version 3.0."
Presently, NetCat can use only ASCII files and HTML. The Company is working on
making NetCat compatible with SQL databases (such as Oracle and Sybase), which
would allow NetCat to function with a larger group of customer databases. Also,
the Company is working on making NetCat capable of creating a wider variety of
presentation graphics, and on increasing the efficiency of NetCat's order
processing.
Another initiative involves an upgrade of the Company's EDIxchange Program
suite to permit the creation of an "Integrated UPC Catalogue." Presently, under
the Company's EDIxchange Program suite, as utilized in the Hub Model, the Hub
company/purchaser is required to input manually its suppliers' catalogues on the
Hub company's Web Site. The Company is working on an upgrade to that software
which would allow suppliers to maintain their own catalogue information,
including the UPC (Universal Product Code) information, electronically on the
Hub company's Web Site, thus permitting the Hub company to browse that database
or catalogue for purchasing.
Another initiative involves the upgrade of the Company's ECIntegrator.
Presently, that software allows for the electronic import and export of business
documents from RealWorld and Synchronics accounting systems only. The Company is
working on an upgrade which would permit interface with other accounting
systems. The new product would be Windows-based and would function with the
Company's EDI service bureau EDIbridgeNET.
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The Company's final major initiative at present involves an upgrade of the
Company's EDIbridgeNET communications network. Presently, the Company
administers its own communications network relating to EDIbridgeNET, such as the
modems and other hardware necessary to communicate with its EDI customers. The
Company is evaluating the feasibility of outsourcing that core communication
function to a telecommunications company.
Each of the foregoing product development initiatives is subject to risk.
The Company cannot predict when any of them will be completed, if at all. There
is no assurance that the Company will develop successfully or in a
cost-effective manner any of the products, services, or product enhancements
discussed, or that they will find market acceptance if developed.
COMPETITION
The electronic commerce and EDI network services and computer software
markets are highly competitive. The principal competitors in EDI and
specifically in the delivery of EDI over the Internet are, at present, Harbinger
Corporation, Sterling Commerce, GEIS, Netscape, Open Market, Premenos, Icat,
Interworld Technology Ventures, Elcom International, Broadvision, Connect, IBM,
Microsoft, EDS, and MCI, each of which has announced plans to design and develop
software products and to provide services that facilitate electronic commerce
over the Internet.
Aside from the Internet, numerous companies supply electronic commerce
network services, and several competitors target specific vertical markets such
as the pharmaceutical, agribusiness, retail and transportation industries.
Competitors provide software designed to facilitate electronic commerce and EDI
communications. Existing VANs provide network services and related software
products and services. Other competitors provide PC-based computer programs and
network services specifically targeted to facilitate electronic banking
transactions. These competitors include banks and financial institutions that
operate privately-owned computer networks that link directly to their commercial
customers. The Company believes that many of its competitors have significantly
greater financial and personnel resources than the Company.
Competition from Internet-based competitors is also significant. The market
for Internet software and services is emerging and highly competitive, ranging
from small companies with limited resources to large companies with
substantially greater financial, technical and marketing resources than the
Company. The Company believes that existing competitors are likely to expand the
range of their electronic commerce services to include Internet access, and that
new competitors, which may include telephone companies and media companies, are
likely to increasingly offer services which utilize the Internet to provide
business-to-business data transmission services. A group of computer companies
including some competitors of the Company, and the Company itself, have formed
Commerce Net, a consortium which has announced an intention to explore the use
of the Internet for commercial applications. Additionally, several competitive
network service providers allow their subscribers access to the Internet, and
several major software and telecommunications companies, including Sprint, MCI,
AT&T and Microsoft, either have or are expected to have Internet access
services. Similarly, the major on-line service companies, such as America
On-Line, Compuserve and Prodigy, also offer Internet services and are expected
to enhance the services in the future to include certain aspects of electronic
commerce.
COMPETITIVE STRATEGY
The Company's competitive strategy is to offer electronic commerce
solutions using Internet and EDI technology through designs that can be
customized to fit a customer's specific needs.
The Company intends to apply its Internet and EDI technology products, its
development efforts, and its marketing efforts, at the "application layer" of
electronic commerce. The application layer addresses the customers' immediate
need to work with product catalogues and to exchange useful business documents.
The application layer is distinguished from the "core" or "infrastructure"
layer, which addresses the basic elements of transmitting an EDI document over
the Internet. At the application layer, one assumes that a properly-formatted
EDI document can be securely transmitted over the Internet.
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The Company intends to avoid competing at the EC core or basic
infrastructure technology layer. In that regard, it does not intend to compete
in technical and product categories such as encryption and authentication
schemes, secure transport methods, EDI mailboxing services, secure browsers and
servers, or low-level communication protocols.
Further, the Company intends to market products that require the EDI
trading partners to have only a standard Web browser with standard enhancements
or "plug-ins" (like Adobe Acrobat and Sun's Java). The Company will centralize
EDI translation and mapping from its application interface to the EDIbridgeNet
outsource service bureau.
The Company hopes to differentiate itself in the marketplace for
Internet/EDI solutions with NetCat. The Company believes that its existing
competition currently offers generic, form-based software solutions with limited
functionality. In contrast, EDIxchange provides both product catalog and order
facilitation. When combined with the Company's service bureau, the Company can
offer customers a complete, turnkey electronic commerce solution that is
compatible with their existing EDI system.
The Company may, in order to acquire new technology, additional products,
market share or other business opportunity, enter into strategic joint ventures
or mergers or make strategic acquisitions. Such transactions may be funded by
using the proceeds of this Offering, issuing stock of the Company, incurring
debt, or any combination of the foregoing. The Company is not presently
negotiating any such transactions, nor does it have any commitments to do so.
There can be no assurance that the Company will be successful in its effort
or that it will not be materially adversely affected by competitive factors.
INTELLECTUAL PROPERTY RIGHTS
The Company relies primarily on a combination of copyright, patent and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company has filed an
application for a patent covering its NetCat software, which is presently
pending before the United States Patent and Trademark Office ("PTO"). The
Company also has filed federal trademark registration applications for its
DynamicWeb, NetCat, EDIxchange and EDIbridgeNET trademarks. Those trademark
registration applications are presently pending before the PTO.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. There can be
no assurance that the Company's means of protecting its proprietary rights will
be adequate or that competitors will not independently develop similar or
superior technology. The Company believes that, due to the rapid pace of
innovation within the electronic commerce, EDI and related software industries,
factors such as the technological and creative skills of its personnel are more
important in establishing and maintaining a leadership position within the
electronic commerce industry than are the various legal protections of its
technology. The Company does not believe that any of its products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to current
or future products. From time to time, the Company has received notices which
allege, directly or indirectly, that the Company's products or services infringe
the rights of others. The Company generally has been able to address these
allegations without material cost to the Company. The Company expects that
software product developers will increasingly be subject to infringement claims
as the number of products and competitors in electronic commerce grows and the
functionality of products in different industry segments overlaps. Any such
claims, irrespective of their merit, could be time-consuming, result in costly
litigation, cause product shipment delays, require the Company to enter into
royalty or licensing agreements, or prevent the Company from using certain
technologies. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all, which could have a
material adverse effect on the Company.
The Company currently has in place confidentiality and non-competition
agreements with certain of its employees. The Company has adopted a policy of
requiring that all future employees sign appropriate confidentiality agreements
and, where appropriate, non-competition agreements.
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The Company currently licenses proprietary data encryption and
authentication software of RSA Data Security ("RSA"). The RSA software is
incorporated in certain other software licensed to the Company from Community
Connexion related to the Web server utilized by the Company. The RSA software is
available on a non-exclusive basis. No assurance can be given that the
encryption software presently available to the Company will continue to be
available to the Company on commercially reasonable terms, or at all.
Additionally, there is no assurance that if a new encryption technology
develops, that it will be available to the Company on commercially acceptable
terms, if at all.
The Company also licenses Cybercash software, which is credit card
verification software, on a non-exclusive basis.
The Company's proprietary software is written in Practical Extraction and
Reporting Language ("PERL"), which is the computer program language utilized for
Internet applications. Because the Internet is not controlled or supervised by
any one person or group, the evolution and continued utilization of PERL cannot
be controlled or predicted. Changes in or the elimination of PERL could cause
the Company to have to assume responsibility for support and development of that
software.
GOVERNMENTAL REGULATIONS
The Company's network services are transmitted to its customers over
dedicated and public telephone lines. These transmissions are governed by
regulatory policies establishing charges and terms for communications. Changes
in the legislative and regulatory environment relating to on-line services, EDI
or the Internet access industry, including regulatory or legislative changes
which directly or indirectly affect telecommunication costs or increase the
likelihood of competition from regional telephone companies or others, could
have an adverse effect on the Company's business; as could potential
governmental actions outside of the United States. The Telecommunications Act of
1996 amended the federal telecommunications laws to lift restrictions on
regional telephone companies and others competing with the Company and to impose
certain restrictions regarding obscene and indecent content communicated to
minors over the Internet or through interactive computer services. The
Telecommunications Act of 1996 imposes fines and other criminal liability on any
entity that knowingly uses a telecommunications device or interactive computer
service to send obscene or indecent material to minors or permits any
telecommunications facility under such entity's control to be used for such a
purpose. The Company cannot predict the impact, if any, that this Act and future
court opinions, legislation, regulations or regulatory changes may have on its
business. Management believes that the Company is in material compliance with
all applicable regulations.
EMPLOYEES
As of September 1, 1997, the Company had 20 employees, of whom 17 were
full-time employees. Approximately 6 are technical personnel engaged in
maintaining or developing the Company's products or performing related services,
approximately 4 are marketing and sales personnel, approximately 5 are engaged
in customer support and operations, and approximately 5 are involved in
administration and finance.
FACILITIES
The Company's corporate offices are located at 271 Route 46 West, Building
F, Suite 209, Fairfield, New Jersey. The Company has entered into two leases for
approximately 5,400 square feet for its executive and administrative staff at an
aggregate monthly rental of approximately $6,600. The Company believes that such
space will be sufficient for its needs for the foreseeable future and that
alternative space is available at rental rates which would not materially
adversely affect the Company. See "CERTAIN TRANSACTIONS -- Office Lease."
The Company owns its former offices (at 1033 Route 46 East, Clifton, New
Jersey, which it acquired in its acquisition of Software Associates in November
of 1996). It has vacated those premises, which are listed for sale. Those
premises are mortgaged with an approximately $191,000 mortgage.
LEGAL PROCEEDINGS
The Company is not a party to any material pending litigation.
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<PAGE> 37
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS.
The following table contains certain information with respect to the Board
of Directors and the executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ----------------------------------------
<S> <C> <C>
Steven L. Vanechanos, Jr.(1) 43 Chairman of the Board and Chief
Executive Officer
James D. Conners 58 President and Chief Operating Officer
Steve Vanechanos, Sr.(1) 67 Director, Vice President, Treasurer and
Secretary
Kenneth R. Konikowski 50 Director and Executive Vice President
F. Patrick Ahearn, Jr.(2) 49 Director
Denis Clark 53 Director
Frank T. DiPalma(3) 51 Director
Robert Droste(2)(3) 43 Director
</TABLE>
- ---------------
(1) Steve Vanechanos, Sr. is the father of Steven L. Vanechanos, Jr. and Michael
Vanechanos. As of September 1, 1997, Michael Vanechanos beneficially owns
approximately 8% of the Company's outstanding Common Stock. See "PRINCIPAL
STOCKHOLDERS" and "CERTAIN TRANSACTIONS -- Significant Shareholder."
(2) Member of the Audit Committee of the Board of Directors. The Audit Committee
recommends an outside auditor for the year and reviews the financial
statements and progress of the Company. This Committee was formed in 1997.
(3) Member of the Compensation Committee. The Compensation Committee meets on an
as-needed basis between meetings of the Board of Directors to discuss
compensation related matters. This Committee was formed in 1997.
STEVEN L. VANECHANOS, JR. became President and Chairman of the Board of
Directors of the Company on March 26, 1996. On August 26, 1997, he assumed the
office of Chief Executive Officer and Mr. Conners became the President. Mr.
Vanechanos has been President of DynamicWeb Transaction Systems, Inc. ("DWTS"),
a wholly-owned subsidiary of the Company, since its incorporation in October
1995. He also was a co-founder of Megascore, Inc. ("Megascore"), a wholly-owned
subsidiary of the Company, in 1981 and has served as its President since April
1985. He has a Bachelor of Science Degree in Finance and Economics from
Fairleigh Dickinson University, Rutherford, New Jersey Campus. In 1981, he
received a Certificate in Computer Programming and in 1982, he received a
Certificate in Data Processing from The Institute for the Certification of
Computer Professionals.
JAMES D. CONNERS became President and Chief Operating Officer of the
Company on August 26, 1997. Prior to joining the Company, Mr. Conners served as
the Vice President of Strategic Planning of Sterling Commerce in 1996 and the
Vice President of its Internet Business Unit in 1997. Prior to joining Sterling
Commerce, Mr. Conners spent 15 years at General Electric Information Services
(GEIS) in various sales and marketing positions, most recently as the General
Manager in charge of the Ameritech Alliance. Mr. Conners graduated from the
University of Detroit with a BS degree in Mathematics with a minor in Physics.
STEVE VANECHANOS, SR. became Vice President, Secretary, Treasurer and a
Director of the Company on March 26, 1996. He was a co-founder of Megascore in
1981 and of DWTS in 1995. He has served as a Vice President of Megascore since
April 1985 and of DWTS since October 1995. He attended Newark College of
Engineering in Newark for two years. He continued his education with
certifications from PSI Programming Institute in New York City and with courses
in principles of accounting at ABA Institute, Hudson County Chapter.
33
<PAGE> 38
KENNETH R. KONIKOWSKI became the Executive Vice President and a Director of
the Company on December 1, 1996. Prior to that date, Mr. Konikowski was
President of Software Associates, which he founded in 1985. Software Associates
is currently a wholly-owned subsidiary of the Company. See "CERTAIN
TRANSACTIONS."
F. PATRICK AHEARN, JR. became a Director of the Company on March 26, 1996.
Mr. Ahearn has served as a director of Megascore since 1985 and of DWTS since
February 1996. Since 1993, Mr. Ahearn has served as the Chairman of the Board of
E.C.M. Group, Inc., White Plains, New York. From 1992 to 1995, Mr. Ahearn served
as Managing Director for Continental Bank and the President of 22 of its
subsidiaries. He is also a Colonel in the United States Marine Corps. Mr. Ahearn
has a Bachelor of Arts Degree from the College of Holy Cross.
DENIS CLARK became a Director of the Company on June 12, 1997. Mr. Clark
has served as Vice President of Sterling Commerce, Inc. from 1993 to 1996 and
was employed by IBM Corporation as a Director of Consulting from 1991 to 1992
and as a Director of Software Marketing from 1989 to 1991.
FRANK T. DIPALMA became a Director of the Company on March 26, 1996. Since
January 1997, Mr. DiPalma has been employed as Vice President of Operations and
Engineering for Energy Corporation of America, Mountaineer Gas Division. Prior
to that time, and during the past five years, he held various management
positions for Public Service Electric and Gas, a public utility located in
Newark, New Jersey. In 1995 and 1996, he was the owner of Palmer Associates, a
management consulting company. Mr. DiPalma graduated from New Jersey Institute
of Technology with a Bachelor of Science in Mechanical Engineering, Fairleigh
Dickinson University with a Masters in Business Administration, and the
University of Michigan's Executive Development Program.
ROBERT DROSTE became a Director of the Company on March 26, 1996. Mr.
Droste has served as a director of Megascore since 1985 and of DWTS since
February 1996. During the past five years, Mr. Droste has been the Director of
Administration and Manager of Internal Audit for Russ Berrie & Co., Inc.,
Oakland, New Jersey. He has a Bachelor of Science Degree in Accounting from
Fairleigh Dickinson University, Rutherford, New Jersey.
Pursuant to the Company's Amended and Restated Certificate of
Incorporation, the Board of Directors is divided into three classes which shall
be as nearly equal in number as possible. The Directors in each class will hold
office following their initial appointment to office for terms of one year, two
years and three years, respectively and, upon reelection, will serve for terms
of three years thereafter. Each Director will serve until his or her successor
is elected and qualified. Presently, Directors Ahearn, DiPalma and Clark are
Class I Directors to hold office until the annual shareholder election of
Directors in 1998; Directors Konikowski and Vanechanos, Sr. are Class II
Directors to hold office until the annual shareholder election of Directors in
1999; and Directors Droste and Vanechanos, Jr., are Class III Directors to hold
office until the annual shareholder election of Directors in 2000.
Pursuant to the Company's Amended and Restated Certificate of
Incorporation, a Director may be removed by shareholders only upon the
affirmative vote of at least a majority of the votes which all shareholders
would be entitled to cast. The Board of Directors shall have the exclusive power
to fill any vacancy occurring in the Board of Directors, including a vacancy
created by an increase in the number of Directors, by a majority vote of the
Directors then in office. Any Director so elected shall serve until the next
annual meeting of shareholders.
34
<PAGE> 39
EXECUTIVE COMPENSATION
General
There were no executive officers of the Company or any of its subsidiaries
whose salary and bonus exceeded $100,000 for the fiscal year ended September 30,
1996. The following table sets forth the compensation paid to Steven L.
Vanechanos, Jr., the Company's President from March 26, 1996 to August 26, 1997
(when he continued in the role of Chief Executive Officer but relinquished the
title of President to James Conners). Jonathan B. Lassers served as the
Company's President and Chief Executive Officer from May 1995 until March 26,
1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION
----------------------------------------- ---- ------- ------------
<S> <C> <C> <C>
Steven L. Vanechanos, Jr. 1996(1) $58,762(2) $ 10,300(3)
President and Chief Executive Officer
Jonathan B. Lassers 1996(4) $ 0(5) $ 0(5)
Former President and Chief Executive 1995 $ 0(6) $ 0(6)
Officer
</TABLE>
- ---------------
(1) Mr. Vanechanos, Jr. commenced his employment with the Company on March 26,
1996, the date upon which Seahawk Oil International, Inc. acquired
DynamicWeb Transaction Systems, Inc. and changed its name to DynamicWeb
Enterprises, Inc. Prior to such time, he had been President of DWTS.
(2) This amount includes salary paid by Megascore during the year ended
September 30, 1996. Megascore was acquired by the Company on September 30,
1996.
(3) Consists of (a) lease payments totaling $4,300 made by the Company for an
automobile used by Mr. Vanechanos, and (b) travel and entertainment expenses
of approximately $6,000 paid by the Company. Mr. Vanechanos did not receive
any long-term compensation.
(4) Mr. Lassers terminated his employment with the Company on March 26, 1996,
the date upon which Seahawk Oil International, Inc. acquired DynamicWeb
Transaction Systems, Inc. and changed its name to DynamicWeb Enterprises,
Inc.
(5) Mr. Lassers commenced his employment with the Company in May 1995. Mr.
Lassers has represented to management that he was paid no salary or other
compensation prior to March 26, 1996. The Company did not pay any amounts to
Mr. Lassers after that date.
Stock Options
There were no executive officers of the Company or any of its subsidiaries
who received or exercised stock options, stock appreciation rights or other
stock awards from the Company during the fiscal year ended September 30, 1996.
As of September 30, 1996, except for the Company's 1992 Stock Option Plan, the
Company did not have in place any stock option, stock appreciation right, or
similar compensation plan, nor were any options or stock appreciation rights
outstanding and exercisable as of such date under the 1992 Stock Option Plan or
otherwise. On March 7, 1997, the Company terminated the 1992 Stock Option Plan.
On June 12, 1997, the shareholders of the Company approved the 1997 Employee
Stock Option Plan and the 1997 Stock Option Plan for Outside Directors
(collectively, the "1997 Plans").
EMPLOYMENT AGREEMENTS
On December 1, 1996, Kenneth R. Konikowski, Executive Vice President of the
Company, entered into an Employment Agreement with the Company (the "Konikowski
Agreement"). Under the terms of the Konikowski Agreement, Mr. Konikowski serves
as Executive Vice President and a member of the Company's Board of Directors and
is entitled to an annual salary of $135,600. The Konikowski Agreement provides
that this amount may be increased based on annual performance reviews pursuant
to the Company's policies and practices. Mr. Konikowski is also eligible to be
paid an annual bonus based on the Company's to-be-
35
<PAGE> 40
established incentive bonus plan. Mr. Konikowski also receives certain employee
benefits, including $500,000 of life insurance, disability and health insurance,
vacation days, and use of an automobile. He is also eligible to participate in
the Company's 1997 Employee Stock Option Plan.
The Konikowski Agreement provides that if Mr. Konikowski's employment is
terminated by the Company other than for "Cause," "Disability" or "Material
Breach," each as defined therein, or if he terminates his employment for "Good
Reason," as defined therein, Mr. Konikowski is entitled to a lump sum amount
equal to the commuted value of his base salary in effect or authorized at the
time of termination for the period remaining until November 30, 2001 (determined
by discounting all payments at a rate equal to the bond equivalent yield of the
latest two-year Treasury Bill auction). The Company is also required to maintain
in full force and effect certain of Mr. Konikowski's employee benefits.
On August 26, 1997, the Company hired James D. Conners as President, and
the Company and Mr. Conners entered into an Employment Agreement (the "Conners
Agreement"). The Conners Agreement provides that he shall serve as President of
the Company for a term of 3 years, with automatic renewal unless either party
gives timely notice of its intent not to renew. The Conners Agreement provides
for a base salary of $160,000, and obligates the Company to grant options to
purchase 104,338 shares of the Company's stock during his employment period for
a price of $3.83 per share, 45,648 of such shares to vest at August 25, 1998,
32,606 to vest at August 25, 1999, and the remaining 26,084 to vest at August
25, 2000. On September 11, 1997, Mr. Connors was granted 104,338 options under
the 1997 Employee Plan. Further, Mr. Conners is entitled to a $1,000 per month
housing allowance and a $500 per month leased automobile allowance. He is
eligible to participate in the 1997 Employee Plan and the Company's other
employee benefit plans as implemented from time to time.
The Conners Agreement provides that if Mr. Conners employment is terminated
other than for "Cause" as defined therein, Mr. Conners is entitled to receive
his base salary, incentive compensation and options for the balance of his
employment period.
STOCK OPTION PLANS
1997 Employee Stock Option Plan
On June 12, 1997, the shareholders of the Company approved the Company's
1997 Employee Stock Option Plan (the "1997 Employee Plan"). The 1997 Employee
Plan authorizes the Compensation Committee (the "Committee") of the Board of
Directors to grant options for the purchase of up to 234,764 shares of Common
Stock. Any shares as to which an option expires, lapses unexercised, or is
terminated or canceled may be subject to a new option.
Under the 1997 Employee Plan, both "Incentive Stock Options" (as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")),
which qualify for certain tax benefits, and options which do not qualify for
such tax benefits ("Nonqualified Stock Options") may be granted to eligible
employees of the Corporation and its subsidiaries. All current employees of the
Company are eligible to participate in the 1997 Employee Plan.
The Committee has the authority to grant options to employees under the
1997 Employee Plan, based upon the recommendation of the Corporation's Chief
Executive Officer and subject to the approval of a majority of the disinterested
members of the Board. Option grants to employees are anticipated to be made
annually. Eligible employees generally include all key employees of the
Corporation and its subsidiaries. This would include the executive officers.
Recent Grants. On August 8, 1997, the Committee made an initial grant of
options to purchase a total of approximately 99,054 shares to employees under
the 1997 Employee Plan, and on September 11, 1997, the Committee granted options
to purchase 104,338 shares to James Conners in connection with his commencing
employment with the Company.
36
<PAGE> 41
1997 Stock Option Plan for Outside Directors
Also on June 12, 1997, the shareholders of the Company approved the 1997
Stock Option Plan for Outside Directors (the "1997 Director Plan"). Each person
(i) who is a director of the Company and (ii) who is not, as of the grant date,
an employee of the Company shall, on the earlier of (a) the date on which this
Offering is completed, or (b) September 30, 1997, and thereafter on the date of
each succeeding annual meeting of shareholders at which directors are elected,
automatically be granted an option to purchase 3,912 shares of the Common Stock.
Future directors elected by the Board to fill a vacancy will also receive such a
grant on the date of such initial election as a director. Accordingly, Messrs.
Ahearn, Clark, DiPalma and Droste will each receive, on the earlier of (a) the
date on which this Offering is completed, or (b) September 30, 1997, options
under the 1997 Director Plan to purchase an aggregate of 3,912 shares of the
Common Stock.
In addition to the automatic grants described above, the 1997 Director Plan
further authorizes the Committee to grant options for the purchase of an
aggregate amount up to 78,254 shares of the Common Stock. Any shares as to which
an option expires, lapses unexercised, or is terminated or canceled may be
subject to a new option. Only Nonqualified Stock Options may be granted under
the 1997 Director Plan. The exercise price for options granted under the 1997
Director Plan will be equal to the fair market value of the stock underlying the
option on the date the option is granted.
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITIES AND INDEMNIFICATION;
DISCLOSURE OF COMMISSION POSITION OR INDEMNIFICATION OF SECURITIES ACT
LIABILITIES
In accordance with New Jersey law, the Company's Amended and Restated
Certificate of Incorporation eliminates in certain circumstances the liability
of directors of the Company for monetary damages for breach of their fiduciary
duty as directors. This provision does not eliminate the liability of a director
(i) for a breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions by the director not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for a
willful or negligent declaration of an unlawful dividend, stock purchase or
redemption or (iv) for transactions from which the director derived an improper
personal benefit.
In addition, the Company's Bylaws include provisions to indemnify its
officers and directors and other persons against expenses, judgments, fines and
amounts incurred or paid in settlement in connection with civil or criminal
claims, actions, suits or proceedings against such persons by reason of serving
or having served as officers, directors, or in other capacities, if such person
acted in good faith, and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Company and, in a criminal action or
proceeding, if he had no reasonable cause to believe that his/her conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in good faith
and in a manner which he or she reasonably believed to be in or not opposed to
the best interests of the corporation or that he or she had reasonable cause to
believe his or her conduct was unlawful. Indemnification as provided in the
Bylaws shall be made only as authorized in a specific case and upon a
determination that the person met the applicable standards of conduct.
Insofar as limitation of, or indemnification for, liabilities arising,
under the Securities Act may be permitted to directors, officers, or persons
controlling the Company pursuant to the foregoing, or otherwise, the Company has
been advised that, in the opinion of the Commission, such limitation or
indemnification is against public policy as expressed in the Securities Act, and
is therefore unenforceable.
DIRECTORS' COMPENSATION
The non-employee directors and the employee directors do not receive a fee
for attending meetings or other fees or retainers for serving on the board.
37
<PAGE> 42
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of September 1, 1997, for (i) each
person who owns of record or is known by the Company to be the beneficial owner
of more than five percent (5%) of the Common Stock, (ii) each of the Company's
current Directors, (iii) each person named in the Summary Compensation Table set
forth above under "MANAGEMENT," and (iv) all current directors and executive
officers of the Company as a group, such person's name and address, the number
of shares of Common Stock beneficially owned by such person, and the percentage
of the outstanding Common Stock so owned. Unless otherwise indicated in a
footnote, each of the following persons holds sole voting and investment power
over the shares listed as beneficially owned.
<TABLE>
<CAPTION>
PRO FORMA
AMOUNT AND NATURE PERCENT
OF BENEFICIAL PERCENT OF OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1)(2) CLASS(3) CLASS(4)
----------------------------------------------- ----------------- ---------- ---------
<S> <C> <C> <C>
Steven L. Vanechanos, Jr....................... 443,670 21.00% 11.49%
92 Clarken Drive
West Orange, New Jersey 07052
Steven Vanechanos, Sr.......................... 442,289 20.94% 11.45%
96 Union Avenue
Rutherford, New Jersey 07082
Kenneth R. Konikowski(5)....................... 224,330 11.57% 6.33%
36 Pinebrook Road
Towco, New Jersey 07082
Michael Vanechanos............................. 170,224 8.06% 4.41%
129 S. Telegraph Hill Road
Holmdel, New Jersey 07703
Sierra Growth & Opportunity.................... 119,990 5.68% 3.11%
551 Fifth Avenue, Suite 605
New York, New York 10017
James D. Conners............................... 0(6) 0% 0%
5506 Carnoustie Court
Dublin, Ohio 43017
F. Patrick Ahearn, Jr.......................... 7,504(7) 0.36% 0.19%
107 Maple Street
Rutherford, New Jersey 07070
Frank T. DiPalma............................... 15,221(7)(8) 0.72% 0.39%
179 Claremont Road
Ridgewood, New Jersey 07450
Robert Droste.................................. 7,505(7) 0.36% 0.19%
24 Summit Road
Clifton, New Jersey 07012
Denis Clark.................................... 3,912(7) 0.19% 0.10%
8417 Greenside Drive
Dublin, Ohio 43017
Jonathan B. Lassers(9)......................... 6,521 0.31% 0.17%
275 Uxbridge
Cherry Hill, New Jersey 08034
All directors and executive officers as a group
(8 in number)(10).............................. 1,164,431 55.12% 30.15%
</TABLE>
- ---------------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in the
General Rules and Regulations of the Securities and Exchange Commission
("SEC") and may include securities owned by or for the individual's spouse
and minor children and any other relative who has the same home, as well as
securities to which the individual has or shares voting or investment power
or has the right to acquire beneficial ownership within sixty (60) days of
the date of this Prospectus. Beneficial ownership may be disclaimed as to
certain of the securities. Steven L. Vanechanos, Jr. and Michael Vanechanos
are brothers, and are the sons of Steve
38
<PAGE> 43
Vanechanos, Sr. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS --
Significant Shareholder." Each of the foregoing disclaims beneficial ownership
of the shares of Common Stock owned by the others.
(2) Information furnished by the directors and executive officers of the
Company. All numbers of shares reflect the 0.2608491-for-one Reverse Stock
Split. See "RECENT DEVELOPMENTS."
(3) Reflects 112,488 shares of Common Stock which the Company sold (but has not
yet issued) in the April 1997 Financing and 100,000 shares of Common Stock
which the Company sold (but has not yet issued) as part of the August 1997
Financing, as well as a total of 100,000 shares contributed to the Company,
and held as Treasury Stock by the Company, by Mr. Vanechanos, Sr. and Mr.
Vanechanos, Jr. See "INTERIM FINANCINGS." The Company anticipates that it
will issue such shares on the earlier of (i) concurrently with the issuance
of shares in this Offering, or (ii) October 31, 1997. Percentages based
upon (a) 1,999,950 shares outstanding on September 1, 1997, plus (b) an
additional 15,648 shares issuable within 60 days of the date of this
Prospectus to the named outside directors under the 1997 Director Plan,
plus (c) an additional 112,488 shares issuable in respect of the April 1997
Financing and 100,000 shares issuable in respect of the August 1997
Financing, as well as a total of 100,000 shares recontributed to the
Company, and held as Treasury Stock by the Company, Mr. Vanechanos, Sr. and
Mr. Vanechanos, Jr. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS -- Shareholdings of Certain Principals." See also Footnote (7)
below.
(4) Percentages based upon 3,862,438 shares to be outstanding at the completion
of this Offering, plus the additional 15,648 shares currently issuable
under the 1997 Director Plan.
(5) Does not include additional shares of Common Stock that may be issuable in
connection with the prior acquisition of Software Associates. See "CERTAIN
TRANSACTIONS -- Acquisition of Software Associates and Megascore."
(6) Mr. Conners has been granted options to purchase 104,338 shares on
September 11, 1997 under the 1997 Employee Plan, none of which can be
acquired within 60 days of this Prospectus. See "MANAGEMENT -- Employment
Agreements."
(7) Includes options to purchase 3,912 shares granted in 1997 under the 1997
Director Plan.
(8) All of such shares are held jointly by Mr. DiPalma and his spouse.
(9) Mr. Lassers served as President and Chief Executive Officer and a director
of the Company from May 1995 until March 26, 1996. He has not been
affiliated with the Company since such date.
(10) Does not include shares owned by Jonathan B. Lassers. See Footnote (9)
above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITION OF SOFTWARE ASSOCIATES AND MEGASCORE
On November 30, 1996, pursuant to a Stock Purchase Agreement dated such
date among the Company, Software Associates and Kenneth R. Konikowski, the sole
shareholder of Software Associates (the "SA Agreement"), the Company exchanged
860,000 shares with Mr. Konikowski (adjusted to 224,330 shares as a result of
the 0.2608491-for-one Reverse Stock Split) of the Company's Common Stock for all
of the issued and outstanding capital stock of Software Associates. Accordingly,
Software Associates is presently a wholly owned subsidiary of the Company.
Pursuant to the SA Agreement, Kenneth R. Konikowski was named Executive
Vice President and a director of the Company and his Employment Agreement was
executed. Pursuant to the SA Agreement, as amended by a letter agreement dated
April 17, 1997, between the Company and Mr. Konikowski, the Company is obligated
to issue to Mr. Konikowski up to 297,367 additional shares of its Common Stock
in the event the average closing bid price of the Common Stock does not equal
$12.939 per share for the five trading days immediately prior to January 30,
1999. If any such additional shares are issued, the ownership interest of all
other holders of Common Stock will be diluted in favor of Mr. Konikowski. On a
pro forma basis assuming
39
<PAGE> 44
all of such shares were issued to Mr. Konikowski as of the date of the Closing
of this Offering, Mr. Konikowski would own approximately 13.0% of the
outstanding Common Stock, and each of Steven L. Vanechanos, Jr. and Steve
Vanechanos, Sr. would own approximately 11.5% of the outstanding Common Stock,
respectively.
On September 30, 1996, pursuant to a Stock Purchase Agreement dated such
date among the Company, Megascore and Megascore's shareholders, the Company
acquired all of the issued and outstanding capital stock of Megascore in
exchange for 50,000 shares of Common Stock (adjusted to 13,042 shares as a
result of the 0.2608491-for-one Reverse Stock Split). Prior to such acquisition,
Steven L. Vanechanos, Jr. and Steve Vanechanos, Sr. were the President and Vice
President, Treasurer and Secretary, respectively, and collectively owned of
record 76.4% of the outstanding capital stock, of Megascore. Megascore is
presently a wholly-owned subsidiary of the Company. Megascore is a full-service
systems integrator specializing in distribution, accounting and point-of-sale
computer software consulting services for suppliers and retailers.
SIGNIFICANT SHAREHOLDER
As of September 1, 1997, Michael Vanechanos is the beneficial owner of
170,224 shares of Common Stock representing 8% of the issued and outstanding
Common Stock of the Company as of such date. He purchased 85,448 of those shares
from the Company for $100,000 in January 1996, and received 71,734 of those
shares as a finder's fee from Berkshire Financial Corp. in connection with the
Company's acquisition of DWTS. He purchased 13,042 of those shares in an open
market transaction on April 30, 1997. Mr. Vanechanos is presently employed as a
securities trader at H.J. Meyers & Co., Inc., the Representative in this
Offering and the placement agent in the Interim Financings. Michael Vanechanos
is the brother of Steven L. Vanechanos, Jr., the Company's Chairman of the Board
and Chief Executive Officer, and is the son of Steve Vanechanos, Sr., the
Company's Vice President, Treasurer, Secretary and a director. See "PRINCIPAL
STOCKHOLDERS." Each of the foregoing individuals disclaims beneficial ownership
of the shares of Common Stock owned by the others.
OFFICE LEASE
The Company leases a portion of its office facility from the Mask Group, a
partnership in which Kenneth R. Konikowski, the Executive Vice President of the
Company and a director, and his wife are partners. The annual rent under such
lease is $37,500, subject to fixed annual increases of 3%, plus the payment of
condominium maintenance fees. The lease expires on December 31, 2002. The
Company believes that the rent charged by the Mask Group approximates fair
market rents in the area. The Company is jointly obligated with the Mask Group
on approximately $247,000 of indebtedness (as of August 1, 1997) to a third
party lender to the Mask Group relating to a mortgage loan on those premises.
The Mask Group is making the payments on that loan, and has informed the Company
that the loan is current.
OFFICER LOANS
Steven L. Vanechanos, Jr. has loaned $75,000 to the Company, $23,000 of
which was advanced on July 11, 1997, $35,000 of which was advanced on July 28,
1997, $500 of which was advanced on August 1, 1997, and $17,000 of which was
advanced on August 11, 1997. Steve Vanechanos, Sr. has loaned $40,000 to the
Company, $7,000 of which was advanced on July 23, 1997, $30,000 of which was
advanced on July 28, 1997, and $3,000 of which was advanced on August 20, 1997.
These loans bear interest at 8% per annum, and will be repaid from the proceeds
of this Offering. See "USE OF PROCEEDS."
FUTURE TRANSACTIONS
All future transactions between the Company and its officers, directors,
principal shareholders and affiliates will be approved by a majority of the
Board of Directors, including a majority of the independent and disinterested
outside directors on the Board of Directors, and will have terms no less
favorable to the Company than could be obtained from unrelated third parties.
SHAREHOLDINGS OF CERTAIN PRINCIPALS
In connection with August 1997 Financing, the placement agent, H.J. Meyers
& Co., Inc., required that Steven L. Vanechanos, Jr. and Steve Vanechanos, Sr.
make a contribution to the capitalization of the
40
<PAGE> 45
Company. That contribution was in the form of a relinquishment of a portion of
their previously outstanding Common Stock. In particular, Steven L. Vanechanos,
Jr. and Steve Vanechanos, Sr. each contributed to the Company, for a total of
$1.00 paid to each, 50,000 shares of Common Stock of the Company owned by them.
That relinquishment is reflected in the number and percentage of the outstanding
Common Stock owned by those persons in the table set forth under "PRINCIPAL
STOCKHOLDERS." As a result of that relinquishment of shares, the total number of
outstanding shares of Common Stock will not be changed as a result of the August
1997 Financing. See "INTERIM FINANCINGS."
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<PAGE> 46
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, $.0001 par value per share, and 5,000,000 shares of undesignated
Preferred Stock. As of the date of this Prospectus (and giving effect to the
Reserve Stock Split described in this Prospectus), there were issued and
outstanding 1,999,950 shares of Common Stock and no shares of Preferred Stock.
An additional 112,488 shares of Common Stock are issuable in connection with the
April 1997 Financing and an additional 100,000 shares of Common Stock are
issuable in connection with the August 1997 Financing, although 100,000 shares
also will be contributed to the Company and held as Treasury Stock in connection
therewith. See "INTERIM FINANCINGS" and "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS." As of September 1, 1997, the Common Stock is held of record by
approximately 3,255 stockholders.
COMMON STOCK
Holders of Common Stock have the right to cast one vote, in person or by
proxy, for each share owned of record on the record date (as defined in the
Company's by-laws) on all matters submitted to a vote of the holders of Common
Stock, including the election of directors. Holders of Common Stock do not have
cumulative voting rights, which means that holders of more than 50% of the
outstanding shares voting for the election of the class of directors to be
elected by the Common Stock can elect all of such directors, and, in such event,
the holders of the remaining shares of Common Stock will be unable to elect any
of the Company's directors.
Holders of the Common Stock are entitled to share ratably in such dividends
as may be declared by the Board of Directors out of funds legally available
therefor, when, as and if declared by the Board of Directors and are also
entitled to share ratably in all of the assets of the Company available for
distribution to holders of shares of Common Stock upon the liquidation,
dissolution or winding up of the affairs of the Company. Holders of Common Stock
do not have preemptive, subscription or conversion rights. All outstanding
shares of Common Stock are, and those shares of Common Stock offered hereby will
be, validly issued, fully paid and non-assessable.
REPRESENTATIVE'S WARRANTS
In connection with this Offering, the Company issued to the Representative
warrants to purchase an aggregate of 100,000 shares of Common Stock. See
"UNDERWRITING" for a description of the material terms of the Representative's
Warrant.
STOCK OPTION PLANS
The Company has adopted a 1997 Employee Stock Option Plan pursuant to which
it may issue options to purchase up to 234,764 shares of Common Stock. The
Company has granted 203,392 options under the Employee Plan. The Company also
has adopted the 1997 Stock Option Plan for Outside Directors, pursuant to which
it may issue options to purchase up to 78,254 shares of Common Stock. The
Company has granted 15,648 options under the Director Plan. See
"MANAGEMENT -- Stock Option Plans."
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of undesignated
Preferred Stock ("Undesignated Preferred Stock"). The Undesignated Preferred
Stock may be issued in series, and shares of each series will have such rights
and preferences as are fixed by the Board of Directors in the resolutions
authorizing the issuance of that particular series. In designating any series of
Undesignated Preferred Stock, the Board of Directors may, without further action
by the holders of Common Stock, fix the number of shares constituting that
series and fix the dividend rights, dividend rate, conversion rights, voting
rights (which may be greater or lesser than the voting rights of the Common
Stock), rights and terms of redemption (including any sinking fund provisions),
and the liquidation preferences of the series of Undesignated Preferred Stock.
The holders of
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<PAGE> 47
any series of Undesignated Preferred Stock, when and if issued, are expected to
have priority claims to dividends and to any distributions upon liquidation of
the Company, and they may have other preferences over the holders of the Common
Stock.
The Board of Directors may issue series of Undesignated Preferred Stock
without action by the stockholders of the Company. Accordingly, the issuance of
Undesignated Preferred Stock may adversely affect the rights of the holders of
the Common Stock. In addition, the issuance of Undesignated Preferred Stock may
be used as an "anti-takeover" device without further action on the part of the
stockholders. Issuance of Undesignated Preferred Stock may dilute the voting
power of holders of Common Stock (such as by issuing Undesignated Preferred
Stock with super-voting rights) and may render more difficult the removal of
current management, even if such removal may be in the shareholders' best
interest. The Company has no
present intention to issue any shares of Undesignated Preferred Stock. In
addition, the Company has, pursuant to the Underwriting Agreement, agreed with
the Representative that the Company will not sell or otherwise issue any shares
of preferred stock for two years following this Offering, without the
Representative's prior written consent.
CERTAIN ANTI-TAKEOVER PROVISIONS IN THE CERTIFICATE OF INCORPORATION AND BYLAWS
Classified Board of Directors and Related Provisions
The Company's Certificate of Incorporation provides that the Board of
Directors is to be divided into three classes which shall be as nearly equal in
number as possible. The directors in each class will hold office following their
initial appointment to office for terms of one year, two years and three years,
respectively and, upon reelection, will serve for terms of three years
thereafter. Each director will serve until his or her successor is elected and
qualified.
The Company's Certificate of Incorporation provides that a director may be
removed by shareholders only upon the affirmative vote of at least a majority of
the votes which all shareholders would be entitled to cast. The Company's
Certificate of Incorporation further provides that the Board of Directors shall
have the exclusive power to fill any vacancy occurring in the Board of
Directors, including a vacancy created by an increase in the number of
directors, by a majority vote of the directors then in office. Any director so
elected shall serve until the next annual meeting of shareholders.
A classified board of directors makes it more difficult for shareholders,
including those holding a majority of the outstanding shares of Common Stock, to
force an immediate change in the composition of a majority of the Board of
Directors. Because the terms of only one-third of the incumbent directors expire
each year, it requires at least two annual elections for the shareholders to
change a majority, whereas a majority of a non-classified board may be changed
in one year. In the absence of the provisions of the Company's Certificate of
Incorporation classifying the Board, all of the directors would be elected each
year.
Other Antitakeover Provisions
The Company's Certificate of Incorporation contains certain other
provisions that may also have the effect of deterring or discouraging, among
other things, a non-negotiated tender or exchange offer for the Common Stock, a
proxy contest for control of the Company, the assumption of control of the
Company by a holder of a large block of the Common Stock and the removal of the
Company's management. These provisions: (i) empower the Board of Directors,
without shareholder approval, to issue preferred stock, the terms of which,
including voting power, are set by the Board; (ii) restrict the ability of
shareholders to remove directors; (iii) require that shareholders with at least
80% of total voting power approve mergers and other similar transactions if the
transaction is not approved, in advance, by the Board of Directors; (iv)
prohibit shareholders' actions without a meeting; (v) require that shareholders
with at least 80%, or in certain instances a majority, of total voting power
approve the repeal or further amendment of the Certificate of Incorporation;
(vi) limit the right of a person or entity to vote more than 10% of the
Corporation's voting stock; and (vii) require that shares with at least 66 2/3%
of total voting power approve any repeal or amendment of the Bylaws.
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<PAGE> 48
TRANSFER AGENT
The Company has appointed American Stock Transfer & Trust Company, 40 Wall
Street, New York, New York, 10005 as Transfer Agent for its Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 3,862,438 shares of
Common Stock outstanding. Of those shares, a total of 2,055,438 shares,
including the 1,750,000 shares offered hereby will be freely tradeable without
further registration under the Securities Act.
Up to 175,000 additional shares of Common Stock may be purchased by the
Representative after the first anniversary date of this Prospectus through the
exercise of the Representative's Warrant. Any and all shares of Common Stock
purchased upon exercise of the Representative's Warrant will be freely
tradeable, provided that the Company satisfies certain securities registration
and qualification requirements in accordance with the terms of the
Representative's Warrant. See "UNDERWRITING."
Of the expected 3,862,438 shares of Common Stock outstanding upon
completion of this Offering, approximately 1,807,000 shares of Common Stock are
"restricted securities" within the meaning of Rule 144 of the Securities Act.
See "UNDERWRITING," "RISK FACTORS -- Shares Eligible For Future Sale."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act,
will be entitled to sell within any three-month period a number of shares
beneficially owned for at least one year that does not exceed the greater of (i)
1% of the then outstanding shares of Common Stock, or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice, and the availability of current public information about
the Company. However, a person who is not deemed to have been an affiliate of
the Company during the 90 days preceding a sale by such person, and who has
beneficially owned shares of Common Stock for at least two years, may sell such
shares without regard to the volume, manner of sale, or notice requirements of
Rule 144.
Prior to this Offering, there has been a limited public market for the
Company's securities. Following this Offering, the Company cannot predict the
effect, if any, that sales of Common Stock pursuant to Rule 144 or otherwise, or
the availability of such shares for sale, will have on the market price
prevailing from time to time. Nevertheless, sales by the current stockholders of
substantial amounts of Common Stock in the public market could adversely affect
prevailing market prices for the Common Stock. In addition, the availability for
sale of a substantial amount of Common Stock acquired through the exercise of
the Representative's Warrant could adversely affect prevailing market prices for
the Common Stock. The Company's officers, Directors and holders of 5% of the
outstanding shares of Common Stock have agreed not to sell the shares
beneficially owned by such persons for a period of 24 months from the date of
this Prospectus without the Representative's written consent. In addition, the
Company has agreed that it will not issue any shares of Common Stock for a
period of 12 months following the date of this Prospectus without the
Representative's written consent, except for shares of Common Stock issuable
upon exercise of stock options that have been or may be granted under the
Employee Plans.
44
<PAGE> 49
UNDERWRITING
The Underwriters named below have agreed, subject to the terms and
conditions of the Underwriting Agreement between the Company and H.J. Meyers &
Co., Inc., as Representative of the Underwriters, to purchase from the Company
the number of shares of Common Stock set forth opposite their names. The 10%
underwriting discount set forth on the cover page of this Prospectus will be
allowed to the Underwriters at the time of delivery to the Underwriters of the
shares of Common Stock so purchased.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
NAME OF UNDERWRITER PURCHASED
------------------------------------------------------------------ ---------
<S> <C>
H.J. Meyers & Co., Inc............................................
--------
TOTAL...................................................
========
</TABLE>
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the front cover page of this Prospectus, and at such price less a
concession not in excess of $ per share of Common Stock to certain
dealers who are members of the National Association of Securities Dealers, Inc.,
of which the Underwriters may allow and such dealers may reallow concessions not
in excess of $ per share of Common Stock to certain other dealers. The
public offering price and concession and discount may be changed by the
Underwriters after the initial public offering.
The Company has granted to the Underwriters an over-allotment option
expiring at the close of business on the 45th day subsequent to the date of this
Prospectus, to purchase up to an additional 262,500 shares of Common Stock at
the public offering price, less the underwriting discount set forth on the cover
page of this Prospectus. The Underwriters may exercise such option only to
satisfy over-allotments in the sale of the shares of Common Stock.
The Company has agreed to pay to the Representative a non-accountable
expense allowance equal to 3% of the total proceeds of this Offering, or
$210,000 (and 3% of the total proceeds from the sale of any shares of Common
Stock pursuant to the exercise of the over-allotment option, or $237,000 if the
Underwriters exercise the over-allotment option in full). In addition to the
Underwriters' commissions and the Representative's expense allowance, the
Company is required to pay the costs of qualifying the shares of Common Stock
under federal and state securities laws, together with legal and accounting
fees, printing and other costs in connection with this Offering.
At the closing of this Offering, the Company will issue to the
Representative, for nominal consideration, the Representative's Warrant to
purchase up to 100,000 shares of Common Stock of the Company. The shares of
Common Stock subject to the Representative's Warrant are identical to the shares
of Common Stock sold to the public, except for the purchase price and certain
registration rights. The Representative's Warrant will be exercisable for a
four-year period commencing one year from the date of this Prospectus, at an
exercise price of $4.80 per share of Common Stock (that being 120% of the
initial public offering price per share of Common Stock). The Representative's
Warrant will not be transferable prior to their initial exercise date except to
successors in interest to the Representative and/or one or more officers of the
Representative.
The Representative's Warrant will contain anti-dilution provisions
providing for appropriate adjustment in the event of any recapitalization,
reclassification, stock dividend, stock split or similar transactions. The
Representative's Warrant does not entitle the Representative to any rights as a
shareholder of the Company until such warrants are exercised and the shares of
Common Stock are purchased thereunder.
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<PAGE> 50
The Representative's Warrant and the shares of Common Stock issuable
thereunder may not be offered for sale to the public except in compliance with
the applicable provisions of the Act. The Company has agreed that if it causes a
post-effective amendment to the Registration Statement of which this Prospectus
is a part, or a new registration statement or offering statement under
Regulation A, to be filed with the Securities and Exchange Commission
("Commission"), the Representative shall have the right during the life of the
Representative's Warrant to include therein for registration the
Representative's Warrant and/or the shares of Common Stock issuable upon their
exercise at no expense to the Representative. Additionally, the Company has
agreed that, upon demand by the holder(s) of at least 50% of the (i) total
unexercised Representative's Warrant and (ii) shares of Common Stock issued upon
the exercise of the Representative's Warrant, made on no more than two separate
occasions during the exercise period of the Representative's Warrant, the
Company shall use its best efforts to register the Representative's Warrant
and/or any of the shares of Common Stock issuable upon the exercise thereof,
provided that the Company has available current financial statements, the
initial such registration to be at the Company's expense and the second at the
expense of the holder(s).
For the period during which the Representative's Warrant are exercisable,
the holder(s) will have the opportunity to profit from a rise in the market
value of the Company's Common Stock, with a resulting dilution in the interests
of the other stockholders of the Company. The holder(s) of the Representative's
Warrant can be expected to exercise the warrants at a time when the Company
would, in all likelihood, be able to obtain any needed capital from an offering
of its unissued Common Stock on terms more favorable to the Company than those
provided for in the Representative's Warrant. Such facts may materially
adversely affect the terms on which the Company can obtain additional financing.
During the three year period from the closing of the Offering, the
Representative has been granted a right of first refusal to act as underwriter
or agent for any public or private offering or sale of securities by the
Company, its officers, directors and 5% shareholders.
The Company has agreed to enter into a one year consulting agreement with
the Representative, pursuant to which the Representative will act as financial
consultant to the Company, commencing upon the closing date of this Offering.
Under the terms of this agreement, the Representative, to the extent reasonably
required in the conduct of the business of the Company and at the prior written
request of the President of the Company, has agreed to evaluate the Company's
managerial and financial requirements, assist in the preparation of budgets and
business plans, advise with regard to sales planning and sales activities, and
assist in financial arrangements. The Representative will make available
qualified personnel for this purpose. The non-refundable consulting fee of
$72,000 will be payable, in full, on the closing date of this Offering.
The Company has agreed that it will engage a public relations firm
acceptable to the Representative and the Company. The Company also has agreed to
maintain a relationship with such public relations firm for minimum period of
two years and on such other terms as are acceptable to the Representative.
The Company has also agreed that, for a period of two years from the
closing of this Offering, if it participates in any merger, consolidation or
other transaction which the Representative has brought to the Company (including
an acquisition of assets or stock for which it pays, in whole or in part, with
shares of the Company's Common Stock or other securities), which transaction is
consummated within three years of the closing of this Offering, then it will pay
for the Representative's services an amount equal to 5% of the first $3.0
million of value paid or value received in the transaction, 3.5% of any
consideration above $3.0 million and less than $5.0 million and 2% of any
consideration in excess of $5.0 million. The Company has also agreed that if,
during this two-year period, someone other than the Representative brings such a
merger, consolidation, or other transaction to the Company, and if the Company
in writing retains the Representative for consultation or other services in
connection therewith, than upon consummation of the transaction the Company will
pay to the Representative as a fee the appropriate amount as set forth above or
as otherwise agreed to between the Company and the Representative.
The Company has agreed that for a period of one year from the date of this
Prospectus the Company will not sell or otherwise dispose of any securities
without the prior written consent of the Representative, which consent shall not
be unreasonably withheld, with the exception of shares of Common Stock issued
pursuant to the exercise of options, warrants or other convertible securities
outstanding prior to the date of this Prospectus.
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<PAGE> 51
The Company will not sell or issue any securities pursuant to Regulation S under
the Securities Act without the Representative's prior written consent.
The Company's officers, directors and 5% shareholders have agreed that for
a period of 24 months from the date of this Prospectus they will not offer,
sell, contract to sell or otherwise dispose of any shares of Common Stock
acquired prior to this Offering, without the prior written consent of the
Representative.
For a period of 36 months from the closing of this Offering, the
Representative is entitled to designate one member as a nominee for election to
the Company's Board of Directors. Steven L. Vanechanos, Jr. and Steve
Vanechanos, Sr. have agreed to vote their shares in favor of such nominee. If
the Representative elects not to nominate a Board Member, then it shall have the
right to select a person to act as an observer to attend all meetings of the
Board of Directors. The Company has agreed to hold at least four meetings and to
indemnify the Representative's observer against any claims arising out of his
participating at meetings.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
the Registration Statement, including liabilities under the Act.
The offering price of the securities being offered hereby was determined by
negotiation between the Company and the Representative. Factors considered in
determining such price include the history of and the prospects for the industry
in which the Company competes, the past and present operations of the Company,
the future prospects of the Company, the ability of the Company's management,
the earnings, net worth and financial condition of the Company, the general
condition of the securities markets at the time of this Offering, and the prices
of similar securities of comparable companies.
INTERIM FINANCINGS
In April, 1997, the Company completed a private placement of $600,000 of
unsecured subordinated Promissory Notes and 112,488 shares of Common Stock (the
"April 1997 Financing"). The April 1997 Financing consisted of the sale by the
Company of 24 units, each composed of a $25,000 unsecured, subordinated
Promissory Note and 4,687 shares of Common Stock. Those notes will be repaid
from the proceeds of this Offering.
The net proceeds to the Company from the April 1997 Financing totaled
approximately $492,000. Those net proceeds were used for Company operations from
April 1997 through August 1997. $50,000 was used to repay officer loans, $60,000
was used to pay legal and accounting expenses associated with the Company's
filing of its periodic reports under the Securities and Exchange Act of 1934 and
the holding of its 1997 Annual Meeting of Stockholders, and the balance,
approximately $382,000, was used to fund operating deficits incurred by the
Company during that period. Of those operating deficits, the Company believes
that approximately $150,000 is allocable to the support of the marketing
activities of the Company, approximately $100,000 is allocable to the
compensation of personnel in operations and other costs of services, and the
balance of $132,000 is allocable to the support of the general and
administrative activities of the Company.
H.J. Meyers, Inc., the Representative, acted as placement agent in
connection with the April 1997 Financing and received commissions and a
non-accountable expense allowance in the aggregate amount of $78,000.
In August, 1997, the Company completed a second private placement (the
"August 1997 Financing") of $500,000 of unsecured, subordinated Promissory Notes
and 100,000 shares of Common Stock divided into 20 units, each composed of a
$25,000 unsecured, subordinated Promissory Note and 5,000 shares of Common
Stock. Those notes will be repaid from the proceeds of this Offering.
The net proceeds to the Company from the August Financing were
approximately $427,500, which are being and will be used for Company operations,
including sales and marketing expense, product development, operations, and
working capital.
H.J. Meyers, Inc. acted as placement agent in connection with the August
1997 Financing and received commissions and a non-accountable expense allowance
in the aggregate amount of $65,000.
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<PAGE> 52
For financial accounting purposes, the Company has allocated the amounts
raised in each private placement between the Promissory Notes and the shares of
Common Stock included in the units, based upon the "fair value" of the Common
Stock at the time of issuance of the respective units. In the case of the April
Financing, the Company allocated $450,000 to the shares and the remaining
$150,000 to the notes. In the case of the August Financing, the Company
allocated $400,000 to the shares and the remaining $100,000 to the notes. The
difference between the face amount of the notes and the aforesaid amounts
allocated to them represents debt discount. Thus, the debt discount for the
April notes is $450,000 and the debt discount for the August notes is $400,000.
Further, the Company incurred deferred financing fees of $108,000 in the
April 1997 Financing and $72,500 in the August 1997 Financing.
The debt discount and deferred financing fees are amortized over the life
of the debt and charged to operations. A portion of the debt discount and
deferred financing fees have been charged to operations prior to the date of
this Prospectus, and the unamortized balance will be charged to operations when
the debt is repaid, which is expected to be out of the net proceeds of this
Offering.
LEGAL MATTERS
Certain legal matters relating to the Common Stock offered hereby have been
passed upon for the Company by the law firm of Stevens & Lee, Wayne,
Pennsylvania and Cherry Hill, New Jersey. Certain legal matters in connection
with the Offering will be passed upon for the Representative by Harter, Secrest
& Emery, Rochester, New York.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act with respect to the securities offered hereby (the
"Registration Statement"). This Prospectus, which is a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and exhibits thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. For further information with
respect to the Company and such securities, reference is hereby made to the
Registration Statement and the exhibits filed therewith. The Company hereby
undertakes to provide to each person to whom this Prospectus is delivered, upon
written or oral request, a copy of any and all of the information that has been
incorporated by reference in this Prospectus. Such request should be directed to
DynamicWeb Enterprises, Inc., 271 Route 46 West, Building F, Suite 209,
Fairfield, New Jersey, 07004; telephone (973) 244-1000; Attention: Corporate
Secretary.
In addition, the Company is subject to the informational requirements of
the Securities and Exchange Act of 1934 and, in accordance therewith, files
reports, proxy statements and other information with the Commission. All of
these documents may be inspected at the office of the Commission without charge,
450 Fifth Street, N.W., Washington, D.C. 20549 or certain regional offices of
the Commission, located at Seven World Trade Center, 13th Floor, New York, New
York 10048 or 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
Commission also maintains a Web Site at "http://www.sec.gov" where such material
filed electronically can be examined. Copies of such material may also be
obtained upon payment to the Commission of prescribed fees and rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, DC 20549.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and with such other periodic reports as
the Company may from time to time deem appropriate or as may be required by law.
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<PAGE> 53
EXPERTS
The financial statements of the Company at September 30, 1996 and for each
of the fiscal years in the two year period then ended, and the financial
statements of Software Associates, Inc. at June 30, 1996 and for each of the
fiscal years in the two year period then ended, appearing in this Prospectus and
Registration Statement have been audited by Richard A. Eisner & Company, LLP,
independent auditors, as set forth in their reports thereon (both of which call
attention to substantial doubts as to the ability of the respective companies to
continue as a going concern) appearing elsewhere herein, and are included herein
in reliance upon such reports given upon the authority of said firm as experts
in auditing and accounting.
49
<PAGE> 54
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
I N D E X
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES:
REPORT OF INDEPENDENT AUDITORS.................................................. F-2
CONSOLIDATED BALANCE SHEETS AS AT SEPTEMBER 30, 1996 AND (UNAUDITED) AS AT JUNE
30, 1997........................................................................ F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND
SEPTEMBER 30, 1995 AND (UNAUDITED) FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND
JUNE 30, 1996................................................................... F-4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995 AND (UNAUDITED) FOR THE NINE MONTHS
ENDED JUNE 30, 1997............................................................. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND
SEPTEMBER 30, 1995 AND (UNAUDITED) FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND
JUNE 30, 1996................................................................... F-6
NOTES TO FINANCIAL STATEMENTS................................................... F-7
PRO FORMA:
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS AND UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENT ADJUSTMENTS....................................... F-17
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET........................ F-18
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS.............. F-19
SOFTWARE ASSOCIATES, INC.:
REPORT OF INDEPENDENT AUDITORS.................................................. F-20
BALANCE SHEET AS AT JUNE 30, 1996............................................... F-21
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1996 AND JUNE 30, 1995..... F-22
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY FOR THE YEARS ENDED JUNE 30, 1996
AND JUNE 30, 1995............................................................... F-23
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1996 AND JUNE 30, 1995.... F-24
NOTES TO FINANCIAL STATEMENTS................................................... F-25
UNAUDITED CONDENSED BALANCE SHEET AS AT SEPTEMBER 30, 1996...................... F-28
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995.......................... F-29
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995....................................... F-30
NOTES TO UNAUDITED FINANCIAL STATEMENTS......................................... F-31
</TABLE>
F-1
<PAGE> 55
Board of Directors and Stockholders
DynamicWeb Enterprises, Inc.
Fairfield, New Jersey
Upon the completion of the transactions described in Note J[5], we will be
in the position to issue the following opinion:
Richard A. Eisner & Company, LLP
New York, New York
September 5, 1997
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
DynamicWeb Enterprises, Inc.
Fairfield, New Jersey
"We have audited the accompanying consolidated balance sheet of DynamicWeb
Enterprises, Inc. and subsidiaries (formerly Seahawk Capital Corporation) as at
September 30, 1996 and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years ended September 30,
1996 and September 30, 1995. 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 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 audits provide a reasonable basis for our opinion.
"In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the financial position of DynamicWeb
Enterprises, Inc. and subsidiaries (formerly Seahawk Capital Corporation) as at
September 30, 1996 and the results of their operations and their cash flows for
the years ended September 30, 1996 and September 30, 1995, in conformity with
generally accepted accounting principles.
"The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B, a substantial
portion of the Company's resources may be depleted before it is able to market
and derive significant revenues from its products and services. These factors
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 B. The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties."
Richard A. Eisner & Company, LLP
New York, New York
April 7, 1997
With respect to Note J[5]
, 1997
F-2
<PAGE> 56
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 174,403 $ 95,818
Accounts receivable, less allowance for doubtful accounts of
$34,328 and $60,928............................................ 70,518 209,035
Prepaid and other current assets.................................. 32,068 31,213
--------- -----------
Total current assets...................................... 276,989 336,066
Property and equipment (Notes D and E).............................. 239,889 278,763
Patents and trademarks, less accumulated amortization of $2,166 and
$3,402............................................................ 19,299 23,257
Customer list, less accumulated amortization of $11,667 (Note
J[2])............................................................. 88,333
Deferred financing fees, less accumulated amortization of $36,000
(Note J[8])....................................................... 72,000
Deferred registration costs (Note J[4])............................. 75,000
--------- -----------
Total..................................................... $ 536,177 $ 873,419
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 34,581 $ 165,415
Accrued expenses and other........................................ 18,487 79,235
Current maturities of long-term debt (Note E)..................... 12,434 8,370
Loans payable -- banks (Note J[9])................................ 24,500
Deferred revenue.................................................. 11,330 18,073
Subordinated notes payable -- interim financing, less unamortized
debt discount of $300,000 (Note J[8][a])....................... 300,000
--------- -----------
Total current liabilities................................. 76,832 595,593
Long-term debt, less current maturities (Note E).................... 197,661 188,084
--------- -----------
Total liabilities......................................... 274,493 783,677
--------- -----------
Commitments (Notes I and J)
Stockholders' equity (Notes A, F and J):
Preferred stock -- par value to be determined with each issue;
5,000,000 shares authorized; none issued
Common stock -- $.0001 par value; 50,000,000 shares authorized;
1,710,408 shares issued and outstanding at September 30, 1996
and 2,112,438 shares issued and to be issued at June 30,
1997........................................................... 171 211
Additional paid-in capital........................................ 676,699 2,236,327
Accumulated deficit............................................... (415,186) (2,146,796)
--------- -----------
Total stockholders' equity................................ 261,684 89,742
--------- -----------
Total..................................................... $ 536,177 $ 873,419
========= ===========
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-3
<PAGE> 57
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
------------------------ -------------------------
1996 1995 1997 1996
---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales (Note H[3]):
System sales............................. $ 147,337 $ 296,763 $ 98,254 $ 107,317
Services................................. 312,730 342,980 399,841 241,100
--------- --------- ----------- ---------
Total............................ 460,067 639,743 498,095 348,417
--------- --------- ----------- ---------
Cost of sales:
System sales............................. 71,205 158,820 33,640 55,800
Services................................. 81,194 84,318 126,990 62,434
--------- --------- ----------- ---------
Total............................ 152,399 243,138 160,630 118,234
--------- --------- ----------- ---------
Gross profit............................... 307,668 396,605 337,465 230,183
--------- --------- ----------- ---------
Expenses:
Selling, general and administrative...... 719,443 364,684 1,006,246 460,631
Research and development................. 28,990 12,000 164,024 15,229
--------- --------- ----------- ---------
Total............................ 748,433 376,684 1,170,270 475,860
--------- --------- ----------- ---------
Operating income (loss).................... (440,765) 19,921 (832,805) (245,677)
Purchased research and development......... (713,710)
Interest expense (including amortization of
debt discount and deferred financing fees
of $186,000 for the nine months ended
June 30, 1997)........................... (23,271) (23,350) (210,585) (14,950)
Interest income............................ 8,806 3,140 3,790 5,494
--------- --------- ----------- ---------
(Loss) before income tax benefit........... (455,230) (289) (1,753,310) (255,133)
Income tax benefit -- deferred............. 21,700
--------- --------- ----------- ---------
NET (LOSS)................................. $ (455,230) $ (289) $(1,731,610) $ (255,133)
========= ========= =========== =========
Net (loss) per common share (Note C[7]).... $ (.27) $ (0) $ (.88) $ (.15)
========= ========= =========== =========
Weighted-average number of shares
outstanding.............................. 1,667,202 1,620,804 1,962,778 1,649,687
========= ========= =========== =========
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-4
<PAGE> 58
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(NOTES A, F AND J)
<TABLE>
<CAPTION>
COMMON STOCK -- RETAINED
PAR VALUE $.0001 ADDITIONAL EARNINGS
------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
---------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance -- October 1, 1994 (Note
A)............................... 1,620,804 $162 $ 228,958 $ 40,333 $ 269,453
Net (loss)....................... (289) (289)
--------- ---- ---------- ----------- -----------
Balance -- September 30, 1995...... 1,620,804 162 228,958 40,044 269,164
Issuance of common stock, net of
$52,250 of costs (Note F)..... 89,604 9 447,741 447,750
Net (loss)....................... (455,230) (455,230)
--------- ---- ---------- ----------- -----------
Balance -- September 30, 1996...... 1,710,408 171 676,699 (415,186) 261,684
Issuance of common stock (Note
J[1])......................... 65,212 7 249,993 250,000
Issuance of common stock to
acquire subsidiary (Note
J[2])......................... 224,330 22 859,978 860,000
Shares issuable with the interim
financing (Note J[8][a])...... 112,488 11 449,989 450,000
Payable to stockholders for
fractional shares............. (332) (332)
Net (loss) (unaudited)........... (1,731,610) (1,731,610)
--------- ---- ---------- ----------- -----------
Balance -- June 30, 1997
(unaudited)...................... 2,112,438 $211 $2,236,327 $ (2,146,796) $ 89,742
========= ==== ========== =========== ===========
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-5
<PAGE> 59
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
---------------------- -------------------------
1996 1995 1997 1996
--------- -------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss).................................................... $(455,230) $ (289) $(1,731,610) $(255,133)
Adjustment to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization............................... 23,644 5,614 34,415 9,919
Stock issued for compensation............................... 10 10
Purchased research and development.......................... 713,710
Deferred income taxes....................................... (21,700)
Amortization of debt discount and deferred financing fees... 186,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable................ 3,739 (24,810) (20,371) 4,635
(Increase) decrease in prepaid expenses and other current
assets.................................................. (6,923) 18,023 855 (5,610)
Increase (decrease) in accounts payable................... 7,801 (1,910) 127,530 13,764
Increase (decrease) in accrued expenses................... 15,293 (2,368) 5,395 9,922
Increase (decrease) in deferred revenue................... 122 (1,549) 6,743 520
--------- -------- ----------- ---------
Net cash (used in) operating activities................. (411,544) (7,289) (699,033) (221,973)
--------- -------- ----------- ---------
Cash flows from investing activities:
Acquisition of property and equipment......................... (23,838) (6,900) (66,152) (19,087)
Proceeds from sale of equipment............................... 1,954
Acquisition of patents and trademarkets....................... (21,220) (245) (4,251) (17,992)
Cash acquired upon acquisition of subsidiary.................. 15,235
--------- -------- ----------- ---------
Net cash (used in) investing activities................. (45,058) (7,145) (53,214) (37,079)
--------- -------- ----------- ---------
Cash flows from financing activities:
Payment of long-term debt..................................... (11,909) (13,772) (7,838) (9,892)
Proceeds from issuance of common stock........................ 597,750 250,000 597,750
Proceeds from loans -- banks.................................. 14,500
Loan from officer/stockholder................................. 50,000
Payment of officer/stockholder loan........................... (50,000)
Proceeds from sale of units consisting of notes and common
stock....................................................... 600,000
Payment of deferred registration costs........................ (75,000)
Payment of deferred financing fees............................ (108,000)
--------- -------- ----------- ---------
Net cash provided by (used in) financing activities..... 585,841 (13,772) 673,662 587,858
--------- -------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 129,239 (28,206) (78,585) 328,806
Cash and cash equivalents, beginning of period.................. 45,164 73,370 174,403 45,164
--------- -------- ----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................ $ 174,403 $ 45,164 $ 95,818 $ 373,970
========= ======== =========== =========
Supplemental schedule of noncash investing and financing
activities:
During the year ended September 30, 1995, the Company financed
$31,316 of property and equipment
On November 30, 1996 the Company acquired Software Associates,
Inc. as described in Note J[2]
Supplemental disclosure of cash flow information:
Cash paid for interest during the period...................... $ 21,271 $ 23,350 $ 18,313 $ 14,950
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-6
<PAGE> 60
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1997 AND PERIODS ENDED JUNE 30, 1997 AND
JUNE 30, 1996)
(NOTE A) -- BASIS OF PRESENTATION:
The accompanying financial statements include the accounts of DynamicWeb
Enterprises, Inc. ("DWE") and its wholly owned subsidiaries, Megascore, Inc.
DynamicWeb Transactions Systems, Inc. ("DWTS") and Software Associates, from the
date of its acquisition (November 30, 1996) (Note J[2]) (collectively the
"Company"). All significant intercompany balances and transactions have been
eliminated.
On March 26, 1996 DWTS was acquired by Seahawk Capital Corporation
("Seahawk"), a publicly held corporation which had 114,759 shares of common
stock outstanding and no assets. Prior to the acquisition, Seahawk distributed
all of its assets to its shareholders. In the acquisition, the shareholders of
DWTS received 1,281,716 shares of Seahawk's common stock. The acquisition is
being accounted for as if DWTS were the acquiring entity. The shares of Seahawk
are accounted for as being outstanding for all periods presented. In connection
with the acquisition, 191,724 shares were issued to a finder and 19,563 shares
were issued for legal fees. At the conclusion of this transaction, there were
1,607,762 shares outstanding.
DWTS, formerly a division of Megascore, Inc. was established as a separate
legal entity on October 31, 1995. On February 7, 1996 DWTS issued all of its
shares of its common stock to Megascore, Inc. On September 30, 1996, DynamicWeb
Enterprises, Inc. acquired all the common stock of Megascore, Inc. for 13,042
shares of its common stock. The transaction was accounted as a combination of
entities under common control. The accompanying financial statements retain the
historical accounting basis for the net assets of Megascore, Inc. and gives
effect to the operations of Megascore, Inc. for all periods presented.
On May 14, 1996, Seahawk changed its name to DynamicWeb Enterprises, Inc.
and concurrently increased the authorized number of shares of its common stock
to 50,000,000 at a $.0001 par value. The accompanying financial statements give
retroactive effect to the above transaction.
(NOTE B) -- THE COMPANY:
DWE is in the business of facilitating electronic commerce transactions
between business entities, developing, marketing and supporting software
products and other services that enable business to engage in electronic
commerce utilizing the Internet and traditional Electronic Data Interchange
("EDI"). DWE offers electronic commerce solutions in EDI and Internet-based
transactions processing.
Megascore, Inc. is a full-service systems integrator specializing in
distribution, accounting and point-of-sale computer software consulting services
for suppliers and retailers.
Software Associates, Inc. is a service bureau engaged in the business of
helping companies realize the benefits of expanding their data processing and
electronic communications infrastructures through the use of EDI.
Although the Company had working capital at September 30, 1996 and has
subsequently raised net proceeds of approximately $742,000 in issuance of stock
and notes (Notes J[1] and J[8][a]), a substantial portion of its resources may
be depleted before the Company markets and derives significant revenues from its
products and services. These factors raise substantial doubt about the Company
ability to continue as a going concern. The Company is planning to raise
additional equity through a proposed public offering of stock (Note J[4]). There
is no assurance that the Company's products and services will be commercially
successful.
F-7
<PAGE> 61
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE C) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] Revenue recognition:
Revenues are recognized when products are shipped, provided that no
significant vendor obligations remain and collection of the resulting receivable
is deemed probable by management. The Company provides customer support to
purchasers of its product and revenues are recognized when services are
provided. The Company enters into contracts with customers whereby revenues are
earned based upon a per transaction fee.
Deferred revenue represent revenues billed in advance for consulting
support services.
[2] Cash equivalents:
The Company considers all highly liquid investment instruments purchased
with a maturity of three months or less to be cash equivalents.
[3] Depreciation:
Property and equipment are recorded at cost. Depreciation is provided on an
accelerated method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is provided over the shorter of the lease
term or the estimated useful life of the asset.
[4] Intangible assets:
a) Patents and trademarks:
Costs to obtain patents and trademarks have been capitalized. The
Company has submitted numerous applications which are currently pending.
These costs are being amortized over five years.
b) Customer list:
Customer list had been valued in connection with the acquisition of
Software Associates, Inc. (Note J[2]) and is being amortized over five
years.
The Company evaluates its long-lived assets for impairment. When an
impairment occurs, the Company would write down its assets.
[5] Research and development:
Research and development costs are charged to expense as incurred.
[6] Income taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 measures deferred income taxes by applying enacted statutory
rates in effect at the balance sheet date to the differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. The resulting asset for the expected future tax benefit to be
derived primarily from net operating loss carryforwards was fully reserved since
the likelihood of realization of the benefit cannot be established.
[7] Loss per share of common stock:
Net loss per share of common stock is based on the weighted average number
of shares outstanding and shares issuable. Contingent shares issuable in
connection with the acquisition of Software Associates, Inc. (Note J[2]) are
excluded from the weighted average shares outstanding.
F-8
<PAGE> 62
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
[8] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[9] Recently issued accounting pronouncements:
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of" ("FASB 121"), and
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FASB 123"). FASB 121 requires, among other things, that entities
identify events or changes in circumstances which indicate that the carrying
amount of a long-lived asset may not be recoverable. FASB 123 encourages
companies, among other things, to establish a fair value based method of
accounting for stock-based compensation plans and requires disclosure thereof on
a fair value basis. The Company believes that adoption of FASB 121 and FASB 123
will not have a material impact on its financial statements. The Company has
elected to continue to account for employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," using intrinsic values with appropriate disclosures
using the fair value based method.
[10] Interim financial information:
The accompanying financial statements as at June 30, 1997 and for the nine
months ended June 30, 1997 and June 30, 1996 are unaudited, but in the opinion
of management of the Company, reflect all adjustments (consisting only of normal
and recurring adjustments) necessary for a fair presentation. The results of
operations for the nine month period are not necessarily indicative of the
results that may be expected for the full year September 30, 1997.
[11] Fair value of financial instruments:
The Company considers its financial instruments and obligations, which are
carried at cost, to approximate fair value due to the near-term due dates.
F-9
<PAGE> 63
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE D) -- PROPERTY AND EQUIPMENT:
Property and equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
SEPTEMBER 30, JUNE 30, USEFUL
1996 1997 LIFE
------------- -------- ---------
<S> <C> <C> <C>
Office facility condominium.......................... $ 156,600 $156,600 20 years
Office equipment..................................... 17,865 18,247 5 years
Computer equipment (includes a capitalized lease of 80,372 117,167 5 years
$10,000)...........................................
Automobiles.......................................... 33,876 16,221 5 years
Leasehold improvements............................... 38,125
-------- --------
288,713 346,360
Accumulated depreciation and amortization............ 90,224 108,997
-------- --------
198,489 237,363
Land................................................. 41,400 41,400
-------- --------
$ 239,889 $278,763
======== ========
</TABLE>
(NOTE E) -- LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- --------
<S> <C> <C>
*Mortgage payable -- due July 2015; payable in varying monthly
installments at an interest rate at the lower of prime plus
2% or 14.25%................................................ $ 190,805 $188,741
Auto loans -- due through June 1999 payable in aggregate
monthly installments of $767 at interest rates of 5.9% and
10.0%....................................................... 19,290 7,508
Other......................................................... 205
-------- --------
Total indebtedness.................................. 210,095 196,454
Less current maturities....................................... 12,434 8,370
-------- --------
Noncurrent portion.................................. $ 197,661 $188,084
======== ========
</TABLE>
- ---------------
* Collateralized by an office facility condominium and land with a net book
value of approximately $188,000 at September 30, 1996 and approximately
$182,000 at June 30, 1997.
F-10
<PAGE> 64
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt for the next five years as at September 30,
1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
----------------------------------------------------------
<S> <C>
1997.................................................... $ 12,434
1998.................................................... 12,945
1999.................................................... 7,411
2000.................................................... 4,500
2001.................................................... 4,500
Thereafter.............................................. 168,305
--------
Total........................................... $210,095
========
</TABLE>
(NOTE F) -- STOCKHOLDERS' EQUITY:
On March 26, 1996, the Company completed a stock offering under Regulation
S, whereby it sold 89,604 shares of its common stock for $500,000 less fees in
connection with such offering of $52,250 for net proceeds of $447,750.
(NOTE G) -- INCOME TAXES:
[1] The Company has a federal and state net operating loss carryforward of
approximately $400,000 at September 30, 1996 and approximately $1,275,000 at
June 30, 1997 which expires through 2012. In addition at June 30, 1997, the
Company has federal and state net operating loss carryovers of $40,000 and
$36,000 attributable to Megascore, Inc. and Software Associates, Inc. which may
be used to offset income earned by those companies. The tax benefits of these
deferred tax assets are fully reserved for since the likelihood of realization
of the benefit cannot be established.
The Tax Reform Act of 1986 contains provisions which limits the net
operating loss carryforwards available for use in any given year should certain
events occur, including significant changes in ownership interests. If the
Company is successful in completing a proposed public offering, the utilization
of its net operating loss carryover may be limited.
[2] The tax effects of principal temporary differences and net operating
loss carryforwards are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- ---------
<S> <C> <C>
Asset:
Federal and state operating loss carryforwards............. $ 148,000 $ 540,000
Accounts receivable allowance.............................. 13,000 24,000
Accrued expense............................................ 5,000
-------- --------
Total.............................................. 161,000 569,000
Liability:
Accrual basis to cash basis adjustments.................... (13,000)
-------- --------
Net balance................................................ 161,000 556,000
Valuation allowance........................................ (161,000) (556,000)
-------- --------
Net deferred tax asset..................................... $ 0 $ 0
======== ========
</TABLE>
F-11
<PAGE> 65
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the statutory Federal income tax rate of 34% and
the effective (benefit) are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
--------------- ---------------
1996 1995 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Statutory rate (benefit).......................... (34.0)% (34.0)% (34.0)% (34.0)%
Nondeductible items............................... 14.3
Valuation allowance............................... 34.0 34.0 18.5 34.0
------ ------ ------ ------
Effective tax rate (benefit)...................... 0% 0% (1.2)% 0%
====== ====== ====== ======
</TABLE>
(NOTE H) -- CONCENTRATION OF CREDIT RISKS:
[1] Cash and cash equivalents:
The Company places its cash and cash equivalents at various financial
institutions. At times, such amounts might be in excess of the FDIC insurance
limit.
[2] Accounts receivable:
The Company routinely evaluates the credit worthiness of its customers to
limit its concentration of credit risk with respect to its trade receivables.
[3] Significant customers:
The Company had one customer that accounted for 23% of net sales for the
year ended September 30, 1995 and two customers that accounted for 16% and 10%
of net sales for the year end September 30, 1996.
The Company had two customers that accounted for 15% and 11% of net sales
for the nine months ended June 30, 1996 and one customer that accounted for 13%
of net sales for the nine months ended June 30, 1997.
(NOTE I) -- COMMITMENTS:
Leases:
On October 1, 1996, the Company signed an operating lease for office space
which expires in October 2001. In addition, a subsidiary occupies office space
which is described in Note J[2]. The following are minimum annual rental
payments:
<TABLE>
<CAPTION>
PERIOD ENDING JUNE 30,
----------------------------------------------------------
<S> <C>
1998.................................................... $ 80,000
1999.................................................... 82,000
2000.................................................... 83,000
2001.................................................... 86,000
2002.................................................... 61,000
Thereafter.............................................. 24,000
----------
Total........................................... $416,000
==========
</TABLE>
Rent expense for the nine months ended June 30, 1997 was approximately
$48,200.
F-12
<PAGE> 66
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE J) -- SUBSEQUENT EVENTS:
[1] Private placement:
On November 21, 1996, pursuant to Regulation D, the Company sold 65,212
shares of its common stock for $250,000.
[2] Acquisition and related party transaction:
On November 30, 1996, the Company entered into a stock purchase agreement
with Software Associates, Inc. and its sole shareholder (the "SA Agreement")
whereby the Company acquired all the issued and outstanding common stock of
Software Associates, Inc. The Company exchanged 224,330 shares of its common
stock for all of the issued and outstanding shares of Software Associates, Inc.
The Company further agreed to issue up to 297,367 additional shares of its
common stock in the event that the average closing bid price of the Company's
common stock does not equal $12.939 per share for the five trading days
immediately prior to January 30, 1999. In connection with this transaction, the
Company incurred approximately $25,000 of professional fees.
The SA Agreement also requires that the Company issue options for the
purchase of 6,521 shares of its common stock to employees of Software
Associates, Inc.
In connection with the acquisition, the Company entered into a five-year
employment contract with the sole shareholder/president of Software Associates,
Inc. The agreement provides for an annual salary of approximately $136,000 and
includes a discretionary bonus as determined by the Company's Board of
Directors.
Software Associates, Inc., occupies its office space through December 31,
2002, pursuant to a lease which was amended on September 5, 1997 from a
partnership whose partners are the Executive Vice President of the Company and
his wife. The lease provides for an annual increase of three percent and
requires the company to pay condominium maintenance fees. The partnership and
Software Associates, Inc. are jointly liable on the mortgage which was
approximately $249,000 as at November 30, 1996; the debt is being paid by the
partnership, and matures in August 2019. The Company is informed that the
partnership's mortgage balance is current.
The purchase price was recorded as follows at November 30, 1996:
<TABLE>
<S> <C>
Current assets.................................................... $133,381
Fixed assets...................................................... 5,167
Purchased research and development................................ 713,710
Customer list..................................................... 100,000
Current liabilities............................................... (67,258)
--------
$885,000
========
</TABLE>
Purchased research and development was charged to operations upon
acquisition. The acquisition was recorded as a purchase.
F-13
<PAGE> 67
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The condensed unaudited pro forma information of the Company and Software
Associates, Inc. for the year ended September 30, 1996 and September 30, 1995
and for the nine months ended June 30, 1997 are presented as if the acquisition
of Software Associates, Inc. occurred on October 1, 1994. The pro forma
information is not necessarily indicative of the results that would have been
reported had the acquisition occurred on October 1, 1994, nor is it indicative
of the Company's future results.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED
------------------------- JUNE 30,
1996 1995 1997
---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net sales..................................... $1,158,000 $1,432,000 $ 625,000
========== ========== ===========
Net (loss).................................... $ (570,000) $ (10,000) $(1,007,000)*
========== ========== ===========
(Loss) per share.............................. $ (.30) $ (.00) $ (.50)
========== ========== ===========
Weighted-average shares outstanding........... 1,891,532 1,845,134 2,012,103
========== ========== ===========
</TABLE>
- ---------------
* Excludes a charge of approximately $714,000 for purchased research and
development appearing in the historical financial statements for the nine
months ended June 30, 1997.
[3] Loans from officers:
In February and March 1997, the Company received a loan from its Chief
Executive Officer ("CEO") of $50,000 which the Company repaid from the net
proceeds of the private placements described in Notes J[1] and J[8][a]. The
Company subsequently received additional loans from the Company's CEO and Vice
President through August 20, 1997 for approximately $115,000 which is expected
to be repaid from the net proceeds of the Company's proposed public offering
described in Note J[4].
[4] Contemplated public offering:
On February 1, 1997, the Company signed a letter of intent with an
underwriter with respect to a contemplated public offering of the Company's
securities. The Company expects to incur significant additional costs in
connection therewith. In the event that the offering is not successfully
completed, such costs will be charged to expense.
[5] Stockholders' equity:
On March 7, 1997 the Board of Directors approved a reverse stock split for
each share of common stock to be converted into .2608491 of one share and
authorized 5,000,000 shares of preferred stock. On June 12, 1997, the
stockholders approved such transaction to be effective on the effective date of
the offering referred to in Note J[4]. Cash is to be issued to the stockholders
for any fractional shares. The accompanying financial statements give
retroactive effect to this transaction.
[6] Director stock option plan:
On April 28, 1997, the Board of Directors, adopted a stock option plan for
outside directors (the "Director Plan") under which nonqualified stock options
may be granted to its outside directors to purchase up to 78,254 shares of the
Company's common stock. The Director Plan was approved by the stockholders on
June 12, 1997. Directors are to be granted an option to purchase 3,912 of the
Company's common stock at fair market value on September 30, 1997 and at each
subsequent annual meeting of shareholders at which directors are elected.
Options may be exercised for ten years and one month after the date of grant and
may
F-14
<PAGE> 68
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
not be exercised during an eleven-month period following the date of grant
unless there is a change in control, as defined in the Director Plan or the
compensation committee waives the eleven-month continuous service requirement.
As of June 30, 1997, no options were issued under the Director Plan.
[7] Employee stock option plan:
On March 7, 1997, the Board of Directors, adopted the Company's 1997
employee stock option plan (the "Plan"), amended by the Board of Directors on
April 29, 1997, under which incentive stock option and nonqualified stock
options may be granted to purchase up to 234,764 shares of the Company's common
stock. The Plan was approved by the stockholders on June 12, 1997. Incentive
stock options are to be granted at a price not less than the fair market value,
or 110% of fair market value to an individual who owns more than ten percent of
the voting power of the outstanding stock. Nonqualified stock options are to be
granted at a price determined by the Company's compensation committee. As of
June 30, 1997, no options were issued under the Plan. On August 8, 1997, the
Company granted 99,054 options to its employees to purchase the Company's common
stock which had a fair value of $6.23 per share at the date of grant as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXPIRATION
OPTIONS PRICE DATE
- --------- -------- --------------
<S> <C> <C>
89,666 $ 1.56 August 7, 2007
9,388 $ 6.23 August 7, 2007
-------
99,054
=======
</TABLE>
Additionally, on September 11, 1997, the Company granted 104,338 options to
purchase the Company's common stock at $3.83 per share to its President. See
Note J[11].
The Company will record compensation expense for options issued to its
employees below fair market value over the vesting period. The estimated
compensation charge is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------
<S> <C>
1997...................................................... $257,000
1998...................................................... 148,000
1999...................................................... 70,000
2000...................................................... 19,000
--------
Total..................................................... $494,000
========
</TABLE>
[8] Private placements:
[a] On April 30, 1997, pursuant to Regulation D, the Company completed a
private placement whereby it sold 24 units for an aggregate amount of $600,000.
The placement agent is entitled to a fee and nonaccountable expense allowance
aggregating $78,000 or 13% of the private placement offering. Deferred financing
fees in this transaction were approximately $108,000. Each unit consists of a
$25,000 subordinated promissory note bearing interest at 8% and 4,687 shares of
the Company's common stock. The notes are due at the earlier of the closing of
the proposed public offering referred to in Note J[4]; when the Company obtains
an aggregate financing of $2,000,000 excluding expenses or March 31, 1999. The
4,687 shares of common stock in each unit are to be adjusted pursuant to a
formula defined in the private placement memorandum, based on the price of the
proposed offering. The number of shares issuable pursuant to the formula is
112,488 shares using an assumed public offering price of $4.00 per share.
F-15
<PAGE> 69
DYNAMICWEB ENTERPRISES, INC.
(FORMERLY SEAHAWK CAPITAL CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The common stock was valued at a fair value of $450,000 and $150,000 was
allocated to the notes. Debt discount of $450,000 and deferred financing fees of
$108,000 are amortized over the expected completion of the Company's public
offering of securities (October 31, 1997). At June 30, 1997 $186,000 of
amortization was expensed and the remaining balance of $372,000 will be charged
to operations through October 31, 1997. The effective interest rate is
approximately 191%.
[b] On August 27, 1997, pursuant to Regulation D, the Company completed a
private placement whereby it sold 20 units for an aggregate amount of $500,000.
The placement agent is entitled to a fee and nonaccountable expense allowance
aggregating $65,000 or 13% of the private placement offering. Deferred financing
fees in this transaction were approximately $72,500. Each unit consists of a
$25,000 subordinated promissory note bearing interest at 8% and 5,000 shares of
the Company's common stock. In connection with this transaction, two officers of
the Company agreed to contribute a sufficient number of shares to meet this
obligation. The notes are due at the earlier of the closing of the proposed
public offering referred to in Note J[4]; when the Company obtains an aggregate
financing of $2,000,000 excluding expenses or September 30, 1999. The 5,000
shares of common stock in each unit are to be adjusted pursuant to a formula
defined in the private placement memorandum, based on the price of the proposed
offering. The number of shares issuable pursuant to the formula is 100,000
shares using an assumed public offering price of $4.00 per share.
The common stock was valued at a fair value of $400,000 and $100,000 was
allocated to the notes. Debt discount of $400,000 and deferred financing fees of
$72,500 are amortized over the expected completion of the Company's public
offering of securities (October 31, 1997). The Company will charge $472,500 to
operations from August 27, 1997 through October 31, 1997. The effective interest
rate is approximately 525%.
[9] Lines of credit:
The Company has two lines of credit aggregating $90,000 which are
personally guaranteed by an officer of the Company and have interest rates of 2%
and 6 3/4% above the bank's lending rate. The Company borrowed $24,500 as of
June 30, 1997.
[10] Late filings and annual report:
The Company was required to file with the Securities and Exchange
Commission Form 10-KSB for September 30, 1996, Form 10-QSB for the quarter ended
December 31, 1996 and an amended Form 8-K for the acquisition of Megascore, Inc.
and Software Associates, Inc. (Notes A and J[2]). The Company did not distribute
its annual report to its shareholders within 120 days after year end. As of
August 8, 1997, management believes that it has complied with all of its filing
requirements and has distributed its annual report.
[11] Employment contract:
On August 26, 1997, the Company entered into a three year employment
contract with its President for an annual salary of $160,000. Upon expiration of
the employment contract, the term shall be automatically renewed for a year
unless either party gives written notice prior to ninety days before the
expiration date. In connection with this contract, on September 11, 1997, the
Company granted options to purchase 104,338 shares of common stock at $3.83 per
share which expire in ten years and vest over a three year period. The fair
value of the stock at the date of grant was $4.55 per share. Included in Note
J[7] is the estimated expense for the option grant.
F-16
<PAGE> 70
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following pro forma unaudited financial information gives effect to the
acquisition of Software Associates, Inc. on November 30, 1996. The unaudited pro
forma condensed consolidated balance sheet combines the historical balance sheet
of DynamicWeb Enterprises, Inc. as at September 30, 1996 with the historical
balance sheet of Software Associates, Inc. as at June 30, 1996 as if the
acquisition occurred on September 30, 1996. The unaudited pro forma condensed
consolidated statement of operations for the year ended September 30, 1996
combines the operations of DynamicWeb Enterprises, Inc. for the year ended
September 30, 1996 with the operations of Software Associates, Inc. for the year
ended June 30, 1996 as if the acquisition occurred on October 1, 1995. The
transaction is accounted for as a purchase in accordance with Accounting
Principles Board Opinion No. 16.
The unaudited condensed pro forma consolidated balance sheet and statement
of operations should be read in conjunction with the notes thereto and the
audited financial statements of DynamicWeb Enterprises, Inc. and Software
Associates, Inc. and notes thereto. The pro forma information is not necessarily
indicative of what the financial position and results of operations would have
been had the transaction occurred earlier, nor do they purport to represent the
future financial position or results of operations of DynamicWeb Enterprises,
Inc.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
1) To record the preliminary allocation of the purchase price of Software
Associates, Inc. at $860,000 and professional fees of $25,000 and to expense
purchased research and development as at October 1, 1995. The pro forma
information does not reflect any contingently issuable shares, up to 297,367,
that may be issued in the event that the average closing bid price of DynamicWeb
Enterprises, Inc. common stock does not equal $12.939 per share for the five
trading days immediately prior to January 30, 1999.
2) To amortize intangible asset over five years.
3) To record the difference in salary based on an employment contract for
the then shareholder of Software Associates, Inc.
4) Pro forma weighted average number of shares outstanding reflects shares
issued for the acquisition as if they were outstanding for the entire period
presented.
F-17
<PAGE> 71
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------
DYNAMICWEB SOFTWARE
ENTERPRISES, INC. ASSOCIATES, INC.
AS AT AS AT PRO FORMA
SEPTEMBER 30, JUNE 30, PRO FORMA CONSOLIDATED
1996 1996 ADJUSTMENTS RESULTS
----------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............ $ 174,403 $ 12,455 $ 186,858
Accounts receivable, net of allowance
for doubtful accounts.............. 70,518 61,209 131,727
Prepaid and other current assets..... 32,068 32,068
--------- ------- -----------
Total current assets....... 276,989 73,664 350,653
Property and equipment, net of
depreciation and amortization...... 239,889 6,000 245,889
Patents and trademarks, net of
amortization....................... 19,299 19,299
Intangibles.......................... (1) $ 100,000 100,000
--------- ------- --------- -----------
TOTAL...................... $ 536,177 $ 79,664 $ 100,000 $ 715,841
========= ======= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................... $ 34,581 $ 13,548 $ 48,129
Accrued expenses and other........... 18,487 13,955(1) $ 25,000 57,442
Current maturities of long-term
debt............................... 12,434 3,350 15,784
Deferred revenue..................... 11,330 11,330
Deferred income taxes................ 1,000 1,000
--------- ------- --------- -----------
Total...................... 76,832 31,853 25,000 133,685
Long-term debt, less current
maturities......................... 197,661 279 197,940
--------- ------- --------- -----------
Total liabilities.......... 274,493 32,132 25,000 331,625
--------- ------- --------- -----------
Common stock......................... 171 (1) 22 193
16,000(1) (16,000)
Additional paid-in capital........... 676,669 (1) 859,978
23,641(1) (23,641) 1,536,677
Retained earnings.................... 7,891(1) (7,891)
(Accumulated deficit)................ (415,186) (1) (737,468) (1,152,654)
--------- ------- --------- -----------
Total stockholders'
equity................... 261,684 47,532 75,000 384,216
--------- ------- --------- -----------
TOTAL...................... $ 536,177 $ 79,664 $ 100,000 $ 715,841
========= ======= ========= ===========
</TABLE>
F-18
<PAGE> 72
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------
DYNAMICWEB SOFTWARE
ENTERPRISES, INC. ASSOCIATES, INC.
YEAR ENDED YEAR ENDED PRO FORMA
SEPTEMBER 30 JUNE 30, PRO FORMA CONSOLIDATED
1996 1996 ADJUSTMENTS RESULTS
----------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales:
System sales...................... $ 147,337 $380,397 $ 527,734
Services.......................... 312,730 286,983 599,713
---------- -------- ---------
Total..................... 460,067 667,380 1,127,447
---------- -------- ---------
Cost of sales:
System sales...................... 71,205 108,361 179,566
Services.......................... 81,194 79,944 161,138
---------- -------- ---------
Total..................... 152,399 188,305 340,704
---------- -------- ---------
Gross profit........................ 307,668 479,075 786,743
---------- -------- ---------
Expenses:
Selling, general and
administrative................. 719,443 555,660(2) $ 20,000 1,323,103
(3) 28,000
Research and development.......... 28,990 28,990
---------- -------- -------- ---------
Total..................... 748,433 555,660 48,000 1,352,093
---------- -------- -------- ---------
Operating (loss).................... (440,765) (76,585) (48,000) (565,350)
Interest expense.................... (23,271) (125) (23,396)
Interest income..................... 8,806 8,806
---------- -------- -------- ---------
(Loss) before benefit for income
taxes............................. (455,230) (76,710) (48,000) (579,940)
Benefit for deferred income taxes... 29,000 29,000
---------- -------- -------- ---------
NET (LOSS).......................... $ (455,230) $(47,710) $ (48,000) $ (550,940)
========== ======== ======== =========
Pro forma net (loss) per share...... $ (.29)
=========
Pro forma weighted average number of
shares outstanding................ 1,667,202 (4) 224,330 1,891,532
========== ======== =========
</TABLE>
F-19
<PAGE> 73
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Software Associates, Inc.
Fairfield, New Jersey
"We have audited the accompanying balance sheet of Software Associates,
Inc. as at June 30, 1996 and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended June 30, 1996 and June
30, 1995. 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 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 audits provide a reasonable basis for our opinion.
"In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of Software Associates, Inc. as
at June 30, 1996 and the results of its operations and its cash flows for the
years ended June 30, 1996 and June 30, 1995, in conformity with generally
accepted accounting principles.
"The Company has sustained a net loss in the year ended June 30, 1996 and
has only minimal capital and working capital. Also, as indicated in Note A, on
November 30, 1996, the Company was acquired by DynamicWeb Enterprises, Inc. a
substantial portion of whose resources may be depleted before it markets and
derives significant revenues from its products and services. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The acquiror's plan in regards to these matters are also described in Note A.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties."
Richard A. Eisner & Company, LLP
New York, New York
May 12, 1997
With respect to Note F[1]
September 5, 1997
F-20
<PAGE> 74
SOFTWARE ASSOCIATES, INC.
BALANCE SHEET
AS AT JUNE 30, 1996
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash........................................................................... $12,455
Accounts receivable, less allowance for doubtful accounts of $6,938............ 61,209
-------
Total current assets................................................... 73,664
Equipment, less accumulated depreciation of $4,000............................... 6,000
-------
Total.................................................................. $79,664
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................................... $13,548
Accrued expenses and other current liabilities................................. 13,955
Current maturities of long-term debt (Note C).................................. 3,350
Deferred taxes (Note D)........................................................ 1,000
-------
Total current liabilities.............................................. 31,853
Long-term debt, less current maturities (Note C)................................. 279
-------
Total liabilities...................................................... 32,132
-------
Commitments and contingencies (Note F)
Stockholder's equity (Note A):
Common stock -- no par value; 2,500 shares authorized, issued and
outstanding................................................................. 16,000
Additional paid-in capital..................................................... 23,641
Retained earnings.............................................................. 7,891
-------
Total stockholder's equity............................................. 47,532
-------
Total.................................................................. $79,664
=======
</TABLE>
Attention is directed to the foregoing accountants' report and
to the accompanying notes to financial statements.
F-21
<PAGE> 75
SOFTWARE ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Revenues (Note E[2]):
System sales, net.................................................... $380,397 $259,459
Services, net........................................................ 286,983 529,975
-------- --------
Total........................................................ 667,380 789,434
-------- --------
Cost of sales:
System sales......................................................... 108,361 78,680
Services............................................................. 79,944 84,016
-------- --------
Total........................................................ 188,305 162,696
-------- --------
Gross profit........................................................... 479,075 626,738
Selling, general and administrative.................................... 555,660 610,407
-------- --------
Operating (loss) income before interest and taxes...................... (76,585) 16,331
Interest expense....................................................... 125 130
-------- --------
(Loss) income before income taxes...................................... (76,710) 16,201
Income tax benefit (provision) -- deferred............................. 29,000 (11,000)
-------- --------
NET (LOSS) INCOME...................................................... $(47,710) $ 5,201
======== ========
</TABLE>
Attention is directed to the foregoing accountants' report and
to the accompanying notes to financial statements.
F-22
<PAGE> 76
SOFTWARE ASSOCIATES, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(NOTE A)
<TABLE>
<CAPTION>
COMMON STOCK --
NO PAR VALUE ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance -- July 1, 1994................. 2,500 $16,000 $ 23,641 $ 50,400 $ 90,041
Net income............................ 5,201 5,201
----- ------- ------- -------- --------
Balance -- June 30, 1995................ 2,500 16,000 23,641 55,601 95,242
Net (loss)............................ (47,710) (47,710)
----- ------- ------- -------- --------
Balance -- June 30, 1996................ 2,500 $16,000 $ 23,641 $ 7,891 $ 47,532
===== ======= ======= ======== ========
</TABLE>
Attention is directed to the foregoing accountants' report and
to the accompanying notes to financial statements.
F-23
<PAGE> 77
SOFTWARE ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income.................................................... $(47,710) $ 5,201
Adjustment to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation...................................................... 2,000 2,000
Deferred income taxes............................................. (29,000) 11,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable...................... 83,065 (76,753)
Increase (decrease) in accounts payable......................... (13,305) 11,003
Increase in accrued expenses and other liabilities.............. 5,342 7,024
-------- --------
Net cash provided by (used in) operating activities.......... 392 (40,525)
Cash flows from financing activities:
Payments of long-term debt........................................... (3,350) (3,021)
-------- --------
NET (DECREASE) IN CASH................................................. (2,958) (43,546)
Cash -- beginning of year.............................................. 15,413 58,959
-------- --------
CASH -- END OF YEAR.................................................... $ 12,455 $ 15,413
======== ========
Supplemental schedule of noncash investing and financing activities:
During the year ended June 30, 1995, the Company financed $10,000
of equipment.
Supplemental disclosures of cash flow information:
Cash paid for during the year:
Interest.......................................................... $ 125 $ 130
Taxes............................................................. 125
</TABLE>
Attention is directed to the foregoing accountants' report and
to the accompanying notes to financial statements.
F-24
<PAGE> 78
SOFTWARE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) -- THE COMPANY:
Software Associates, Inc. (the "Company") is a New Jersey corporation
incorporated in March 1985. The Company is an Electronic Data Interchange
("EDI") service bureau engaged in the business of helping companies realize the
benefits of expanding their data processing and electronic communications
infrastructures through the use of EDI. The Company also resells hardware and
licensed software which is generally customized for its customers.
On November 30, 1996, the Company was acquired by DynamicWeb Enterprises,
Inc. ("DynamicWeb"). DynamicWeb expects to utilize the Company's expertise in
EDI to expand their business and product lines over the interest. A substantial
portion of DynamicWeb's resources may be depleted before it markets and derives
significant revenues from its products and services. DynamicWeb is planning to
raise additional equity through a proposed public offering of stock, the net
proceeds of which it intends to use, in part, to support future operations.
(NOTE B) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] Revenue recognition:
Revenues are recognized when products are shipped provided that no
significant obligations remain, and collection of the resulting receivable is
deemed probable by management. The Company provides customer support and
revenues are recognized when services are provided. The Company also enters into
contracts with customers whereby revenues are earned based on a transaction fee.
[2] Depreciation:
Equipment is recorded at cost. Depreciation is provided using the
straight-line method over five years.
[3] Income taxes:
The Company files its corporate income tax returns on a cash basis and
accounts for income taxes on an accrual basis in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 measures deferred income taxes by applying enacted statutory
rates in effect at the balance sheet date to the differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements.
[4] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[5] Fair value of financial instruments:
The Company considers its financial instruments and obligations, which are
carried at cost, to approximate fair value due to the near term due dates.
F-25
<PAGE> 79
SOFTWARE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE C) -- LONG-TERM DEBT:
Long-term debt consists of a capitalized lease obligation as at June 30,
1996:
<TABLE>
<S> <C>
Equipment lease payable, due in July 1997; payable in monthly
installments of $291 including 4% interest........................ $3,629*
Less current maturities............................................. 3,350
------
Noncurrent portion........................................ $ 279
======
</TABLE>
- ---------------
* Collateralized by computer equipment with a net book value of approximately
$6,000.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------------------
<S> <C>
1997................................................................ $3,350
1998................................................................ 279
------
Total..................................................... $3,629
======
</TABLE>
(NOTE D) -- INCOME TAXES:
[1] The Company has federal and state net operating loss carryforwards of
approximately $30,000 that expires from 2009 to 2010.
The Tax Reform Act of 1986 contains provisions which limits the net
operating loss carryforwards available for use in any given year should certain
events occur, including significant change in ownership interests. The
utilization of the net operating loss may be limited due to the acquisition of
the Company as described in Note A.
[2] The tax effects of principal temporary differences and net operating
loss carryforwards are as follows as at June 30, 1996:
<TABLE>
<S> <C>
Asset:
Federal and state operating loss carryforwards.................. $ 12,000
Liability:
Accrual basis to cash basis adjustment.......................... (13,000)
--------
Net deferred tax liability...................................... $ (1,000)
========
</TABLE>
[3] The difference between the statutory federal income tax at the rate of
34% and the actual tax are as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1996 1995
-------- -------
<S> <C> <C>
Statutory rate (benefit)................................ $(26,018) $ 5,508
State taxes (benefit) net of federal income tax
effect................................................ (4,603) 972
Nondeductible items..................................... 3,305 3,305
Other................................................... (1,684) 1,215
-------- -------
Total......................................... $(29,000) $11,000
======== =======
</TABLE>
F-26
<PAGE> 80
SOFTWARE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE E) -- CONCENTRATION OF CREDIT RISK:
[1] Accounts receivable:
The Company routinely evaluates the credit worthiness of its customers to
limit its concentration of credit risk regarding its trade receivables.
[2] Significant customers:
The Company had one customer that accounted for 15% of revenue for the year
ended June 30, 1996 and two customers that accounted for 19% and 22% of revenue
for the year ended June 30, 1995.
(NOTE F) -- COMMITMENTS AND CONTINGENCIES:
[1] Lease and related party transaction:
The Company occupies its office space, through December 31, 2002, pursuant
to a lease which was amended on September 5, 1997, from a partnership whose
partners are the sole stockholder of the Company and his wife. The lease
provides for an annual increase of three percent and condominium maintenance
fees. The partnership and the Company are jointly liable on the mortgage which
was approximately $250,000 as at June 30, 1996; the debt is being paid by the
partnership, and matures in August 2019. The Company is informed that the
partnership's mortgage balance is current.
The following are the future annual rental payments:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
----------------------------------------------------------
<S> <C>
1997...................................................... $ 42,000
1998...................................................... 42,800
1999...................................................... 44,000
2000...................................................... 45,400
2001...................................................... 46,700
Thereafter................................................ 72,500
----------
Total........................................... $293,400
==========
</TABLE>
Rent expense and related operating expense for the years ended June 30,
1996 and June 30, 1995 was approximately $46,400 and $44,400, respectively.
[2] Line of credit:
The Company has a line of credit of $50,000. No balances are outstanding as
at June 30, 1996. The stockholder of the Company has personally guaranteed the
debt under the line of credit. In May 1997, the Company borrowed $14,750 under
the line of credit at an interest rate of 2% above the bank's lending rate.
[3] Employment contract:
In connection with the acquisition of the Company as described in Note A,
the Company entered into a five-year employment contract with its then sole
stockholder. The agreement provides for an annual salary of approximately
$136,000 and includes a discretionary bonus as determined by DynamicWeb's Board
of Directors.
F-27
<PAGE> 81
SOFTWARE ASSOCIATES, INC.
UNAUDITED CONDENSED BALANCE SHEET
AS AT SEPTEMBER 30, 1996
ASSETS
<TABLE>
<S> <C>
Cash............................................................................... $11,376
Accounts receivable, net of allowance for doubtful accounts........................ 67,769
-------
Total current assets..................................................... 79,145
Property and equipment, net of depreciation and amortization....................... 5,500
-------
TOTAL.................................................................... $84,645
=======
LIABILITIES
Accounts payable and accrued expenses.............................................. $20,628
Lease obligation................................................................... 2,797
Deferred income taxes.............................................................. 7,000
-------
Total current liabilities................................................ 30,425
-------
STOCKHOLDER'S EQUITY
Common stock -- no par value; 2,500 shares authorized, issued and outstanding...... 16,000
Additional paid-in capital......................................................... 23,641
Retained earnings.................................................................. 14,579
-------
Total stockholder's equity............................................... 54,220
-------
TOTAL.................................................................... $84,645
=======
</TABLE>
The accompanying notes are an integral part of
these condensed statements.
F-28
<PAGE> 82
SOFTWARE ASSOCIATES, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Net sales:
System sales......................................................... $ 55,517 $ 44,766
Services............................................................. 78,174 91,681
-------- --------
Total........................................................ 133,691 136,447
-------- --------
Cost of sales:
System sales......................................................... 16,645 39,475
Services............................................................. 23,845 29,889
-------- --------
Total........................................................ 40,490 69,364
-------- --------
Gross profit........................................................... 93,201 67,083
Selling, general and administrative expenses........................... 80,513 145,995
-------- --------
Operating income (loss)................................................ 12,688 (78,912)
Income tax benefit (provision) -- deferred............................. (6,000) 29,000
-------- --------
NET INCOME (LOSS)...................................................... 6,688 (49,912)
Retained earnings, beginning of period................................. 7,891 55,601
-------- --------
RETAINED EARNINGS, END OF PERIOD....................................... $ 14,579 $ 5,689
======== ========
</TABLE>
The accompanying notes are an integral part of
these condensed statements.
F-29
<PAGE> 83
SOFTWARE ASSOCIATES, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ 6,688 $(49,912)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation......................................................... 500
Deferred income taxes................................................ 6,000 (29,000)
Changes in operating assets and liabilities:
Accounts receivable................................................ (6,560) 101,688
Accounts payable and accrued expenses.............................. (6,875) (20,224)
------- --------
Net cash provided by (used in) operating activities............. (247) 2,552
Cash flows (used in) financing activities:
Payment of capital lease obligation..................................... (832)
------- --------
NET (DECREASE) INCREASE IN CASH........................................... (1,079) 2,552
Cash -- beginning of period............................................... 12,455 15,413
------- --------
CASH -- END OF PERIOD..................................................... $11,376 $ 17,965
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
F-30
<PAGE> 84
SOFTWARE ASSOCIATES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(NOTE A) -- THE COMPANY:
Software Associates, Inc. (the "Company") is a New Jersey corporation
incorporated in March 1985. The Company is an Electronic Data Interchange
("EDI") service bureau engaged in the business of helping companies realize the
benefits of expanding their data processing and electronic communications
infrastructures through the use of EDI. The Company also resells hardware and
licensed software which is generally customized for its customers.
(NOTE B) -- BASIS OF PRESENTATION:
The unaudited condensed consolidated balance sheet and statement of
operations should be read in conjunction with the audited financial statements
of Software Associates, Inc. and notes thereto contained elsewhere herein. The
information does not purport to represent the future financial position or
results of operations of Software Associates, Inc. The interim financial
statements include all necessary adjustments, consisting of normal recurring
items, which in the opinion of management are necessary for a fair presentation
of such financial information.
F-31
<PAGE> 85
======================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BY, ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS FURNISHED.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.................... 1
Recent Developments................... 4
Summary Financial Information......... 5
Risk Factors.......................... 6
Use of Proceeds....................... 15
Market for Common Stock and Related
Stockholder Matters................. 17
Capitalization........................ 18
Dilution.............................. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 24
Management............................ 33
Principal Stockholders................ 38
Certain Relationships and Related
Transactions........................ 39
Description of Securities............. 42
Shares Eligible for Future Sale....... 44
Underwriting.......................... 45
Interim Financings.................... 47
Legal Matters......................... 48
Additional Information................ 48
Experts............................... 49
Index to Financial Statements......... F-1
Signatures............................ II-7
Exhibit Index......................... II-8
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE LATER OF THE EFFECTIVE DATE OF
THE REGISTRATION STATEMENT OR THE FIRST DATE ON WHICH THE COMMON STOCK WAS
OFFERED TO THE PUBLIC) ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
[LOGO]
DYNAMICWEB
ENTERPRISES, INC.
1,750,000 SHARES OF COMMON STOCK
------------------------
PROSPECTUS
------------------------
H. J. MEYERS & CO, INC.
, 1997
======================================================
<PAGE> 86
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Certificate of Incorporation provides that the Registrant
shall indemnify any person who is or was a director, officer, employee or agent
of the Registrant to the fullest extent permitted by the New Jersey Business
Corporation Act (the "NJBCA"), and to the fullest extent otherwise permitted by
law. The NJBCA permits a New Jersey corporation to indemnify its directors,
officers, employees and agents against liabilities and expenses they may incur
in such capacities in connection with any proceeding in which they may be
involved, unless a judgment or other final adjudication adverse to the director,
officer, employee or agent in question establishes that his or her acts or
omissions (a) were in breach of his or her duty of loyalty (as defined in the
NJBCA) to the Registrant or its shareholders, (b) were not in good faith or
involved a knowing violation of law or (c) resulted in the receipt by the
director, officer, employee or agent of an improper personal benefit.
Pursuant to the Registrant's Certificate of Incorporation and the NJBCA, no
director or officer of the Registrant shall be personally liable to the
Registrant or to any of its shareholders for damages for breach of any duty owed
to the Registrant or its shareholders, except for liabilities arising from any
breach of duty based upon an act or omission (i) in breach of such director's or
officer's duty of loyalty (as defined in the NJBCA) to the Registrant or its
shareholders, (ii) not in good faith or involving a knowing violation of law or
(iii) resulting in receipt by such director or officer of an improper personal
benefit.
In addition, the Registrant's Bylaws include provisions to indemnify its
officers and directors and other persons against expenses, judgments, fines and
amounts incurred or paid in settlement in connection with civil or criminal
claims, actions, suits or proceedings against such persons by reason of serving
or having served as officers, directors, or in other capacities, if such person
acted in good faith, and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Registrant and, in a criminal action or
proceeding, if he had no reasonable cause to believe that his/her conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in good faith
and in a manner which he or she reasonably believed to be in or not opposed to
the best interests of the corporation or that he or she had reasonable cause to
believe his or her conduct was unlawful. Indemnification as provided in the
Bylaws shall be made only as authorized in a specific case and upon a
determination that the person met the applicable standards of conduct.
The Underwriting Agreement, included as Exhibit 1.1 hereto, provides that,
in certain circumstances, each of the Underwriters will indemnify the directors
and officers of the Registrant against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
II-1
<PAGE> 87
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
filing this Registration Statement:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee..................... $ 2,500
National Association of Securities Dealers, Inc. filing fee....... 1,200
Nasdaq listing fee................................................ 7,000
Pacific Stock Exchange Listing Fee................................ 25,000
Printing and Engraving Expenses................................... 85,000
Accounting Fee and Expenses....................................... 75,000
Legal Fees and Expenses........................................... 105,000
Blue Sky Qualification Fees and Expenses.......................... 75,000
Underwriters Expense Allowance.................................... 210,000
Transfer Agent Fees and Expenses.................................. 10,000
Expenses of Selling............................................... 50,000
Miscellaneous..................................................... 72,000
========
Total................................................... $717,700
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since September 1, 1994, the Company has sold the following securities
without registration under the Securities Act:
1. On May 8, 1995, the Company sold 15,000,000 previously unissued
shares of its Common Stock to Jonathan B. Lassers, Cherry Hill, New Jersey,
for $150,000 in cash. As part of the transaction, Mr. Lassers also acquired
a transferable warrant to purchase up to an additional 70,000,000 shares of
the Company's Common Stock, exercisable until December 31, 1997 at $0.01 a
share. Such warrant was terminated in exchange for the issuance to Mr.
Lassers on February 29, 1996 of 11,000,000 shares of the Company's Common
Stock.
2. On or about March 26, 1996, the Company issued 735,000 shares of
Common Stock to Berkshire International Finance, Inc., New York, New York
as a finder's fee and 75,000 shares of Common Stock to William N. Levy,
Esquire, Voorhees, New Jersey, as payment for legal services, each in
connection with the Company's acquisition of DynamicWeb Transaction
Systems, Inc.
3. On April 3, 1996, the Company sold 343,511 shares of Common Stock
to Arista High Technology Growth Fund, Cayman Islands, British West Indies,
for an aggregate purchase price of $500,000.
4. On November 21, 1996, the Company sold 250,000 shares of Common
Stock to Michael Associates, Jersey City, New Jersey, for an aggregate
purchase price of $250,000.
5. On November 30, 1996, the Company issued 860,000 shares of Common
Stock to Kenneth R. Konikowski, Towaco, New Jersey, in exchange for all of
the outstanding capital stock of Software Associates, Inc., a New Jersey
corporation.
6. On November 30, 1996, the Company issued 50,000 shares of Common
Stock to the 27 shareholders of Megascore, Inc., a New Jersey corporation,
in exchange for all of the outstanding capital stock of Megascore, Inc.
7. In April of 1997, the Company sold 24 Units (each Unit consisting
of 4,687 shares of common stock and a $25,000 principal amount of
Subordinated, Unsecured 8% Promissory Note) to select accredited investors
for an aggregate purchase price of $600,000. H.J. Meyers & Co, Inc., a
registered broker-dealer and representative of the several underwriters in
this Offering, acted as placement agent for this offering and received a
placement agent fee of $60,000 and a non-accountable expense allowance of
II-2
<PAGE> 88
$18,000. The sale of 8 of those Units closed on April 9, 1997; another 8 of
those Units closed on April 11, 1997; and the final 8 of those Units closed
on April 30, 1997.
8. In August of 1997, the Company sold 20 Units (each Unit consisting
of 5,000 shares of common stock and a $25,000 principal amount of
Subordinated, Unsecured 8% Promissory Note) to select accredited investors
for an aggregate purchase price of $500,000. H.J. Meyers & Co, Inc., a
registered broker-dealer and representative of the several underwriters in
this Offering, acted as placement agent for this offering and received a
placement agent fee of $50,000 and a non-accountable expense allowance of
$15,000. The sale of all 20 of those Units closed on August 27, 1997.
9. On February 7, 1996, DynamicWeb Transaction Systems, Inc.
(predecessor to the Company) issued 23,878 shares of its common stock to
each of Frank T. DiPalma, Ridgewood, New Jersey (a director of the Company)
and Steve Sheiner, Studio City, California, in exchange for services
rendered.
10. On January 12, 1996, DynamicWeb Transaction Systems, Inc.
(predecessor to the Company) issued 327,577 shares of its common stock to
Michael Vanechanos, Holmdel, New Jersey, in exchange for an aggregate
purchase price of $100,000.
11. On January 24, 1996, DynamicWeb Transaction Systems, Inc.
(predecessor to the Company) issued 163,786 shares of its common stock to
John Helbock, Holmdel, New Jersey, in exchange for an aggregate purchase
price of $50,000.
Except for Number 3 above, all sales and issuances of securities in the
transactions described above were deemed to be exempt from registration under
the Securities Act of 1933, as amended, by virtue of Section 4(2) or Regulation
D promulgated thereunder. The purchasers in each case represented their
intention to acquire the securities for investment only and not with a view to
the distribution thereof. Required disclosure was provided, or access to
information in lieu of disclosure was present. Required legends are affixed to
the stock certificates and other securities issued in such transactions. In the
case of Number 3 above, the sale and issuance of the securities were deemed to
be exempt from registration by virtue of Regulation S. The securities were sold
outside of the United States and required resale restrictions were imposed.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits:
<TABLE>
<CAPTION>
NUMBER TITLE
----- -------------------------------------------------------------------------------
<S> <C>
1.1 Underwriting Agreement**
3.1.1 Certificate of Incorporation of the Registrant as filed with the Secretary of
State of New Jersey on August 7, 1979 (incorporated by reference to Exhibit
3.1.1 filed with Registrant's Annual Report on Form 10-K for the Year ended
December 31, 1991).
3.1.2 Certificate of Amendment to Registrant's Certificate of Incorporation, as filed
with the Secretary of State of New Jersey on May 19, 1980 (incorporated by
reference to Exhibit 3.1.2 filed with Registrant's Annual Report on Form 10-K
for the Year ended December 31, 1991).
3.1.3 Certificate of Amendment to Registrant's Certificate of Incorporation, as filed
with the Secretary of State of New Jersey on April 1981 (incorporated by
reference to Exhibit 3.1.3 filed with Registrant's Annual Report on Form 10-K
for the Year ended December 31, 1991).
3.1.4 Certificate of Amendment of Registrant's Certificate of Incorporation, as filed
with the Secretary of State of New Jersey on April 24, 1986 (incorporated by
reference to Exhibit 3.1.4 filed with Registrant's Annual Report on Form 10-K
for the Year ended December 31, 1991).
3.1.5 Certificate of Amendment to Registrant's Certificate of Incorporation, as filed
with the Secretary of State of New Jersey on July 15, 1988 (incorporated by
reference to Exhibit 3.1.5 filed with Registrant's Annual Report on Form 10-K
for the Year ended December 31, 1991).
</TABLE>
II-3
<PAGE> 89
<TABLE>
<CAPTION>
NUMBER TITLE
----- -------------------------------------------------------------------------------
<S> <C>
3.1.6 Certificate of Amendment to Registrant's Certificate of Incorporation, as filed
with the Secretary of State of New Jersey on November 28, 1989 (incorporated by
reference to Exhibit 3.1.6 filed with Registrant's Annual Report on Form 10-K
for the Year ended December 31, 1991).
3.1.7 Certificate of Amendment to the Registrant's Certificate of Incorporation, as
filed with the Secretary of State of New Jersey on August 15, 1994
(incorporated by reference to Exhibit 3.1.7 filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994).
3.1.8 Certificate of Amendment to Registrant's Certificate of Incorporation, as filed
with the Secretary of State of New Jersey on May 14, 1996, changing the name of
the Company to DynamicWeb Enterprises, Inc. (incorporated by reference to
Exhibit 3.2.3 filed with Registrant's Annual Report on Form 10-KSB for December
31, 1995).
3.1.9 Certificate of Amendment to Registrant's Certificate of Incorporation, as filed
with the Secretary of State of New Jersey on , 1997.**
3.2.1 Bylaws of the Registrant adopted August 7, 1979 (incorporated by reference to
Exhibit 3.2.1 filed with Registrant's Report on Form 10-K for the Year ended
December 31, 1991).
3.2.2 Amendments adopted March 8, 1982 to Bylaws of the Registrant (incorporated by
reference to Exhibit 3.2.2 filed with Registrant's Report on Form 10-K for the
Year ended December 31, 1991).
3.2.3 Amended and Restated Bylaws of the Registrant adopted March 7, 1997
(incorporated by reference to Exhibit 3.2.3 filed with Registrant's Annual
Report on Form 10-KSB for the year ended September 30, 1996).
4.1 Specimen Stock Certificate.**
4.2 Form of Representative's Warrant.**
5.1 Opinion of Stevens & Lee re: legality.**
10.1 Release and Severance Agreement dated February 12, 1993 between Seahawk Capital
Corporation and Robert S. Friedenberg (incorporated by reference to Exhibit
10.2 to Registrant's Annual Report on Form 10-K for the year ended December 31,
1992).
10.2 Agreement dated February 24, 1995 between the Registrant and Jonathan B.
Lassers as to the purchase of common stock (incorporated by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K dated as of May 8,
1995).
10.3 Amendment Agreement dated May 1, 1995 between the Registrant and Jonathan B.
Lassers as to the purchase of common stock and common stock purchase warrants
(incorporated by reference to Exhibit 10.2 to Registrant's Current Report on
Form 8-K dated as of May 8, 1995).
10.4 Agreement dated February 29, 1996 between the Registrant and Jonathan B.
Lassers as to the exchange of common stock for his common stock purchase
warrants (incorporated by reference to Exhibit 10.4 filed with Registrant's
Report on Form 10-KSB for the year ended September 30, 1996).
10.5 Stock Exchange Agreement dated as of December 31, 1994 among the Registrant,
John C. Fitton and Seahawk Overseas Exploration Corporation (incorporated by
reference to Exhibit 10.4 to Registrant's Current Report on Form 8-K dated as
of May 8, 1995).
10.6 Stock Purchase Agreement dated March 5, 1996 among the Registrant, DynamicWeb
Transaction Systems, Inc. ("DWTS") and the shareholders of DWTS (incorporated
by reference to Exhibit 10.14 to Registrant's Annual Report on Form 10-KSB for
the year ended December 31, 1995).
10.7 Amendment to Stock Purchase Agreement dated May 14, 1996 between the Registrant
and DWTS (incorporated by reference to Exhibit 10.14(A) to Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 1995).
</TABLE>
II-4
<PAGE> 90
<TABLE>
<CAPTION>
NUMBER TITLE
----- -------------------------------------------------------------------------------
<S> <C>
10.8 Amendment to Stock Purchase Agreement dated June 13, 1996 between the
Registrant and DWTS (incorporated by reference to Exhibit 10.14(B) to
Registrant's Form 10-QSB for the period ended March 31, 1996).
10.9 Stock Purchase Agreement dated September 30, 1996 among the Registrant,
Megascore, Inc. and the shareholders of Megascore, Inc. (incorporated by
reference to Exhibit 1 to the Registrant's Current Report on Form 8-K dated
November 30, 1996).
10.10 Stock Purchase Agreement dated November 30, 1996 among the Registrant, Software
Associates, Inc. and Kenneth R. Konikowski (incorporated by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K dated November 30,
1996).
10.11 Amendment to Stock Purchase Agreement dated April 7, 1997 between the
Registrant and Kenneth R. Konikowski (incorporated by reference to Exhibit
10.11 filed with Registrant's Report on Form 10-KSB for the year ended
September 30, 1996).
10.12 Lock-Up Agreement dated November 30, 1996 among the Registrant, Steve L.
Vanechanos, Jr. and Kenneth R. Konikowski (incorporated by reference to Exhibit
10.12 filed with Registrant's Report on Form 10-KSB for the year ended
September 30, 1996).
10.13 Employment Agreement dated December 1, 1996 between the Registrant and Kenneth
R. Konikowski (incorporated by reference to Exhibit 10.13 filed with
Registrant's Report on Form 10-KSB for the year ended September 30, 1996).
10.14 DynamicWeb Enterprises, Inc. 1997 Employee Stock Option Plan (incorporated by
reference to Annex B to the Registrant's Information Statement filed May 15,
1997, pursuant to Section 14(c) of the Securities Exchange Act of 1934).
10.15 DynamicWeb Enterprises, Inc. 1997 Stock Option Plan for Outside Directors
(incorporated by reference to Annex C to the Registrant's Information Statement
filed May 15, 1997, pursuant to Section 14(c) of the Securities Exchange Act of
1934).
10.16 Lease Agreement dated November 1, 1996 between Beauty and Barber Institute,
Inc. and DynamicWeb Transaction Systems, Inc. (incorporated by reference to
Exhibit 10.16 filed with Registrant's Report on Form 10-KSB for the year ended
September 30, 1996).
10.17 Lease Agreement dated July 1, 1994 between Software Associates, Inc. and The
Mask Group (incorporated by reference to Exhibit 10.17 filed with Registrant's
Report on Form 10-KSB for the year ended September 30, 1996).
10.18 Amendment No. 1 to Lease Agreement between Software Associates, Inc. and The
Mask Group (incorporated by reference to Exhibit 3 to the Registrant's Form 8-K
dated September 9, 1997).
10.19 Employment Agreement dated August 26, 1997, between the Registrant and James D.
Conners (incorporated by reference to Exhibit 1 to Registrant's Form 8-K dated
September 9, 1997).
10.20 Form of Financial Consulting Agreement between the Registrant and H.J. Meyers &
Co., Inc.**
10.21 Form of Mergers and Acquisition Agreement between the Registrant and H.J.
Meyers & Co., Inc.**
16.1 Letter on change in certifying accountant (R. Andrew Gately & Co.)
(incorporated by reference to Exhibit 16.1 to Registrant's Current Report on
Form 8-K dated February 19, 1997 (to be filed by amendment)).
16.2 Letter on change in certifying accountant (Allen G. Roth, P.A.) (incorporated
by reference to Exhibit 16.2 to the Registrant's Current Report on Form 8-K
dated February 19, 1997, as amended by Amendment dated March 12, 1997).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Stevens & Lee (included in Exhibit 5.1)
23.2 Consent of Richard A. Eisner & Company, LLP
</TABLE>
II-5
<PAGE> 91
<TABLE>
<CAPTION>
NUMBER TITLE
----- -------------------------------------------------------------------------------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed
** To be filed by amendment
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
Offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 ("Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer of controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by its is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-6
<PAGE> 92
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of
Fairfield, State of New Jersey on September 12, 1997.
DYNAMICWEB ENTERPRISES, INC.
By:
------------------------------------
Steven L. Vanechanos, Jr.
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven L. Vanechanos, Jr., James D. Conners,
Steve Vanechanos, Sr., and Stephen F. Ritner, Esquire, and each of them, his
true and lawful attorney-in-fact, as agent with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacity, to sign any or all amendments to this Registration Statement and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting to each such
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as each of them might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed below by the following persons
and in the capacities and on the dates stated.
<TABLE>
<C> <S> <C>
/s/ STEVEN L. VANECHANOS, JR. Chief Executive Officer September 12, 1997
- --------------------------------------------- and Director
Steven L. Vanechanos, Jr.
/s/ STEVE VANECHANOS, SR. Treasurer, Chief Financial September 12, 1997
- --------------------------------------------- Officer, and Chief
Steve Vanechanos, Sr. Accounting Officer,
Director
/s/ F. PATRICK AHEARN Director September 12, 1997
- ---------------------------------------------
F. Patrick Ahearn
/s/ DENIS CLARK Director September 12, 1997
- ---------------------------------------------
Denis Clark
/s/ FRANK T. DIPALMA Director September 12, 1997
- ---------------------------------------------
Frank T. DiPalma
/s/ ROBERT DROSTE Director September 12, 1997
- ---------------------------------------------
Robert Droste
/s/ KENNETH R. KONIKOWSKI Director September 12, 1997
- ---------------------------------------------
Kenneth R. Konikowski
</TABLE>
II-7
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER TITLE PAGE
----- --------------------------------------------------------------------- ------------
<S> <C> <C>
1.1 Underwriting Agreement**.............................................
3.1.1 Certificate of Incorporation of the Registrant as filed with the
Secretary of State of New Jersey on August 7, 1979 (incorporated by
reference to Exhibit 3.1.1 filed with Registrant's Annual Report on
Form 10-K for the Year ended December 31, 1991)......................
3.1.2 Certificate of Amendment to Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
May 19, 1980 (incorporated by reference to Exhibit 3.1.2 filed with
Registrant's Annual Report on Form 10-K for the Year ended December
31, 1991)............................................................
3.1.3 Certificate of Amendment to Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
April 1981 (incorporated by reference to Exhibit 3.1.3 filed with
Registrant's Annual Report on Form 10-K for the Year ended December
31, 1991)............................................................
3.1.4 Certificate of Amendment of Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
April 24, 1986 (incorporated by reference to Exhibit 3.1.4 filed with
Registrant's Annual Report on Form 10-K for the Year ended December
31, 1991)............................................................
3.1.5 Certificate of Amendment to Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
July 15, 1988 (incorporated by reference to Exhibit 3.1.5 filed with
Registrant's Annual Report on Form 10-K for the Year ended December
31, 1991)............................................................
3.1.6 Certificate of Amendment to Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
November 28, 1989 (incorporated by reference to Exhibit 3.1.6 filed
with Registrant's Annual Report on Form 10-K for the Year ended
December 31, 1991)...................................................
3.1.7 Certificate of Amendment to the Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
August 15, 1994 (incorporated by reference to Exhibit 3.1.7 filed
with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994)...................................................
3.1.8 Certificate of Amendment to Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
May 14, 1996, changing the name of the Company to DynamicWeb
Enterprises, Inc. (incorporated by reference to Exhibit 3.2.3 filed
with Registrant's Annual Report on Form 10-KSB for December 31,
1995)................................................................
3.1.9 Certificate of Amendment to Registrant's Certificate of
Incorporation, as filed with the Secretary of State of New Jersey on
, 1997.**..................................................
3.2.1 Bylaws of the Registrant adopted August 7, 1979 (incorporated by
reference to Exhibit 3.2.1 filed with Registrant's Report on Form
10-K for the Year ended December 31, 1991)...........................
3.2.2 Amendments adopted March 8, 1982 to Bylaws of the Registrant
(incorporated by reference to Exhibit 3.2.2 filed with Registrant's
Report on Form 10-K for the Year ended December 31, 1991)............
3.2.3 Amended and Restated Bylaws of the Registrant adopted March 7, 1997
(incorporated by reference to Exhibit 3.2.3 filed with Registrant's
Annual Report on Form 10-KSB for the year ended September 30,
1996)................................................................
4.1 Specimen Stock Certificate.**........................................
</TABLE>
<PAGE> 94
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER TITLE PAGE
----- --------------------------------------------------------------------- ------------
<S> <C> <C>
4.2 Form of Representative's Warrant.**..................................
5.1 Opinion of Stevens & Lee re: legality.**.............................
10.1 Release and Severance Agreement dated February 12, 1993 between
Seahawk Capital Corporation and Robert S. Friedenberg (incorporated
by reference to Exhibit 10.2 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1992)...........................
10.2 Agreement dated February 24, 1995 between the Registrant and Jonathan
B. Lassers as to the purchase of common stock (incorporated by
reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K
dated as of May 8, 1995).............................................
10.3 Amendment Agreement dated May 1, 1995 between the Registrant and
Jonathan B. Lassers as to the purchase of common stock and common
stock purchase warrants (incorporated by reference to Exhibit 10.2 to
Registrant's Current Report on Form 8-K dated as of May 8, 1995).....
10.4 Agreement dated February 29, 1996 between the Registrant and Jonathan
B. Lassers as to the exchange of common stock for his common stock
purchase warrants (incorporated by reference to Exhibit 10.4 filed
with Registrant's Report on Form 10-KSB for the year ended September
30, 1996)............................................................
10.5 Stock Exchange Agreement dated as of December 31, 1994 among the
Registrant, John C. Fitton and Seahawk Overseas Exploration
Corporation (incorporated by reference to Exhibit 10.4 to
Registrant's Current Report on Form 8-K dated as of May 8, 1995).....
10.6 Stock Purchase Agreement dated March 5, 1996 among the Registrant,
DynamicWeb Transaction Systems, Inc. ("DWTS") and the shareholders of
DWTS (incorporated by reference to Exhibit 10.14 to Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 1995)...
10.7 Amendment to Stock Purchase Agreement dated May 14, 1996 between the
Registrant and DWTS (incorporated by reference to Exhibit 10.14(A) to
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1995)............................................................
10.8 Amendment to Stock Purchase Agreement dated June 13, 1996 between the
Registrant and DWTS (incorporated by reference to Exhibit 10.14(B) to
Registrant's Form 10-QSB for the period ended March 31, 1996)........
10.9 Stock Purchase Agreement dated September 30, 1996 among the
Registrant, Megascore, Inc. and the shareholders of Megascore, Inc.
(incorporated by reference to Exhibit 1 to the Registrant's Current
Report on Form 8-K dated November 30, 1996)..........................
10.10 Stock Purchase Agreement dated November 30, 1996 among the
Registrant, Software Associates, Inc. and Kenneth R. Konikowski
(incorporated by reference to Exhibit 2 to the Registrant's Current
Report on Form 8-K dated November 30, 1996)..........................
10.11 Amendment to Stock Purchase Agreement dated April 7, 1997 between the
Registrant and Kenneth R. Konikowski (incorporated by reference to
Exhibit 10.11 filed with Registrant's Report on Form 10-KSB for the
year ended September 30, 1996).......................................
10.12 Lock-Up Agreement dated November 30, 1996 among the Registrant, Steve
L. Vanechanos, Jr. and Kenneth R. Konikowski (incorporated by
reference to Exhibit 10.12 filed with Registrant's Report on Form
10-KSB for the year ended September 30, 1996)........................
</TABLE>
<PAGE> 95
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER TITLE PAGE
----- --------------------------------------------------------------------- ------------
<S> <C> <C>
10.13 Employment Agreement dated December 1, 1996 between the Registrant
and Kenneth R. Konikowski (incorporated by reference to Exhibit 10.13
filed with Registrant's Report on Form 10-KSB for the year ended
September 30, 1996)..................................................
10.14 DynamicWeb Enterprises, Inc. 1997 Employee Stock Option Plan
(incorporated by reference to Annex B to the Registrant's Information
Statement filed May 15, 1997, pursuant to Section 14(c) of the
Securities Exchange Act of 1934).....................................
10.15 DynamicWeb Enterprises, Inc. 1997 Stock Option Plan for Outside
Directors (incorporated by reference to Annex C to the Registrant's
Information Statement filed May 15, 1997, pursuant to Section 14(c)
of the Securities Exchange Act of 1934)..............................
10.16 Lease Agreement dated November 1, 1996 between Beauty and Barber
Institute, Inc. and DynamicWeb Transaction Systems, Inc.
(incorporated by reference to Exhibit 10.16 filed with Registrant's
Report on Form 10-KSB for the year ended September 30, 1996).........
10.17 Lease Agreement dated July 1, 1994 between Software Associates, Inc.
and The Mask Group (incorporated by reference to Exhibit 10.17 filed
with Registrant's Report on Form 10-KSB for the year ended September
30, 1996)............................................................
10.18 Amendment No. 1 to Lease Agreement between Software Associates, Inc.
and The Mask Group (incorporated by reference to Exhibit 3 to the
Registrant's Form 8-K dated September 9, 1997).......................
10.19 Employment Agreement dated August 26, 1997, between the Registrant
and James D. Conners (incorporated by reference to Exhibit 1 to
Registrant's Form 8-K dated September 9, 1997).......................
10.20 Form of Financial Consulting Agreement between the Registrant and
H.J. Meyers & Co., Inc.**............................................
10.21 Form of Mergers and Acquisition Agreement between the Registrant and
H.J. Meyers & Co., Inc.**............................................
16.1 Letter on change in certifying accountant (R. Andrew Gately & Co.)
(incorporated by reference to Exhibit 16.1 to Registrant's Current
Report on Form 8-K dated February 19, 1997 (to be filed by
amendment))..........................................................
16.2 Letter on change in certifying accountant (Allen G. Roth, P.A.)
(incorporated by reference to Exhibit 16.2 to the Registrant's
Current Report on Form 8-K dated February 19, 1997, as amended by
Amendment dated March 12, 1997)......................................
21.1 Subsidiaries of the Registrant.......................................
23.1 Consent of Stevens & Lee (included in Exhibit 5.1)...................
23.2 Consent of Richard A. Eisner & Company, LLP..........................
27.1 Financial Data Schedule..............................................
</TABLE>
- ---------------
* Previously filed
** To be filed by amendment
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form SB-2 of
the form of our report (to be dated April 7, 1997 and dated the effective date
with respect to Note J[5]) relating to the consolidated financial statements of
DynamicWeb Enterprises, Inc. (formerly Seahawk Capital Corporation) as at
September 30, 1996 and each of the fiscal years in the two-year period then
ended and our report dated May 12, 1997 (September 5, 1997 with respect to Note
F[1]) relating to the financial statements of Software Associates, Inc. as at
June 30, 1996 and each of the fiscal years in the two-year period then ended.
Each report calls attention to substantial doubt existing as to the ability of
the companies to continue as going concerns. We also consent to the reference to
our firm under the captions "Experts" and "Summary Financial Information" in the
prospectus.
/s/ RICHARD A. EISNER & CO., LLP
New York, New York
September 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 95,818
<SECURITIES> 0
<RECEIVABLES> 269,963
<ALLOWANCES> 60,928
<INVENTORY> 0
<CURRENT-ASSETS> 336,066
<PP&E> 387,760
<DEPRECIATION> 108,997
<TOTAL-ASSETS> 873,419
<CURRENT-LIABILITIES> 595,593
<BONDS> 0
0
0
<COMMON> 211
<OTHER-SE> 89,531
<TOTAL-LIABILITY-AND-EQUITY> 873,419
<SALES> 498,095
<TOTAL-REVENUES> 498,095
<CGS> 160,630
<TOTAL-COSTS> 1,170,270
<OTHER-EXPENSES> 713,710
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 210,585
<INCOME-PRETAX> (1,753,310)
<INCOME-TAX> (21,700)
<INCOME-CONTINUING> (1,731,610)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,731,610)
<EPS-PRIMARY> (.89)
<EPS-DILUTED> (.89)
</TABLE>
